What is Subrogation and How Does it Work?
Subrogation is essentially a right to reimbursement. In a personal injury case, subrogation allows an insurance company to recover the money that it paid on your behalf for medical expenses or other insurance benefits. Technically speaking, subrogation is actually the legal substitution of an insurance company for the injured victim, entitling the insurance company to make the legal claims of the injured victim. Put another way, an insurance company that pays benefits on behalf of an injured person steps into the shoes of the injured person and has the right to assert the injured person’s claims against the negligent party.
Sometimes the insurance company will assert its claim directly against the person who caused your injuries (that person is called the tortfeasor). Other times, the insurance company will notify you or your attorney that it has a right to subrogation and that it expects to be repaid out of any money recovered in your case. Correctly handling subrogation claims is critical. Failing to properly resolve a subrogation claim leaves you vulnerable to lawsuits and judgments by the insurance company.
Types of Subrogation
Different types of insurers have different sources of the right to subrogation. For example, in Colorado, all Worker’s Compensation insurance companies have a legal right to subrogation granted by Colorado Revised Statutes, section 8-41-203. Health and disability insurance companies get their right to subrogation by contract—i.e. somewhere in all the paperwork that they provide you it states that they have a right to subrogation. Not every insurer has subrogation rights though. Typically, if an insurance company does not have a statutory right to subrogation and the insurance policy does not say they have a right to subrogation, then you do not need to repay it. But figuring out whether an insurance company truly has a valid subrogation claim can be difficult. It involves reading lengthy documents filled with legalese. It’s important to know where to look and what to look for. Even if a document claims the right to subrogation, that claim may not be enforceable.
Limitations on the Right of Subrogation
Sometimes victims believe it does not make sense to pursue a claim because they assume that all of the recovery will go to repay the insurance companies. However, this is often not the case. The only way to clearly evaluate whether a claim is worth pursuing is to consult an experienced lawyer with thorough knowledge of insurance law and subrogation rights. Not all types of recovery are subject to claims of subrogation. Even when certain types of recovery are subject to claims of subrogation, other laws limit the insurance companies’ rights to be fully repaid.
For example, let’s consider a situation where an individual is working at the time he is injured. He is a salesman driving a company vehicle between work-related stops. While driving, someone runs a red light, colliding with his vehicle and seriously injuring him. Since he was working, worker’s compensation insurance pays all of his medical bills and also pays him for lost time from work. The insurer pays $40,000 for medical bills and $35,000 for lost wages. That means that the worker’s compensation insurer has a subrogation claim for $75,000. Let’s also assume that the person who ran the red light has state minimum insurance liability limits of $25,000 and no personal assets. The victim has underinsurance coverage on his own policy for $50,000. This means that the total available insurance coverage is $75,000. Let’s also assume for this example that the victim has a valid claim for all types of damages (medical bills, lost wages, pain and suffering, inconvenience, emotional stress, and impairment of quality of life) that total $150,000. Should the person in this example pursue a recovery?
The answer is yes. Although the worker’s compensation carrier technically has a right to subrogation for $75,000 and the total available insurance is only $75,000, the victim will still make a net recovery. Why? Because two laws apply to limit the insurer’s subrogation right. First, worker’s compensation insurance is only entitled to subrogation against money recovered from the defendant. In this example, that means the defendant’s $25,000 liability insurance coverage. The insurer is not entitled to recover against underinsurance coverage that the victim maintains on his own policy. Therefore, of the $75,000 recovered by the victim, only $25,000 is subject to subrogation by the worker’s compensation insurer.
A second limitation also may apply to reduce the amount even further. Remember that in this example, the victim’s actual damages were $150,000, but the amount recovered from all available sources was only $75,000. Therefore, the victim only recovered half of his actual damages. Since he did not recover an amount equaling his total damages, the argument should be made that the worker’s compensation insurer should take a proportionate deduction from their subrogation claim. This reduces the amount subject to subrogation even further.
Two other helpful rules sometimes apply to reduce the amount subject to subrogation. The first is called the Made Whole Rule. This rule applies to private health insurance companies governed by Colorado law. In cases where it applies, the Made Whole Rule states that if the victim did not recover the full amount of her damages, then the insurance company may not recover anything!
The second helpful rule is the Common Fund Doctrine, which requires that insurers reduce their liens proportionately to pay a portion of your attorney’s fees and case costs. After all, if you hire the attorney who does all of the work to obtain a recovery that gets split between you and the insurance companies, how is it fair that you pay the entire fee and costs out of your portion and the insurance company gets its full portion? The Common Fund Doctrine applies to make sure that the insurance company does not get a free ride at your expense and makes them pay their fair share of your attorney’s fees and case costs.
In summary, subrogation presents many difficult issues. No one simple rule exists for all subrogation cases. The rights of the insurer vary depending on:
The type of case (car crash, premises liability, product liability);
Who has the right to subrogation (worker’s compensation, private health insurance, ERISA benefits plan); and
The source of the recovery (auto liability insurance, auto underinsurance, homeowner’s insurance).
It is impossible to cover every possible example in this blog post. The important things to know are that many pitfalls and a few lifelines exist in the complicated world of subrogation. Knowing which limitations apply and how to assert your rights will make a tremendous difference to your net recovery. Our attorneys have successfully resolved hundreds of subrogation issues favorably for our clients. We will make sure that you receive the maximum recovery possible.