The Basics of "Subrogation"
Introduction Although subrogation has broad application as an equitable remedy in a variety of circumstances, it is a keystone concept in insurance coverage litigation. Historically, subrogation was a common law concept permitting one party to "step into" the shoes of another so as to assume the rights and claims of that party against other third-parties. In the insurance context, the concept of subrogation permits an insurance company to recoup amounts paid to its policyholder from a third party culpable for the policyholder's loss or claim. The term "subrogor" refers to the party relinquishing his rights/claims; the term "subrogee" refers to the individual or entity assuming the party's rights/claims. The right to bring a subrogation claim can be established by law, contract, or statute. The public policy goal of subrogation is to place the ultimate risk of loss on the wrongdoer, and not the victim or his insurer/surety. Subrogation also furthers the public policy goal of limiting the responsibility of insurance companies to provide coverage for losses that are not "truly fortuitous" in nature.
In the insurance context, subrogation actions generally arise out of two situations: 1) in first-party claims (i.e., made by the policyholder to its insurer) in which an insurer pays policy proceeds to its policyholder, and later seeks to recoup those amounts from an third party responsible for the loss or claim; or 2) in third-party liability claims (made against a policyholder by third parties asserting liability claims), in which an insurer defends/indemnifies its policyholder from a third-party claim, and later seeks to recoup those amounts from another third party responsible for the loss or claim, in an action brought by the insurer or the policyholder. In either scenario, the general concept is the same: the insurer pays out policy proceeds, and seeks to recover those from third parties believed to be responsible for the loss/claim.
Subrogation Rights in Policies Many insurance policies contain a paragraph in which the insurer reserves the right of subrogation in the event of a loss or payment of a claim. Typical subrogation clauses read as follows: By accepting payments under this Coverage Part, the Insured agrees that we shall be subrogated to all claims, demands, actions, and rights of recovery the Insured may have against any third party or any insurer, to the extent of any and all payments made hereunder. … If we pay a claim under your policy, we will take over your right to recover those amounts from any other individual or entity. You agree to cooperate with us and not take any action that will harm our impair our pursuit of recovery.
At common law, insurers that fully indemnify their policyholders are generally permitted to commence recovery litigation against a wrongdoer, control the conduct of the litigation, and share in the proceeds of recovery against the wrongdoer. These rights, however, may be expanded or contracted depending on the language of the insurance contract, which will govern the relationship between the parties.
Waiver of Subrogation Clauses Many business contracts contain "waiver of subrogation rights" clauses that are routinely found alongside standard indemnity / hold harmless language. In these clauses, one or both of the contractees typically agree to waive any and all subrogation rights they may have against the other should a claim arise. However, the mechanical insertion of this boilerplate language can have the potential to create coverage problems. For example, if the loss/claim arises out of the contractor's negligence, then it may be harder for a contractee to obtain coverage for the loss/claim because the contractee's insurer cannot pursue the contractor to recover or recoup any policy proceeds paid as a result of the claim. In some cases, coverage disputes can arise as to whether the waiver of subrogation clause impairs the insurer's interests; in other cases, policyholders can add to their policies endorsements that obligate insurers to follow form on waivers of subrogation entered into by the policyholder.
Apportionment of Recovery A significant issue in subrogation law deals with the apportionment of recovery in the event that a subrogation action against a culpable third party is successful. Consider the following example: in the auto policy context, a policyholder is rear-ended by a third-party and makes a claim to its auto insurer for damage to the his vehicle and medical injuries, and the insurer pays 50% of the value of the claim and asserts subrogation rights; in the meantime, the policyholder successfully pursues a negligence action against the negligent driver, and ultimately recoups the other 50% of the value of the policyholder's total claim as awarded by a jury. How is that 50% to be divided? Does it all go to the policyholder? Or does it any of it benefit the insurer?1
Unfortunately, there are no clear answers to these questions. The law on the apportionment of recovery in subrogation actions is mixed, not well-established, and inconsistent among jurisdictions. It is further complicated by issues of partial coverage, concerns of double-recovery, awards of punitive damages, jury determinations on the amount of damages, the effect of such verdicts establishing the amount necessary to make policyholders whole (thus resulting in collateral estoppel of contrary arguments in future coverage actions), and other issues.
Generally, however, states follow several approaches:
- "Made Whole" Doctrine. This doctrine is an equitable principle that states than an insurer is not entitled to any subrogation rights until the policyholder is made whole, or in other words, completely compensated for its loss. This is the general and majority rule. The "made whole" doctrine reinforces the principle that the insurer, not the insured, is to bear the risk of a covered loss for which the policyholder has already paid in the form of premiums.
- Pro Tanto Rule. A number of states also recognize pro tanto subrogation, or in other words, subrogation rights permitted to the insurer even though the policyholder's claim has been only partially paid. The pro tanto rule, adopted by a minority of jurisdictions,2 permits the insurer to have the first claim to recovery from the third party and the policyholder is to have the remaining balance. Courts analyzing this method of distributing subrogation proceeds have held, however, that there must be clear and express policy language unequivocally supporting the insurer's right to recoup subrogation proceeds before the policyholder's losses are wholly satisfied.
- Pro Rata Rule. Although it does not have widespread support among courts, the pro rata rule apportions subrogation proceeds between insurer and policyholder in proportion to the percentage of the loss borne by each.
Distinctions Although subrogation is similar to several interrelated concepts, it should not be confused with the following:
- Reimbursement or Unjust Enrichment. These are equitable theories by which insurers may seek to recover payments made to an policyholder from the policyholder itself.
- Contribution. Contribution is the right by which an insurer may pursue other insurers responsible for the same loss/claim seeking recoupments of amounts paid to the policyholder. Contribution actions generally require two or more insurance policies covering the same risk giving rise to the loss.
Conclusion Although subrogation can be a dense body of law, the understanding of several topics such as the ones discussed above can help provide a starting point.