Subrogation can be a minefield

Rough Notes, Sep 2000 by Kleinman, Randall

What every agent should know

There are a lot of things that agents ought to know something about. Subrogation stands fairly high on the list because it can have a big impact on your insureds' losses and renewal premiums.

However, subrogation also stands near the top of the list of things that most agents are fuzzy about. The typical agent knows a little about it but isn't really clear on all those terms like contribution, indemnity, and subrogation, where insurers are adjusting who pays what to whom and when.

And if you aren't clear on the difference between subrogation and assignment, don't worry. The courts aren't too clear on it either! (But see below-we'll define them when the time comes.)

Your insureds' premiums are likely to increase if they have substantial losses paid by your carrier. On the other hand, if someone else is ultimately liable, the carrier may be able to recover its payments, and perhaps some of your insureds won't have to see their premiums go up.

Subrogation is one of those things that have been around forever. Historians say that the Romans used the principle of subrogation a couple of thousand years ago (in a less complex form than exists today), and the tradition was carried on in Europe over the succeeding centuries. In the United States, some of the oldest cases in the law books involve subrogation.

The result is that the law of subrogation varies from state to state in its particulars. In addition, because the law of subrogation is so ancient, there are separate rules if the subrogation involves estates, mechanic's liens, sureties, codebtors, co-partners, mortgagees, or governmental units. What's more, because the law of subrogation is supposed to be "elastic" (as one court put it), judges often have the right to extend the law beyond its existing boundaries. Therefore, this article can touch on only the basic outlines of subrogation law. The analysis of a specific subrogation situation depends on the specific factual situation, and on the law of the particular state involved.

Subrogors and subrogees

Subrogation occurs when a carrier gets the right, from its insured, to sue someone to recover payments made by the carrier on the insured's behalf. This often happens when the carrier is obligated under the policy to make the payments but, in reality, someone else is ultimately liable for the loss.

The insured in such a case is called the subrogor; the carrier is the subrogee and is subrogated to the rights of the insured.

When does this situation come up? One common example is when a carrier has paid a claim on behalf of an insured defendant in an accident case and then turns around to sue another party who may be liable-or even sues another carrier. Subrogation might occur if one carrier has settled but thinks another insurer is also liable. Subrogation might occur if an excess carrier has paid a claim that the primary carrier should have paid in part.

Not only does subrogation occur in all these forms; but, to further complicate things, in many states subrogation can be based on either tort law or contract law. In addition, statutes may provide for subrogation rights as well.

There are lawyers who do nothing but subrogation cases. Sometimes these lawyers will get a few dozen cases at a time from an insurance company. In recent years, some large law firms have gotten into subrogation to help insurers recover some of the multi-million-dollar payments they have made.

Many people are confused about the difference between subrogation and contribution. Contribution is a right, based on equitable principles and arising from a joint liability, that is enforceable after the party seeking contribution has paid more than his/her fair share. It is neither a contract nor a tort remedy, but a right based on principles of fairness. Contribution and subrogation overlap, but there are instances where one may be applicable and not the other.

Assignment is a transfer of property (which may be tangible or intangible) from one person to another, and usually involves the transfer of both the rights and the duties connected with the property. Assignments are usually based on a contractual agreement between two parties. As such, an assignment differs from a subrogation or contribution in that an assignment is generally not based on the same legal principles of fairness. An insurance company may seek a voluntary assignment of rights from an insured or another person if the insurer thinks its position in court as an assignee will be stronger than as a subrogee.

A minefield awaits!

Subrogation has lots of traps for insurance companies. Judges tend to think that insurance companies are supposed to pay claims and be done, and there is some reluctance to let them recover their payments from others. The result is a minefield for insurance companies.

The first mine is that an insurance company is not supposed to "volunteer" payments. In other words, if an insurer was not liable for payments, then it cannot recover payments made. This can lead to court battles as to whether an insurer really had an obligation to make payments. In these days of bad faith concerns, an insurer may sometimes make questionable payments to avoid getting sued for bad faith, and that may jeopardize the chance of recovery.