Subrogation in Insurance: Types and Principles with an Example

Have you ever gotten into a situation when you knew the accident wasn’t your fault but couldn’t do anything, even though it was the opposite party’s fault? This is precisely where you could benefit from Subrogation in Insurance. Sounds eerie? Read on; we’ll simplify it for you.

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What is Subrogation?
How Does Subrogation Work?
Types of Subrogation
Principle of Subrogation with an Example
Waiver of Subrogation
Frequently Asked Questions

What is Subrogation in Insurance?

Subrogation in insurance is a term used to describe a legal right the insurance company holds to pursue a third-party responsible for the damages caused to the insured. Simply put, when an insurance company pays you the amount you claimed when the third party was responsible for the damage, you subrogate your rights to the insurance company.

This means you give the insurance company the legal right to sue the person who caused the accident to recover the money you were paid for the damages.

How Does Subrogation Work in Insurance?

It is the act of pursuing a third party on behalf of the policyholder after paying the claim amount. The insured makes his payment on time in case of a claim, and the insurance company reimburses the same amount to the third party who may have caused the impairment.

When acquainted with the term ‘Subrogation’, policyholders will instantly think that this is one term and is beneficial only for insurance companies. Still, it is surprisingly and indirectly beneficial to the insured. Some insurance companies add the deductible amount, too, in the case of a subrogation.

So, in a situation where a third party causes damage, you get your claim amount plus the deductible once the third party pays the compensation to the insurance company.

This is in no way a hidden process; your insurer will be transparent to you. You will be given the record of the amount it paid you for your claim and the amount they are reimbursed from the third party as a subrogation claim.

Types of Subrogation in Insurance

The subrogation in insurance is categorised into three groups, which are discussed in the following section:

1. Contractual Subrogation

Also known as Conventional Subrogation, Contractual Subrogation allows the insurer to absorb the insured's situation and stand in their shoes.

In this case, they also sue the third party after the forfeiture of authority to the insurer. This is mainly required when the insured doesn’t want to go through the hassle of filing a lawsuit on his own.

2. Equitable Subrogation

This subrogation mainly deals with fairness and equity, and the insurer recovers money without legal proceedings or contracts. For example, suppose the insurer pays a debt that otherwise should have been paid by a third party. In that case, equitable subrogation gives the insurer the privilege to recover the paid amount from the third party.

3. Statutory or Legal Subrogation

Contrary to the other two categories, statutory subrogation does not require the insurance company to pay for the losses caused by any third party. Here, a deal or pact is made between the sufferer and the party responsible for the damage to compensate for the loss. Some people feel this category to be more convenient than the other two.

What is the Principle of Subrogation in Insurance?

The Principle of Subrogation is a basic concept that involves:

Allowing the insurer to hold the policyholder's legal rights in case of recovering damages.
Giving the insurance company the right to hold third parties responsible for any loss.
Transferring the insured's rights to the insurance company in case of seeking compensation from a third party. In short, subrogation allows the insurance company to work in the policyholder's shoes and seek recovery or compensation. However, some key points are to be followed, and they are:
Lower the premiums by recouping their losses.
Ensures fair judgment by making the party at fault pay for the losses.
Ensures prevention of double recovery.
This is only applicable after the policyholder has been compensated for the losses by the insurer.

Understanding the Principle of Subrogation with an Example

People might need help to comprehend some laws and theories. However, an example always comes to the rescue in these situations. The following section talks about the principle of subrogation example:

Suppose some random person has damaged the policyholder's car. Initially, the policyholder's insurance company will pay for the losses incurred. Then, the insurance company can seek the other person’s insurance company for reimbursement, as the main fault is that of the random person. Legal actions may also be taken if the driver refuses to pay for the damage caused.

Things are always easier to understand when we can connect them to a story or an example. So here it goes:

One fine day, your car happens to hurt after a reckless driver bumps into your car.

Now, the back of your car is damaged, and this guy doesn’t even seem to accept his fault. You have no time to fight this out or argue further, so you move on with your damaged car and instead get your comprehensive car insurance to pay for the damages (minus the deductibles, of course!).

This is exactly where this fancy term, “Subrogation”, could help you out. Your insurance company here will hold the third party responsible for the damage and reimburse both the amount of money you spent from your pocket and the amount your insurance company paid for due to the damages and losses caused.

What are the Rights of an Insurer When it Comes to Subrogation in Insurance?

It’s important to be aware of one's rights. In this case, let’s understand the rights of your insurer in the case of Subrogation:

After paying the amount of the claim to the insured, an insurer is entitled to act on behalf of the insured, enforce the insured's rights against the third party, and reimburse the amount.
Secondly, after the amount of the claim is paid to the insured, the insurer is subrogated to the insured's rights and may prosecute a suit against the wrongdoer for recovery of its expenditures.

What is Waiver of Subrogation?

A waiver of subrogation is when the insured surrenders the right of subrogation. Generally, the third party responsible partially or wholly for the damage in question would want you to waive off the right of subrogation for their peace of mind as the insurer can hold them liable for the damages.

It is generally done in cases where an insurance company waives its right to seek subrogation against the third party if the insured waives its right to recoup any losses against the other party.

This is a contractual provision whereby an insured waives the right of their insurance company to seek reimbursement for losses from a negligent third party. Typically, insurers charge an additional fee for this special policy endorsement.

Key Things to Remember about Subrogation in Insurance

Here are a few key things to keep in mind about Subrogation in insurance:

The Insurer gets the right to sue the third party after paying off the amount claimed by the insured.
The Insurer can access the right of subrogation only after the amount of the claim is paid to the insured.
In case of waiver of subrogation, your insurer could charge a fee
A subrogation clause is there in all insurance policies
There is transparency between the insurer and the insured
Insurers with effective subrogation acts may offer lower premiums to their policyholders

Most policyholders are unaware of this very important clause when buying an insurance policy, which later results in conflicts. It is important to be acquainted with all the clauses/terms used in insurance before settling down for any of them. You can always reach out to us for an expert opinion.

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Explain it like I'm five

There are three brothers in the family. The eldest brother has promised to take care of his two younger siblings. One day, the youngest brother breaks a toy that belongs to the middle brother. The middle brother starts crying, so the eldest brother gets him a new toy. But to be fair to everyone, he ensures that the youngest brother pays for it from his own pocket money.

What just happened was ‘Subrogation’.

FAQs about Subrogation in Insurance

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How do you manage a Subrogation claim?

Most subrogation claims happen without you having to do a single thing, as insurance companies of both parties battle it out with each other! So, the best thing to do is be patient, and you might even get back your deductible. In case a subrogation claim is made against you, it’s best to cooperate with the insurer. And if you are the one subrogating someone else, make sure you’re in close contact with the insurance company so that your issue is not neglected.

Remember that if you need any help, you can always get an attorney who can ensure you get your rightful compensation. Of course, the main thing is – subrogation means your insurance company will handle it.

So if you’re in a situation that requires subrogation, you don’t have to sweat it!

What is the purpose of Subrogation in Insurance?

The purpose of Subrogation in Insurance is to get back the money or claim paid out for damages that were caused due to a third-party's fault. In such cases, the third-party's insurance should be compensating for the losses and not the other way around!

Do I have to be involved in the subrogation process?

No, after you’ve filed for subrogation with your insurer, you can leave the rest to your insurer 😊

Is Subrogation only applicable in car insurance?

No, the subrogation clause is applicable for all kinds of insurance such a home insurance, bike insurance, bicycle insurance, etc.

What is subrogation in car insurance?

If your car gets damaged by a third party and the insurance company has to pay for the losses, then with the help of the subrogation process, the insurance company can claim the reimbursement from the at-fault person.

Why is subrogation necessary?

Subrogation is a legal process that is beneficial for both the insurer and the policyholder:

Insurer: Protects the insurer from extra financial liability and improves loss ratio and profits.
Policyholder: With subrogation, the at-fault person is held responsible, and the policyholder receives top-notch services at a comparatively lower cost.

Why is subrogation important for an insured and an insurance company?

As mentioned in the article and the previous answer, subrogation is important for an insured and an insurance company for various reasons.

What if I damage someone’s car and ignore the subrogation process?

If you damage someone’s car and ignore the complete subrogation process, the insurer and the insurance company have the full right to sue you and file a lawsuit against you.

How is subrogation created?

Subrogation is created when the insurance company pays out the insured's claim for any damage caused by a third party.

What are the benefits of subrogation?

Subrogation is necessary and beneficial for the insured and the insurer. The benefits include exemption from excessive financial liability in the case of the insurer and in the case of the insured; with the help of subrogation, the company is able to provide premium service at low prices.

What is the difference between indemnity and subrogation?

Indemnity and subrogation are opposite things. Subrogation is the transfer of legal rights from a policyholder to the insurer, whereas indemnity is nothing but a principle that provides guarantees against loss.

What is subrogation in the health insurance sector?

If the policyholder becomes injured or ill due to a third party's fault, subrogation gives the insurance company the right to seek reimbursement for medical expenses.

How long does subrogation take?

On average, the subrogation process takes about 6 months. However, depending on important factors such as the state concerned, fault, and claim complexity, it can take weeks, months, or years to complete.

What to expect during subrogation?

During the complete subrogation process, the insurance company expects nothing but whole-hearted cooperation from the policyholder. Whatever decision you make, you should inform your insurance company so that it doesn't risk the rights to subrogation from the company’s perspective.