Subrogation is the legal term for when one person or a group steps in as a substitute for someone else. When it comes to business insurance, subrogation occurs when your insurance company steps in for you in a legal setting.
Subrogation often happens when you file a claim for damage that is at least partially the fault of a third party. If your policy covers the damage, your insurer will pay you the claim directly. Then, with subrogation, the insurer can sue the third party that caused the damage in order to recoup the money they paid out to you.
Generally, subrogation is beneficial for policyholders because it keeps costs down. Since insurers can recover some of the money they pay out in claims, they can offer lower premiums. Additionally, policyholders get money for their claims when they file, not at the end of a potentially lengthy legal experience.
When an insurance company pursues a third party for damages using subrogation, they will have the same rights and legal standing as the policyholder they are standing in for. Because of this, subrogation doesn’t happen for every claim paid out, only those when the policyholder has the legal standing to sue the third-party.
The subrogation process begins when an insurer pays a claim to a policyholder.
If the insurer decides that a third party is responsible for some or all of the damage incurred, they may decide to seek reimbursement from the third party or their insurance company.
At this point, the insurer assumes all the same legal rights and standings as the policyholder as they attempt to recover the money they paid out.
If the third party is also insured, the two insurance companies work together to come to a legal conclusion over the payment. Or, if the third party doesn’t have insurance, the insurer may choose to sue the third party to recoup damages.
In general, subrogation is extremely hands-off for policyholders as their insurance simply covers them. They have their claims paid while their insurer must work out deals or pursue reimbursement for the money they’ve already paid out.
For a quick example of subrogation: Imagine you have a construction business and one of your employees falls off a ladder and needs medical care. If you have workers comp, your insurance company will pay for their medical bills, recovery, lost wages, and more.
If it turns out that the ladder they were using was faulty and caused the fall, your insurance company may use subrogation to sue the ladder company to get them to cover all of the costs they had to pay to help your employee.
There are times when as a small business owner, you may be asked to waive the right to subrogation by a partner or client. This means that your insurance policy will be 100% responsible for any damage, even if someone else is responsible.
Similar to being asked to add a partner or client as an additional insured, waiving the right to subrogation gives the other party peace of mind in knowing that should something happen, it won’t be their insurance that has to cover it.
Since subrogation generally helps keep insurance costs down, you should expect to pay a higher premium if you request a waiver of subrogation from your insurance company.
While it may sound odd to let your insurance company stand in for you in a legal setting, subrogation is used all the time and can help keep your costs down.
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