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Although subrogation has broad application as an equitable remedy in a variety of circumstances, it is a keystone concept in insurance coverage litigation. Historically, subrogation was a common law concept permitting one party to "step into" the shoes of another so as to assume the rights and claims of that party against other third-parties. In the insurance context, the concept of subrogation permits an insurance company to recoup amounts paid to its policyholder from a third party culpable for the policyholder's loss or claim. The term "subrogor" refers to the party relinquishing his rights/claims; the term "subrogee" refers to the individual or entity assuming the party's rights/claims. The right to bring a subrogation claim can be established by law, contract, or statute. The public policy goal of subrogation is to place the ultimate risk of loss on the wrongdoer, and not the victim or his insurer/surety. Subrogation also furthers the public policy goal of limiting the responsibility of insurance companies to provide coverage for losses that are not "truly fortuitous" in nature.
In the insurance context, subrogation actions generally arise out of two situations: 1) in first-party claims (i.e., made by the policyholder to its insurer) in which an insurer pays policy proceeds to its policyholder, and later seeks to recoup those amounts from an third party responsible for the loss or claim; or 2) in third-party liability claims (made against a policyholder by third parties asserting liability claims), in which an insurer defends/indemnifies its policyholder from a third-party claim, and later seeks to recoup those amounts from another third party responsible for the loss or claim, in an action brought by the insurer or the policyholder. In either scenario, the general concept is the same: the insurer pays out policy proceeds, and seeks to recover those from third parties believed to be responsible for the loss/claim.
Subrogation Rights in Policies
Many insurance policies contain a paragraph in which the insurer reserves the right of subrogation in the event of a loss or payment of a claim. Typical subrogation clauses read as follows:
By accepting payments under this Coverage Part, the Insured agrees that we shall be subrogated to all claims, demands, actions, and rights of recovery the Insured may have against any third party or any insurer, to the extent of any and all payments made hereunder.
If we pay a claim under your policy, we will take over your right to recover those amounts from any other individual or entity. You agree to cooperate with us and not take any action that will harm our impair our pursuit of recovery.
At common law, insurers that fully indemnify their policyholders are generally permitted to commence recovery litigation against a wrongdoer, control the conduct of the litigation, and share in the proceeds of recovery against the wrongdoer. These rights, however, may be expanded or contracted depending on the language of the insurance contract, which will govern the relationship between the parties.
Waiver of Subrogation Clauses
Many business contracts contain "waiver of subrogation rights" clauses that are routinely found alongside standard indemnity / hold harmless language. In these clauses, one or both of the contractees typically agree to waive any and all subrogation rights they may have against the other should a claim arise. However, the mechanical insertion of this boilerplate language can have the potential to create coverage problems. For example, if the loss/claim arises out of the contractor's negligence, then it may be harder for a contractee to obtain coverage for the loss/claim because the contractee's insurer cannot pursue the contractor to recover or recoup any policy proceeds paid as a result of the claim. In some cases, coverage disputes can arise as to whether the waiver of subrogation clause impairs the insurer's interests; in other cases, policyholders can add to their policies endorsements that obligate insurers to follow form on waivers of subrogation entered into by the policyholder.
Apportionment of Recovery
A significant issue in subrogation law deals with the apportionment of recovery in the event that a subrogation action against a culpable third party is successful. Consider the following example: in the auto policy context, a policyholder is rear-ended by a third-party and makes a claim to its auto insurer for damage to the his vehicle and medical injuries, and the insurer pays 50% of the value of the claim and asserts subrogation rights; in the meantime, the policyholder successfully pursues a negligence action against the negligent driver, and ultimately recoups the other 50% of the value of the policyholder's total claim as awarded by a jury. How is that 50% to be divided? Does it all go to the policyholder? Or does it any of it benefit the insurer?1
Unfortunately, there are no clear answers to these questions. The law on the apportionment of recovery in subrogation actions is mixed, not well-established, and inconsistent among jurisdictions. It is further complicated by issues of partial coverage, concerns of double-recovery, awards of punitive damages, jury determinations on the amount of damages, the effect of such verdicts establishing the amount necessary to make policyholders whole (thus resulting in collateral estoppel of contrary arguments in future coverage actions), and other issues.
Generally, however, states follow several approaches:
Although subrogation is similar to several interrelated concepts, it should not be confused with the following:
Although subrogation can be a dense body of law, the understanding of several topics such as the ones discussed above can help provide a starting point.
1 A helpful discussion of this principle is discussed in Greenblatt, “Insurance and Subrogation: When the Pie Isn’t Big Enough, Who Eats Last?” 64 U. Chi. L. Rev. 1337 (Fall 1997).
2 See Elaine M. Rinaldi, Apportionment of Recovery Between Insured and Insurer in a Subrogation Case, 29 TORT & INS. L.J. 803, 807 (1994).
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About the Author
Rabeh M. A. Soofi is an Associate at the law firm of Ice Miller LLP in Indianapolis, Indiana