Subrogation is a common law right by which one person is substituted in place of another person. The substituted person is then entitled to exercise all the same claims, rights, duties and remedies that belonged to the original person. To put it more simply, if a person is subrogated to another person, then that person is said to “stand in that other person’s shoes”.
Although subrogation is a common law right, it can also arise (or be taken away) by Statute. Having said this however, subrogation most commonly arises in relation to policies of insurance and is based on the concept of indemnity. In other words, once an insurer indemnifies an insured by paying the insured’s claim, the insurer is then subrogated to their insured. The subrogation rights of the insurer may also be taken away, or modified, by the policy of insurance. Subrogation is not available to a volunteer or where the payment is gratuitous.
A good example of an indemnity situation involving a contract of insurance is the following: if you are having your roof replaced on your house and one of your roofer’s employees accidentally starts a fire which causes your house to burn down, then your insurer, after paying you to replace your home, can go after the negligent roofing company for the money that it paid to you to rebuild your house (and you hope that the roofing company also has insurance). The indemnification payment by the insurer to the insured is based on the terms of the insurance policy. Normally the indemnification is based on a replacement value of the property as opposed to the actual cash value (ACV) of the property at the time of the loss. However, in the subrogation action, the damages are limited to the ACV. In other words, damages in tort actions are generally assessed based on placing the plaintiff in the same position as he or she would have been in had the incident not occurred i.e. the actual cash value of the property at the time of the loss.
Subject to any insurance policies or Statutes modifying the subrogation rights of the insurer, the insurer is entitled to commence an action and pursue any cause of action available to its insured with respect to effecting complete or partial recovery of the loss against the negligent person. Since the insurer has the same rights as it’s insured, limitation periods as to when any legal action must be commenced also apply to the insurer.
The subrogated action may be commenced in the name of the insured or the insurer. Normally the claim is commenced in the name of the insured. This way, the insurer can also pursue any uninsured claims on behalf of the insured i.e. the deductible. In fact, the insurer has a legal obligation to pursue all the uninsured claims at the same time as pursuing the subrogated damages. The insurer owes a duty to the insured that they will act in good faith and diligently pursue the insured’s uninsured losses as well. If the recovery at the end of the day is insufficient to recover all the losses sustained by the insured, then the amount recovered is split on a pro rata basis between the insured and the insurer.
In addition, the insured is obligated to assist (non-financially) and cooperate with the insurer in its subrogated recovery efforts. If there are no deductibles or uninsured losses being pursued then the insurer and its lawyer have complete carriage of the action and the insured has no material interest in the lawsuit. The insurer can then negotiate and settle the action as they deem appropriate.
On the other hand, if the insured starts an action against the person who caused the damages, then the insured also has an obligation to protect the insurer’s subrogated interests. If the insured does not protect the insurer’s subrogated claim, then the insured is liable to the insurer for the difference between the actual amount recovered and what could have been recovered.
Paul H. Philp
Civil Litigation
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