Subrogation refers to a person stepping into someone else’s shoes. In the context of insurance, this is when an insurer tries to recover the costs it paid for a claim when a third party was responsible for causing at least some of the damage.
There is often considerable confusion as to whether subrogation arises from equity or from contract law. An insurance policy may modify implied contractual rights and the rights arising from equity through the express terms of the contract.
Subrogation only applies if the insured is fully reimbursed under the policy. However, even where an ‘average’ or ‘calculable’ clause reduces the payment, it may still constitute full indemnification under the policy and subrogation will apply.
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When exercising subrogation rights, the insurer must litigate on behalf of the insured. The recourse of the insured is in turn limited to what the insured could have done against the third party responsible for the damage. If the insurer can demonstrate that the claim has been paid in good faith, the company may file a claim for subrogation.
However, if the policyholder violates the right of subrogation of the insured, the compensation to be paid may be reduced. Most policies prevent co-insured subrogation.
Obligations for both parties
When the insurer or the insured initiates proceedings in a recovery action involving subrogation, they are obligated to protect the rights of the other party. This means that the insured in his action cannot harm the rights of the insurer by only claiming compensation that exceeds the amount already reimbursed under the policy.
So while the insured can only settle for his uninsured losses with a negligent third party, this cannot affect the insurer’s right to proceed to recover his indemnified loss under the policy. Similar obligations apply to the insurer.
And if the insured’s loss exceeds the compensation provided under the policy, they have priority over the insurer to recover their uninsured loss at any action. In that case, both the insurer and the policyholder have an interest in the outcome of the procedure.
In summary
Recoveries are an important part of an insurer’s profit. When the insured’s loss exceeds the amount of cover and the policy is not helpful in setting out each party’s rights in the event of subrogation, careful negotiation is necessary to establish the rights of both parties and prevent further litigation from undermining a successful recovery.
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