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Insurance Terms: What is Subrogation?



What is Subrogation?

If your insurance company has ever paid you for a claim that was caused by someone else, subrogation will probably follow. Subrogation is the act of your insurance company “stepping into your shoes” to pursue a third-party for damages they caused you. Using your name, your insurance carrier will attempt to recoup losses they incurred by paying you for damages that should have originally been covered by the third-party’s insurance. 

How It Applies to Your Insurance Policy

The act of subrogation is one of the few legal-action choices that the insured has control over when signing an insurance contract. Typically, the insured is given the choice (usually without his/her knowledge) to allow their insurer to maintain subrogation rights, or to forgo them. Subrogation rights can be waived with a “Waiver of Subrogation“, which prohibits the insurer from freely pursuing a third-party to recoup losses they were deemed responsible for. Even with the waiver, the insurer can still attempt subrogation, but only once permission is granted by the insured.

When would I want a Waiver of Subrogation?

For personal lines such as Auto or Homeowners Insurance, there aren’t really any downsides to granting your insurer subrogation rights, unless you wish to be 100% in control of all legal actions under your name. There is one downside to signing a waiver, though, and that’s additional cost. The insurance carrier will not be able to recoup losses against third-parties, meaning your policy is at a higher risk to lose them money. Flat fees and extra monthly premium allows insurers to hedge this risk, slightly.

A more reasonable scenario for a Waiver of Subrogation is for commercial use. It is especially handy when sub-contracting work to smaller enterprises that would be financially paralyzed in the event of subrogation. 

For instance, let’s say you own a successful construction business that specializes in building condos. They’re complex jobs that require specialists in various fields such as plumbing and electrical, so you sub-contract this work to smaller businesses that you trust. A sub-contracted electrician has caused a fire that spanned dozens of units, causing hundreds of thousands of dollars in damages. The primary issue is that the construction project has a deadline, and you need an insurance payout to replace the materials immediately. Your insurer may reimburse you for these damages when you file a claim with them, even though another party was responsible. This is where the opportunity for your insurer to subrogate comes in. 

If you do not have an active Waiver of Subrogation on your insurance policy, the subrogation will proceed at the insurer’s designation. This puts the sub-contractors you employ at major financial risk, especially when they are underinsured. If you did have an active waiver, the insurer must obtain your permission before pursuing the sub-contractor’s assets – which you are free to decline. You will not have to be responsible for putting a small-time enterprise, that you had trusted to do good work, out of business.

Waivers After an Accident

In some cases, you will sign a Waiver of Subrogation after you have already received compensation from a third-party’s insurer. This waiver will ensure that you received satisfactory compensation, and do not intend to have your insurer subrogate the third-party insurer for additional compensation.
A key principle of insurance states that insureds receiving compensation for claims should only receive the amount needed to indemnify them. Indemnity means that you are compensated enough to pay for the extent of damages, and nothing more; to make the insured financially whole again. If an insured were to profit directly from an insurance contract, they could be convicted for insurance fraud.
This is a common issue in the insurance industry: an insured will receive compensation from a third-party’s insurer after an accident, then make the same claim with their own insurance provider. They would receive twice the compensation as was necessary to repair their damages.

When Your Insurer is Subrogating a Third Party

When your insurer has been given blanket privilege for subrogation, they are liable to pursue third-parties for damages after any insurance claim you make. Despite your name being used for subrogation, you will usually not be involved in the process since you weren’t at-fault. 

The insurer will have paid you for your claim, and then contacted the insurer of the third-party next. If the third-party is underinsured or did not have insurance, they may go after their personal finances or assets.

When You Are Being Subrogated

After an at-fault accident, expect to receive notices in the mail from the other party’s insurer that alert you of upcoming subrogation. Your insurer will likely call you to verify the events at the accident, and a full blown investigation may be launched. If you do not hear from your insurer after a receiving a subrogation letter, call them on your own accord to ensure they’re handling it responsibly. 

You do not want negligence from your insurer causing you problems; the bill could go to collections and you would find yourself in court paying hefty fines. Even worse, you could have a lawsuit brought against you, where after you’ll likely need expensive legal counsel to represent you.

For additional information on this topic, give us a call. Our agents have more than 30 years of field experience, and subrogation can be a tricky subject. If you have a waiver on your current insurance policy and would like a re-shopped quote without one, use our online quoting service to send us your information. Make sure to include NO WAIVER OF SUBROGATION when completing your quote.

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Frequently Asked Questions

What types of insurance can I purchase a Waiver of Subrogation for?

The most common lines of insurance that offer subrogation waivers include Auto Liability Insurance, General Liability Insurance, Umbrella Liability Insurance, and Worker’s Compensation.

How much can I expect to pay for a waiver?

Depending on the insurance carrier, you may pay a flat fee, an increased monthly premium, or both for a waiver. Expect to pay anywhere from $25 to $100 on the flat fee, with monthly premiums varying between carriers. If your ultimate goal is to keep value high and cost low, a waiver would not be in your best interest. Check out our full write-up on Cheap Auto Insurance.

How long does subrogation take?

The answer depends on the quality of the third-party’s insurer. Quality insurers pay subrogation claims in about 45 days, while high-risk insurers pay in roughly 75 days. The length of time it takes your insurer to recoup losses through subrogation will not affect the speed of receiving your compensation, only theirs.

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