- Claims & Risk Management
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An insurance policy, no matter what is being covered, is a contract between the insurance company and the party that wants protection. When a policy involves liability coverage, the contract, essentially, means that the insurance company will handle losses (injuries to other people and/or loss or damage to property that belongs to others). However, eligible losses are restricted to those that are the policyholder’s legal responsibility. There are many times that a loss is settled under a liability policy; but someone else may actually be responsible. Consider an example of subrogation:
Jon and Jenny are new to a neighborhood. A month after moving in, they throw a huge party and invite all of their neighbors. One of the activities is volleyball and they set up a net and space to play in their backyard.
The neighbors know each other well and they are quite competitive. During one game, an accident happens. Glen is injured while trying to block a ball at the net. The injury is very serious and Glen ends up paralyzed. He sues Jon and Jenny for his substantial medical costs and Jon and Jenny’s insurance company settles the loss.
Later, it is discovered that Paul, who was on the opposing volleyball team, had grabbed and pulled Glen when they were battling at the net, causing Glen to lose his balance and fall. Jon and Jenny’s insurance company learns of this and they sue Paul to recoup the money they paid for the loss.
The effort to recover payment made by Jon and Jenny’s insurance company illustrates “subrogation” an essential insurance policy provision. It is a legal right that allows the insurance company to take over a right held by their policyholder. Once an insurance company claims this right, it can pursue recovery from another person (including other entities such as partnerships or corporations) who is actually responsible for a loss.
Preserves Policy Intent
The purpose of any insurance policy is to restore a party’s financial position after an accidental loss. However, many losses are directly caused by some person or party’s actions. An insurance company may pay for a loss and then take a next step, use of subrogation. It allows them to take over the policyholder’s legal right and pursue repayment from a party that is legally responsible for a loss occurring. This helps maintain the intent of insurance policies to respond to accidents rather than to pay more injury or damage that can be attributed to another. The public good is served by making sure that those parties who cause losses are held accountable.
Controls Insurance Cost
Insurers who practice subrogation, recovering payments that they have paid out in claims, they benefit policyholders. Reductions in claims payments minimizes the need to raise insurance premiums. This makes insurance more efficient and affordable.
Subrogation Assists with Insurer Profitability
Insurance companies that are profitable are ones that can continue providing insurance protection. Profitability is created in several ways. First is to make money by properly evaluating the business it agrees to insure. Securing more premiums than it pays out in losses is called underwriting profit. Second, insurers make proper investments of some of its funds. Investment profit is another source of income. Unknown to many, subrogation is the next major method for an insurance company to be successful. Every dollar a company recovers through subrogation goes directly to its bottom line.
Subrogation is so important that policyholders are required to protect their right to subrogation. A policyholder may not waive the right without an insurance company’s written permission. Further, a policyholder that harms (also known as prejudicing) that right could face severe consequences.
The Safegard Group works through the subrogation process to save our clients thousands of dollars every year, learn more about our claims management efforts by clicking here.