Insurance is meant to protect people and businesses from unfortunate events, accidents, negligence, and bad actors. When there’s an unexpected loss and it’s not the party’s own fault, insurance carriers step in to cover the cost, whether property damage, repairs, and/or medical costs.
But what happens when there is someone to blame for the loss – what if it was caused by negligent or malicious actions? Does insurance covering the loss let responsible parties off the hook?
That’s where insurance subrogation – and subrogation-focused lawyers – step in.
Definition: What is Subrogation?
If you’re in the legal field and have little to no idea what subrogation is, you’re in good company; most law schools don’t teach it, even in tort classes. If you’re a person who received a subrogation lien letter in the mail once and panicked, you’re also in good company – it’s a niche space in the legal field, and it happens in the background.
But subrogation plays a crucial role in regulating the insurance industry, legal disputes, even societal equity. Subrogation is a legal mechanism that allows insurers to “step into the shoes” of their insured so they can then directly pursue claims against the responsible party to recover the claim they paid out to their insured. The insured is made whole by the claim the insurer pays; now the insurer stands in the shoes of the insured to pursue the responsible party.
Origins: Subrogation Law Used to be Common Law
Like so many things in modern society, most people do not know where subrogation originated and definitely not how long it has been around; the legal architecture for subrogation was actually built nearly a millennium ago. Ever heard of the Magna Carta – the progenitor of modern common law? Subrogation really started there:
Neither we nor our bailiffs shall seize any land or rent for any debt, so long as the debtor’s chattels are sufficient to discharge the same. Nor shall the debtor’s sureties be distrained, so long as the debtor is able to pay the debt if the debtor fails to pay. Not having the means to pay, then the sureties shall answer the debt, and if they desire, they shall hold the debtor’s lands and rents until they have received satisfaction of the debt for which they have paid him. Unless the debtor can show that he has discharged his obligation to them.
In more accessible terms, if someone owes a debt and they can’t pay it, their guarantor has to. But then the guarantor has the right to hold the debtor’s assets until such a time as they are able to pay. This was the formal basis for subrogation.
Purpose: Subrogation Drives Equity, Enforcement, & Efficiency
Subrogation lawsuits happen behind the scenes, so while it’s not something many people ever encounter, it’s a foundational principle in modern insurance law. The insurer’s right to subrogation recovery serves vital legal purposes:
1. Equity & Accountability
Subrogation ensures the responsible party pays for the harm they caused. Without it, losses would unfairly be put on insurers and tortfeasors would have no imperative to stop acting negligently/maliciously.
2. Controlling Insurance Premiums
If insurers didn’t have the ability to recover any of the claims they pay out, they would not be able to keep premiums low, and policyholders would end up paying more money for less robust policies.
3. Preventing Double Recovery
If the insurer weren’t able to step into the shoes of the insured and pursue the liable party, that liable party could potentially pursued by the insured for the same amounts already paid by the insurer. The insurer would still absorb the loss and the insured could potentially be unfairly enriched.
4. Efficiency & Protection for Policyholders
Subrogation makes things easy for policyholders: you suffer a loss and your insurer quickly pays the damages – you’ve been made whole. No need to endure a lengthy legal process to hold the tortfeasor accountable; under a subrogation theory, the insurer takes on those responsibilities.
Types: Considering Different Types of Subrogation
There are a few different types of subrogation that arise based off the type of insurance dispute the subrogation lawyer must navigate:
1. Equitable Subrogation
Equitable subrogation arises as a matter of fairness. For instance, if someone pays off someone else’s loan, under operation of law they are now the primary lienholder. There’s no statutory or contractual component – it’s just about preventing unjust enrichment.
2. Contractual Subrogation
This is the conventional type of claim subrogation attorneys manage because it is automatically triggered in policy language amongst insurers. After the insurer pays the claim, the insurer is then stands in the shoes of the insured to pursue the responsible party.
3. Statutory Subrogation
In some contexts, the law specifically grants subrogation rights, such as workers’ compensation, PIP, and hospital liens. These laws are meant to protect people’s physical safety, health, and livelihood, so they don’t need to be included in a contract – they’re mandated.
Examples: Hypotheticals in Subrogation Law
Let’s walk through a couple quick examples of common cases subrogation attorneys litigate:
1. Auto Insurance Subrogation
Subrogation lawsuits arising from motor vehicle incidents are extremely common and maybe the simplest way to explain subrogation to someone who is unfamiliar with it. Consider a collision at a traffic light intersection:
You’re driving through an intersection and you have a green light. Another driver runs their red light and T-bones your car, resulting in a totaled vehicle and some pretty big medical bills. Your insurer pays for the automotive and your medical bills, then pursues the other driver’s insurer for the damage they caused because they were fully at fault. There is also underinsured and uninsured motor vehicle (UIM) subrogation, whe
re an insurer can turn to the at-fault party’s assets if the tortfeasor does not have insurance to cover 100% of the damages.
2. Property Subrogation
This sector of insurance law can include subrogation for fire, utility, water, product liability or other damages to home or property. Subrogation for home and property claims can become quite complicated because there are often multiple parties that share liability. Consider a water damage disaster:
You live in a condo. Your upstairs neighbor leaves his faucet on and it floods your unit. Your insurer pays for the loss and pursues your neighbor for subrogation recovery. He claims he never left the faucet on at all and faulty plumbing was the issue. Now the insurer could look to pursue the plumber for faulty work, or the fitting manufacturer for a faulty part, or the adhesive manufacturer for subpar pipe dope. See how it can get complicated pretty quickly?
3. Workers’ Compensation Subrogation
Workers’ comp subrogation can become complicated because the state subrogation laws vary, but each state’s workers’ compensation statutes are strict. This type of claim arises when a loss occurs in the course of someone’s employment. Consider a delivery driver who gets into an accident:
You’re on a shift delivering pizza when another driver runs through a stop sign. The rear end impact is severe and you need medical care for a neck injury. The workers’ comp insurer pays for the repairs to the vehicle as well as your medical bills and then pursues the other driver to recover what they paid. What happens next depends on the state’s subrogation laws, though. Some states give the insurer priority to recover but others prioritize the employee recovering first.
There are other subrogation contexts, too. For instance, in bond subrogation, sureties pursue recovery after paying out a bond. Or consider contract disputes – an insurer has the right to recover a loss paid out because of another party’s breach of contract.
Mechanisms: Subrogation Lawyers Navigate Many Routes to Recovery
Subrogation lawyers, specialists, and adjusters have to navigate the nuances of insurer rights when they file a subrogation demand. And part of understanding that nuance is knowing all the different avenues to subrogation recovery that are available to them. Obviously, litigation is always an option, but there are ways to recover losses without taking a claim to court, too:
1. Pre-Suit Negotiations
When you send an opposing carrier a subrogation demand, there’s always the possibility that the matter can be settled without any sort of court filing. This is especially true in claims where liability and fault are indisputable. However, there’s also an incentive for carriers to settle subrogation matters this way. Not only is it efficient in cost and time, but carriers encounter each other often in subrogation contexts; building cooperative relationships prevents contention and escalation.
2. Claims Mediation
A step up from informal negotiations is to mediate a subrogation claim. An uninvolved third party serves as a liaison between the two carriers, facilitating negotiations for them. This can make reaching a settlement easier because it reduces the stress and contention of negotiations.
3. Subrogation Arbitration
Part of the difficulty in managing subrogation cases in the court system is that arbitrators, judges, and juries aren’t familiar with insurance law or subrogation, and on top of that the public (and sometimes legal) view of insurance carriers can be skewed negatively. Arbitrating claims is a smart solution for insurance companies and subrogation law firms alike.
Specifically designed for the insurance industry, an example of an arbitration forum is Arbitration Forums (AF). Their arbitrators are insurance professionals, and companies who are members of AF agree to be bound by the decisions made by the arbitration panel. All parties understand the field and its peculiarities, and all parties have agreed to the same terms, so each knows their rights and obligations. Arbitration Forums is one of several great resources for alternate dispute resolution that maximizes recovery by minimizing cost of pursuit.
Strategy: Dealing with Different State Subrogation Laws
The last topic for this subrogation primer that can make insurance litigation complicated is managing claims across state lines, which is common because many insurers are regional or national carriers. Some states have subrogation laws that put the carrier at a disadvantage while others have taken the philosophy behind equitable subrogation to heart.
But it’s not just about the political climate of the state; there are major differences in things like:
Statutes of Limitations
Depending on the jurisdiction and type of subrogation claim, statutes of limitations to file, serve, respond, etc, can vary wildly. If the case involves multiple jurisdictions, you have to know which deadline to use or you could accidentally waive the insurer’s right to subrogation recovery.
Ability to Recover
In certain types of subrogation cases, the insurer does not have a right to recover their claims. Sometimes this is due to state statutes about the subrogation process; other times it can be due to subrogation waivers in contracts.
Comparative/Contributory Fault
States assess responability of damages for fault differently. In some jurisdictions, a party may not pursue recovery if they are even 1% at fault (contributory negligence). In others, their ability to recover losses is reduced by the amount of fault they bear for the incident (comparative negligence). And in a modified comparative fault state, if a party is 51% or more at fault, they are barred from pursuing recovery.
Factors like these make determining the right strategy to recover each subrogation claim a complex task. Subrogation law firms can maximize their clients’ chances of recovery by leveraging teams of subrogation attorneys licensed in state and federal jurisdictions across the country. Not only does this ensure clients receive legal counsel with local knowledge, but that regional and national clients receive top-tier subrogation services no matter where their case is brought.
Education: Dive Deeper into Relevant Subjects in Subrogation!
Rathbone Group’s attorneys are committed not only to advocating insurer rights to recovery but also to providing education on subrogation and other important topics in insurance law. Curious to learn more about what subrogation lawyers do? Access dozens of free articles, videos, and podcasts On Subrogation on our blog, YouTube channel, and podcast library. Have a question or want to know more about our subrogation recovery services? Reach out at info@rathbonegroup.com.