What is Subrogation?

Do you remember a television commercial that pictures various people suffering the effects of over-eating while the voice-over slowly repeats the word "in-di-ges-tion?" Whenever I say sub-ro-ga-tion, it makes me think of that commercial. Come to think of it, subrogation can be a remedy for reducing a bloated claim and it's quite possible that after reading this you may be reaching for an antacid. I think there might be a connection here. A square deal Subrogation, as a concept, is really very simple. It is the right to acquire someone else's rights, a demand for something under the right of another. One court referred to it as the "doctrine of a square deal," meaning that it is an equitable resolution to an unfair circumstance. When someone pays a debt he or she doesn't legally owe, the unfairness of this circumstance can be remedied by allowing the payer of the debt (subrogee) to step into the shoes of the party who is owed the debt (subrogor) and demand payment from the party who legally owes the debt. The legal obligation to pay the debt could arise from various wrongs such as negligence, strict liability, absolute liability, intentional interference, breach of contract, etc.

For example, an insurer pays for the damage to its insured's parked car and then is subrogated to the rights of the insured against the driver at fault in causing the damage. This accomplishes two things. First, it results in payment by the party most responsible for the damage. Secondly, it prevents the party incurring the damage from collecting twice: once, from the insurer and, second, from the tortfeasor. The equitable nature of subrogation can be seen in that it promotes the restitution of the subrogee and frustrates the unjust enrichment of the subrogor.

Equitable subrogation Subrogation has some of its earliest origins in English courts of equity, which many historians believe had acquired the concepts from the ancient Romans. A court of equity administers justice according to rules of fairness rather than according to strictly formulated rules of common law. Although most courts in the United States procedurally administer equitable and common law rights in the same court, they nevertheless have retained their separate jurisprudence.

Along with the courts' view of subrogation as a means to prevent injustice comes broad and expansive latitude in the pursuit of equitable solutions. The "elastic" nature of this jurisprudence and the variances between one jurisdiction and another result in significant complexities for subrogation actions. While the concept of subrogation is simple, its application is not. This is why subrogation practice is generally confined to law firms that specialize in it. Just the fact that Black's Law Dictionary refers to subrogation as a "legal fiction" puts you on notice that you may be headed down the yellow brick road for a good-witch/bad-witch experience. (As near as I can tell, the "fiction" lies in the fact that the debt is assumed to remain unextinguished, though actually paid by the subrogee, while the court addresses the question of equity.)

It is important to understand that subrogation is a right of the subrogee, not the subrogor. This means the subrogor cannot waive the right of the subrogee to subrogate. The subrogor may only extinguish its own underlying right, thereby leaving no right for the subrogee to acquire. It would not be proper to say that a policyholder is waiving subrogation; a policyholder has no right of subrogation.

Conversely, an insurer can waive its right to subrogate, but that does not extinguish the policyholder's legal right to pursue the payment of a debt owed.

Contractual subrogation Normally, a construction project has multiple contractors working at a site. If, in a case of negligence, a plumber's torch starts a fire in the building under construction, the builders risk insurer will pay for the damage and seek an equitable subrogation action against the plumber. Suppose the owner or general contractor decides this kind of legal proceeding among contractors working at the site is not expedient to the advancement of the construction project. How could this problem be solved?

Waiver. The foregoing example illustrates one of the reasons equitable subrogation rights are not relied upon in most cases, but rather the parties agree to abide by subrogation rights more clearly defined in a contract. There may even be a statutory specification of subrogation rights, which is typical in workers' compensation laws.

A possible solution to the contractors' subrogation problem is to allow the insured under the builders' risk policy to waive its rights against all of the contractors to the extent that insurance covers the loss. In other words, eliminate the underlying tort action so there are no rights for the insurer to assume. This requires a provision in the contract with the builders' risk insurer (i.e., the insurance policy) that will impact the insurer's subrogation rights.

Such a "subrogation" provision is found in the conditions section of various policies, but may be alternately titled "Transfer Of Rights Of Recovery Against Others To Us" in order to avoid the legal terminology. Some of these provisions with respect to specific policies will be discussed later.

Preservation. Another reason subrogation rights are specified in a contract is to protect a subrogee's rights from being eroded by the actions of the subrogor. If you're planning to step into someone else's shoes, you might want to know whether he or she has athlete's foot. Since the subrogee's rights are contingent upon the rights of the subrogor, anything the subrogor does to spoil its own rights will have an impact on the subrogee. A contract (nearly every insurance policy) will be written to preserve those rights by requiring the subrogor to do nothing to impair them or the subrogee will be discharged from its obligations in the contract.

Antisubrogation Subrogation has its application in many different settings, such as bankruptcy, probate, construction, banking and real estate. By far, the most common application occurs in the realm of insurance, surety being the line having the oldest history with subrogation issues. Insurance is, of course, where we want to focus our attention. However, before getting into the specifics of certain lines, an important rule with regard to subrogation rights in insurance policies must be introduced—the antisubrogation rule.

The general rule is that an insurer may subrogate against the party responsible for the payment of loss under the policy, but the public policy exception is the antisubrogation rule. This rule holds that an insurer has no right of subrogation against its own insured for a claim arising from the very risk for which indemnification was sought under the policy.

If the subcontractor is named as an insured on a builders' risk policy, it satisfies the obvious need to be protected against damage to the subcontractor's own property at the site. The bonus comes by means of the antisubrogation rule, which effectively bars the insurer from subrogating against the subcontractor, though deemed to be responsible for damage to the property of others at the site. Consequently, being named as an insured on someone else's policy is a good strategy for getting relief from certain subrogation actions.

Specific policies In an effort to modify the effect of equitable subrogation, insurance policies have incorporated a subrogation provision that, first, and foremost, preserves the rights of the insurer by obligating the insured to secure those rights and do nothing to impair them. And, second, in recognition of the fact that it may not always be in the best interest of the insured to enforce subrogation rights, certain waivers are permitted.

Personal auto. With respect to Part A—Liability Coverage of the Insurance Services Office Inc.'s (ISO) personal auto policy, a permissive operator is protected from an insurer's subrogation action under the antisubrogation rule. This is because a permissive operator is defined in this section of the policy as an "insured."

However, a permissive operator is not an "insured" with respect to Part D—Coverage For Damage To Your Auto. Consequently, a permissive operator is fair game for a subrogation action if the operator causes damage to the auto and the insurer pays the loss. In recognition of the fact that a policyholder's good relationship with the operator may be at stake, the personal auto policy, unlike the ISO commercial auto policy, suspends the insurer's subrogation rights in favor of a permissive operator. Note that although the insurer withdraws its subrogation rights, the auto owner's right to pursue compensation remains. Consequently, the subrogation provision (paragraph B) reserves the insurer's right to make a claim on the proceeds of any recovery to the extent of the insurer's payment.

The subrogation provision of the ISO personal auto policy states that the insured "shall do nothing after loss to prejudice" the subrogation rights of the insurer. In other words, the insured must not release the responsible party from its obligation (waive rights against the responsible party) after the loss has taken place. It, therefore, is implied that the insured can waive rights before the loss occurs.

Homeowners. The ISO homeowners policy also permits the insured to waive rights against anyone before a loss has occurred, but this policy requires that it be in writing. Once the loss has occurred, it's too late for the insured to waive those rights, which means the insured must transfer them intact to the insurer after payment is made (referred to as an "assignment"). Of course, if the insured breaches the agreement not to waive his rights after a loss has occurred, then the insurer is under no obligation to pay the loss.

Although the ISO homeowners policy allows the insured to waive rights before a loss, such provision is nullified with respect to the insured's personal property in the custody of a bailee that charges a fee to hold, store or move the property. This provision is titled "No Benefit To Bailee" and, in some policies (e.g., the ISO commercial property form), includes any bailee, not just certain bailees for hire. By stating that the bailee cannot benefit from the policy, the insured is precluded from letting the bailee off the hook by terminating the rights the insurer expects to assume.

Commercial property. The subrogation provision of the ISO commercial property policy, as located in the Commercial Property Conditions (CP 00 90) form, takes a step further the insurer's permission to waive rights. Even after a loss has occurred, the insured may waive (in writing) rights against:

  1. a coinsured (just in case the antisubrogation rule is not applicable in that jurisdiction);
  2. a tenant; and
  3. a business firm that owns the named insured or one that is owned by the named insured.

One panicked tenant was under threat of a subrogation action by the landlord's insurer after the tenant negligently caused a fire at the leased premises. The owners of both the landlord corporation and the tenant corporation were the same person. After the owners got paid in one pocket (as landlord), the insurer was in the process of taking back the payment out of the other pocket (as tenant). The simple solution was to waive, by written agreement, the landlord's rights against the tenant, thereby extinguishing the subrogation action of the insurer.

Commercial general liability. The ISO commercial general liability policy also has a subrogation provision that requires a transfer of the insured's rights to the insurer after the loss has been paid. Nevertheless, it is implied that the insured may impair those rights prior to the occurrence of a loss; as the provision states, "The insured must do nothing after loss to impair them."

Sometimes the party seeking protection under the waiver may not want to rely on mere implied consent. More likely, though, the party seeking protection may not want to depend on an exculpatory agreement with the insured (where that party attempts to be relieved from liability), should it prove to be unenforceable. If the exculpatory agreement fails, then the rights are preserved and it's too late for the insured to impair those rights after the loss. For predicaments such as this, ISO developed a Waiver Of Transfer Of Rights Of Recovery Against Others To Us (CG 24 04) endorsement. It assures that subrogation actions will be waived by the insurer against a specific party, regardless of the status of the insured's rights.

Commercial auto. The subrogation provision of the ISO commercial auto policy states that the insured "must do nothing after 'accident' or 'loss' to impair" the subrogation rights of the insurer. Again, this permits the insured to waive rights prior to loss, typically, when this waiver is in a contract with someone with whom the insured wants to conduct business. However, the business contract may require the insured to have the policy endorsed with a waiver of subrogation provision because the other party desires more certainty in its protection.

To satisfy this demand for greater assurance, ISO decided to introduce an optional Waiver Of Transfer Of Rights Of Recovery Against Others To Us (Waiver Of Subrogation) CA 04 44 endorsement. This amends the Transfer Of Rights Of Recovery Against Others To Us condition to waive subrogation when the insured's rights are waived in a contract with that person prior to loss.

By contrast, the commercial general liability CG 24 04 endorsement does not condition its waiver of subrogation on the insured's rights being waived in a contract. As a result, under this endorsement, subrogation actions will be waived by the insurer against a specific party, regardless of the status of the insured's rights.

Unlike the personal auto policy, the subrogation provision of the commercial auto policy does not state that it will not pursue its subrogation rights against a permissive operator of the damaged vehicle. In theory, the insurer could pursue subrogation rights against a negligent employee operator of the insured's vehicle in the absence of a waiver of the insured's rights prior to loss. It may not be common for the employer's insurer to subrogate against an employee, but it potentially could happen. Perhaps drivers should demand a waiver of their employer's rights (to the extent insured) before they operate their employer's vehicles. Some courts may apply the antisubrogation rule under these circumstances, although the employee is not technically an insured for physical damage coverage.

Workers' compensation. The National Council on Compensation Insurance's workers' compensation policy contains the usual subrogation provision that allows the insurer to assume the rights of the insured (employer) against anyone liable, while obligating the insured to protect those rights. What complicates matters in this line of insurance is that the injured worker, not the employer, possesses the right to seek compensation from a negligent party. In order for the employer, or its insurer, to recover the benefits paid to an employee, the workers' compensation law of that jurisdiction must facilitate the process by granting certain rights of action.

First, it is common for states to give the employer/insurer the right to place a lien on the employee's recovery from the party at fault. Second, if the employee does not pursue his right to seek compensation within a specified time, that right normally is assigned to the employer/insurer according to statute. Consequently, the right of subrogation under workers' compensation policies is dependent on statutory authority because it is a derivative of the right of the employee, who is not a party to the contract (policy).

The workers' compensation policy does not permit the insured to waive rights either before or after a loss, whether the subject is Part One—Workers' Compensation Insurance or Part Two—Employers' Liability Insurance. However, there are times when an employer does business with another party who requires that subrogation be waived by the employer's insurer. In many states, like New York and Connecticut, this can be accomplished by attaching the Waiver Of Our Right To Recover From Others Endorsement (WC 00 03 13) to the employer's policy and specifying the name of the party seeking relief. There usually is an additional premium charged for this endorsement because the failure to recover damages in subrogation increases the ultimate net cost of the claim. However, this is not an option in New Jersey and New Hampshire, where use of this endorsement is prohibited.

Life and health. Courts generally do not recognize an equitable right of subrogation by life and health insurers in the absence of a specific provision in the policy, which is more likely to appear in health policies than life policies.

Source: Dan Corbin, PIA

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