Subrogation is a specialized area of the insurance industry that can be a powerful tool to manage risk. Insurance companies are oftentimes on the receiving (serving as a defendant) side of litigation, but there are situations where an insurer can pursue an alleged wrongdoer to recoup claim payments made to their insureds. After payment of a claim and the identification of a potential third-party wrongdoer, an insurance company can pursue a claim of subrogation.
Insurance companies take on risk, plain and simple. In the event an insured suffers a loss, and there is no other exclusion or condition that applies, the insurer is then there to make the insured, or third-party in the event of the insured's liability, whole. In turn, often there's a third-party bad/negligent actor who may be the cause of loss or harm. In those situations, after the insurer has paid its claim and incurred that financial loss, they have the ability under the insurance contract (between the insurer and insured) to step into the insured's place and sue a third party to recover.
The IRMI Glossary of Insurance and Risk Management Terms defines subrogation as follows: "The assignment to an insurer by terms of the policy or by law, after payment of a loss, of the rights of the insured to recover the amount of the loss from one legally liable for it."
Subrogation rights are created, typically, under the terms of the insurance contract between the insurer and the insured. As a condition for coverage, the insurer wants to create a contractual provision/condition with the insured that they can assume the insured's rights to sue a third party. It's part of loss control and claim management.
Here's a sample subrogation clause from an insurance contract:
Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. ("Subrogation Sample Clauses," Law Insider, accessed November 21, 2018.)
Note that not only does the insurer have the right to assume the insured's rights, the insured is also contractually obligated to support the insurer's efforts and, arguably, not do anything to impair the same.
There are probably many reasons, but I'll propose the following three main reasons.
There are many fact patterns that would illustrate the mechanics and value of subrogation, but the following are a few simple scenarios that are designed to illustrate the concept.
Subrogation is a valuable tool for insurance companies that serves many purposes. Subrogation, at its core, is when a person/entity (e.g., insurer) can step into the shoes of someone else (the insured) and pursue a claim against a third party. This is a well-established process, and many insurance companies have an entire department dedicated to subrogation/loss recovery. Without subrogation, bad/negligent wrongdoers may not be responsible for the injuries/losses they create, aggrieved insureds may have to shoulder financial losses for a longer period, and insurance premiums could rise.
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