When your insurer pays for losses on your behalf then assumes your legal right to sue another party that may have caused the damages in the first place, that’s subrogation. It’s a hard concept to wrap your head around, so we’ll look at an example.
First things first: in insurance subrogation, there are three parties involved:
- The insured.
- The insurer.
- The party responsible for the damages.
Say you file a claim on your Commercial Auto policy after a speeding Escalade runs a red light and strikes your insured work truck. Your insurance provider pays for the cost of repairing your truck. But after the claim is settled, the provider seeks reimbursement for those costs from the Escalade owner’s insurance carrier. In this instance, your insurer is taking your place under the rights of your policy – the very definition of subrogation – so that it can be compensated for its losses.
Escalade hits your truck. You collect damages from your insurer. Your insurer seeks compensation for the payout from the Escalade driver (or the driver’s insurance provider).
Simple enough, right? It makes sense that your insurance provider wouldn’t want to lose money, especially when there’s a way it can get compensation from a party that contributed to the damages. But what’s all this about the provider “taking over your rights?” Does that mean you could feasibly have your provider pay for a claim and sue the other driver’s insurance company for the damages, too?
Technically, you could, but then you would be overcompensated. When that happens, your insurance company can recover from you the amount it paid for your claim – i.e., take it back after you get a court settlement. Chances are your provider has a lot more money to invest in a legal team to argue this point, so it’s probably not a smart (or simple) way to go.
Does Subrogation Benefit the Policyholder?
Subrogation might sound like messy legal business, and you’d be mostly right to think this way. But it does have benefits for policyholders. The money from subrogation goes directly to an insurance provider’s bottom line, which isn’t surprising. But here’s where it gets interesting for you: if you work with an insurance company that has an effective subrogation department, the extra cushion means your provider may be able to offer you lower premiums.
Think about it: when an insurance provider has a chance of earning back some of what it pays in benefits, it’s losing less money overall, which means it has to bring in less in the form of premiums.
To learn more about saving money on your insurance, check out our blog series on insurance saving tips.
Subrogation in Action: Not Always Roses for the Insured
According to Pierce College’s news site The Roundup, the LA Community College School District (LACCD) made a last-minute demand for a subrogation letter that forced a nonprofit to cancel its free HIV testing drive that was scheduled during Pierce College’s HIV/AIDS Awareness Week.
Here’s what went down: the LACCD required the nonprofit organizations BIENESTAR and AIDS Health Foundation to sign a letter of subrogation regarding their Workers’ Compensation Insurance coverage. In essence, the letter would keep the nonprofits’ insurance providers from going after LACCD if nonprofit workers were injured at Pierce during the drive.
To put our new word to use, let’s imagine how subrogation would work in that scenario. Say during the HIV-testing drive, a nonprofit employee tripped over a box of supplies and hit her head on the parking lot pavement. She makes a claim on the nonprofit’s Workers’ Comp policy, and the provider covers…
- The medical expenses related to her work injury.
- Replacement wages during her recovery.
If the insurance provider didn’t sign that letter of subrogation, it could sue the university over the worker’s injury to recover what it paid out on the Workers’ Comp claim. After all, the injury happened on the university’s property, so the insurer could argue that the university failed to make its premises safe for others. But if the insurer did sign the subrogation letter, it can’t sue the university to recoup losses.
Though the Workers’ Comp carrier agreed to the letter, it wasn’t going to do so without a charge based on BIENESTAR’s payroll. In the end, the cost was too much for the organization’s already tight budget, so the mobile testing event had to be cancelled, much to everyone’s dismay.
If there’s one takeaway from this story, it’s that insurance can be tricky, and if you want to thoroughly understand your policy, you need to work with an insurance agent. Your agent can guide you through all this murky legal stuff and help ensure that you have the appropriate coverage in place for the events your small business hosts. If a venue throws you an insurance curveball days beforehand, your agent can handle it for you and take that extra worry off your plate.
Need guidance now? Get in touch with an insureon agent at 800-688-1984.