Insurance subrogation refers to an insurer’s legal right to recover money paid to clients or on their behalf after policyholders are found not responsible for damages. Subrogation clauses allow policyholders to get claims covered quickly through their insurance policies while the insurer takes measures to get the claim money back from the liable party or their insurance policy.
For many small business owners, time is of the essence when it comes to getting claims paid. Whether it is getting a commercial car back so you can make deliveries or obtaining immediate medical care for an injured customer, insurance companies want to focus on taking care of clients first and recouping money from liable third parties later. Subrogation allows insurance carriers to retain their rights to do so.
What Is Subrogation in Insurance?
In insurance, subrogation is when one party, in this case an insurer, takes the place of another, typically the policyholder, maintaining all the party’s rights and duties in claims. Subrogation is a legal right insurance carriers maintain on insurance policies, financially protecting themselves while they step in to cover claims their clients are not liable for.
How Insurance Subrogation Works
Subrogation is an important tool for insurance risk management. From an insurance policyholder’s perspective, if they have insurance, their claims to be processed quickly and completely. A policyholder may file a claim through his own policy, meaning he is subject to his deductible and policy limits. This gets his claim paid quickly so he can get back to work. However, if he isn’t at fault, his insurance company will automatically seek compensation through subrogation.
When a claim is made by an injured party, the insurance company processes it so the injured party receives money to cover their damages immediately without anything out of pocket except the deductible. Injuries can be bodily or property damage. As the claim is processed, and long after it is completed, the insurance company can seek to recoup monies paid during the claim.
Deductibles & Subrogation
When a claim is subrogated, the policyholder is responsible for his deductible in the claims process, whereas he wouldn’t be if he filed the claim with the responsible party’s insurance carrier. Assuming a policy has a $500 deductible and a $5,000 claim, the policyholder pays his $500 while his insurance company pays $4,500. The insurance company then seeks its $4,500 and the policyholder’s $500 back from the party at fault.
There is one caveat when it comes to subrogation and deductibles. If your deductible is more than the total claim, your carrier will typically not try to recover the money they paid. The reason is that the insurance company doesn’t want to spend resources to fight for a cost the policyholder assumed. In this situation, the policyholder’s recourse is to file a claim with the responsible party or go to small claims court.
Why Insurance Subrogation Is Important
Insurance subrogation is important to the insurance industry because while injured parties need to have claims paid efficiently, carriers don’t want to bear the costs of claims their clients are not responsible for. Insurance carriers typically encourage injured parties to file claims quickly because getting the claims process started is beneficial to everyone. Unfortunately, the process is often extended when the responsible party denies liability or low balls the value of the loss.
Subrogation allows the insurance carrier to take care of its own clients, delivering on its promises to help them recover from losses while not being burdened by claim costs in the long haul. During the course of a subrogated claim, the policyholder will pay his deductible and then wait for his insurance company to reclaim it on his behalf. This can take time and is not always something recovered, which is the one risk the policyholder assumes when electing to subrogate.
For example, a tree from one’s home falls on the roof of the neighbor’s house, causing $7,000 in damage. The neighbor might claim that the tree owner is responsible but isn’t getting cooperation in filing an insurance claim on the tree owner’s insurance policy. The homeowner with damage could file the claim under his homeowner’s policy, pay the $2,000 deductible he elected on his policy, and get his home repaired while the insurance company fights the neighbor.
Why Insurance Subrogation Is Used
Insurance carriers use subrogation because they cannot deny claims that are covered in their policies. Unless the policyholder’s claim is the result of an excluded event, the insurance company must process it. With subrogation, the insurance company assumes the rights of the policyholder to file a claim against the other insurance carrier or sue the responsible party.
What a Waiver of Subrogation Is
There are instances when policyholders may want to obtain a waiver of subrogation for an additional cost. This is an insurance clause that policyholders can select that stops carriers from recovering money paid on a claim from responsible third parties. This means that claims made and paid through the policyholder’s contract stand. Either the insurance company pays the claim without the ability to reclaim funds or denies it because it is not covered peril.
Waivers of subrogation should only be used in business situations where absolutely necessary. For example, they are common practice in some industries because they help subcontractors and service providers that perform duties at third-party locations to obtain contracts in cases where the other parties demand them.
Waivers of subrogation are commonly used in industries such as:
- Construction and artisan contractors
- IT consultants and technicians
- Real estate
- Delivery and cargo
All small business owners should consider both the advantages and disadvantages of subrogation waivers. Examine the fine print of contracts to be certain you understand what you are contractually obligated to and when possible, maintain policies that allow your insurance carrier to subrogate. It may not always be possible, but you should never assume you have to waive subrogation.
Insurance Subrogation’s Impact on Costs
Subrogation is a contract term and has no additional costs to small business insurance policies unless it is waived. With that said, there are cost ramifications that small business owners should consider.
Some of the ways insurance subrogation impacts costs include:
- Outlay of cash: The deductible needs to be paid to fulfill the policy terms even though this is a claim that would be paid in full by the other party without requiring a deductible.
- Lengthy recoup process: Deductibles may take time to recover and sometimes are never recovered.
- Potential premium increase: Premiums may increase if your insurer pays a claim on your policy and doesn’t get all its money back from a liable third party.
In regards to waiver of subrogation costs, these vary based on state, industry, and policy. Waivers often add anywhere from $25 to $100 to an existing insurance policy.
Common Examples of Small Business Insurance Subrogation
Most policies have a subrogation clause, but some of the most common ones for small businesses are commercial auto, general liability, workers’ compensation insurance, and health insurance, but can be used in any type of policy where a third party is identified as responsible for a claim. Below are a few examples of what subrogation might look like for each type of policy.
Commercial Auto Example
Both personal and commercial auto insurance experience a lot of subrogation claims. Imagine your delivery van is sideswiped in an auto accident where the other driver claims they weren’t at fault. As the business owner and policyholder, you file a claim with your insurer, pay your deductible, and get back to deliveries while your insurance company fights the other party through subrogation. Only later does a judge determine you aren’t liable for the accident.
If subrogation hadn’t been used, you wouldn’t have been able to get your delivery van fixed until the other party was proven liable. Moreover, you could see a premium increase on your commercial auto insurance even if you were deemed at-fault.
General Liability Example
General liability subrogation is very common in situations where there are multiple subcontractors involved in a development or real estate deal. Many general contractors and property owners demand a waiver of subrogation when engaging in business with multiple contractors. When a waiver is not in place, subrogation could track back to small business owners who were on site months or even years prior.
For example, say a homeowners’ association (HOA) hires a contractor to wax its floors. The contractor, who has not waived his rights to subrogation, closes the area to the public access and posts warning signs. A woman ignores the signs and suffers a head injury in a fall. While she files a claim with the contractor’s insurer, the contractor’s insurer goes after the HOA for not assisting with the safety measures. If the HOA had required a waiver of subrogation, then the claim would have stayed with the contractor’s insurance company.
Workers’ Compensation Example
Workers’ compensation insurance is governed at the state level first, meaning not every state allows subrogation and every state has slightly different rules to subrogation. While the rules do vary, the most common example of workers’ compensation subrogation happens with commercial auto accidents.
Let’s say another delivery van is in an accident that was caused by the other driver. The delivery driver, who is an employee, is seriously injured in the accident. Because he is an employee, the claim defaults to the business’ workers’ compensation policy so that his injuries and lost wages are covered. Even though the small business’ workers’ compensation policy kicks in quickly, the insurer goes after the at-fault party’s insurance company to recoup the benefits payments.
Commercial Property Example
Small businesses are often located in buildings and centers where they share walls, utilities, and common areas. Most commercial leasing companies require all tenants to maintain minimum levels of insurance to release them from liability of damages, and these policies also extend to surrounding businesses.
For example, a gym sits on the second floor of a strip mall. A pipe bursts in the bathroom, causing a flood into the tax office below, leading to more than $60,000 in damage to furniture, computers, flooring, and walls. The tax office tries to file the claim through the gym’s insurance, but the gym has a lapsed insurance policy. Rather than fight this out in court, the tax office decides to file a claim through its own insurance carrier, pay its $1,000 deductible, and get back to work. The insurance carrier then subrogates against the gym and the commercial leasing company that allowed the gym to operate without insurance.
Pros & Cons of Subrogation
Insurance policies automatically maintain a subrogation clause, but there are instances were a small business owner may elect to waive subrogation. Understand the pros and cons of subrogation before you ask for a waiver of subrogation.
Pros of Subrogation
The pros of insurance subrogation include:
- Fast claims processing: In situations where the responsible party is delaying or fighting, subrogation allows the claimant to get fast claims results.
- Greater confidence: Policyholders file the claim with their worst-case scenario being only out of pocket with the deductible, which is likely to be recovered too.
- Eliminating personal negotiating: Insurance subrogation reduces stress in the claims process when the responsible party denies the claim. Policyholders get the claim paid and their insurance company’s legal team handles negotiations.
Cons of Subrogation
The cons of subrogation include:
- Out-of-pocket costs: Policyholders are responsible for the deductible in a claim until it is recovered in subrogation, plus they might not get the money back if their insurer is unsuccessful in its pursuit of the responsible party.
- Extended time: Disputes with third-party insurance carriers regarding liability can lead to extended subrogation periods, delaying when policyholders get their deductible back.
- Coverage gaps: The liable party may not have as high coverage as the policyholder, leading to potential coverage gaps with the responsible party or their insurance provider, resulting in claims not being covered.
If you think you need to subrogate or might want to waiver subrogation, talk to your insurance agent about how it can help or hurt you in the claims process.
Tips When Using the Subrogation Clause
There are two periods of time a small business owner may need to think about subrogation regarding his insurance policies: at the time of getting a policy and when making a claim. Here are three tips to help you process claims or choose a waiver when establishing a small business insurance policy.
Make the Claim on the Liable Party
If time is not of the essence or the liable party accepts responsibility, it is best to make the claim directly with that party’s insurance carrier. This removes your insurance company from the process and gets the claim paid directly from the responsible party. Don’t worry; you can still file a claim with your own company if you start to get the runaround from the liable party’s insurance company.
Confirm if a Subrogation Waiver Is in Place or Needed
Read the subcontractor’s contracts and lease terms to make sure you are not required to waive insurance subrogation rights. It is usually in the best interest of a small business owner to retain subrogation rights when possible. However, if you regularly perform duties at third-party locations, it may be a requisite for getting the contract.
Consider Your Costs Before Subrogation
It might seem simple to just hand the claim over to your insurance carrier to deal with things. While this is no real problem in the majority of subrogation claims, keep in mind the possible costs, such as paying your deductible and getting it back in a timely fashion, as well as the potential increase in premium if the claim results in subrogated payments with your insurance carrier.
Frequently Asked Questions (FAQs)
Claims are stressful regardless of whether you subrogate or not. Below are some of the most frequently asked questions regarding the issue.
What is the purpose of subrogation?
Subrogation allows an insurance company to step in as its client to process a claim while preserving all its rights to go after the claim’s responsible party. It helps clients get back to being fully operational faster after a claim and prevents needing to fight with another insurance company that may try to deny a claim or low-ball settlements.
What is a waiver of subrogation?
A waiver of subrogation is an elected endorsement on a policy that tells the insurance carrier that you do not grant it the right to go after the responsible party. Business owners and general contractors often seek a waiver of subrogation from vendors or subcontractors working on their premises to avoid liability from claims resulting from work done by the vendor or subcontractor.
How long does a subrogation claim take?
Subrogation timelines vary among industries, carriers, and actual claims. Subrogation can recoup funds in as quickly as 30 days, or they can take years. In many cases, subrogation may actually result in a mid-level settlement between two insurance carriers, sometimes leaving policyholders unable to recoup out-of-pocket costs such as deductibles.
Subrogation is an important part of insurance claims that allows carriers to step into the shoes of their clients to go after liable parties. While the insurance company goes after the other party, the policyholder enjoys a fast and friendly claims process with their own provider, avoiding business interruption. It allows insurers to deliver on the promise of exceptional service while not biting the financial bullet of claims.