October 19, 2020 4 min read

What Does Subrogation Mean in Business Insurance?

what is subrogation cover

If you’ve ever read through some of your business contracts, legal or otherwise, you may have come across the term “subrogation.” Subrogation is a legal term that signifies that one person or group has stepped in as a substitute for another.

If you see the term being used in the business insurance world, it basically means that your insurance company is stepping in for you and assuming your legal right in order to pursue a third party for an insurance claim.

Assuming that it exists, you should be able to find the subrogation right specified within the contract created between you and your insurance carrier. It is usually a special clause that allows the insurer to initiate the process of recovering a payment by taking a third party to court.

It’s basically a technique used by insurance companies when they want to reclaim money that they have already paid out for insurance claims. When an insurance company uses subrogation, they attempt to recover the money they paid to their insured client from a third party that was at least partially responsible for the damage.

However, it’s important to understand that subrogation doesn’t occur for every single payment that is paid out. The circumstances behind the claim and the corresponding payment need to make sense in order for the insurer to seek subrogation.

But if there’s a situation in which a third party is responsible for the loss in some way, you can expect your insurer to use subrogation in order to recoup money from them.

subrogation illustration

How Does Subrogation Work?

As is the case of subrogation, there are three involved parties: the insurer, the insured party, and the third party responsible for damages.

This is what the subrogation process looks like, in a nutshell:

  • The insurer pays out the losses of the claim that was filed by the insured party.
  • The insured party receives the money.
  • The insurer begins the process of attempting to collect the claim amount from the third party that was responsible for the damages.

To understand the process better, let’s use a standard workers compensation claim as an example:

One of your employees was injured on the job and because you have a workers compensation policy, your insurer pays out the workers comp settlement to your employee to cover the costs of treatment, lost wages, recovery, and whatever other expenses exist.

However, if a third party’s negligence was in some way responsible for the injury of your worker, then your worker would have the right to sue that third party for damages.

With subrogation, your insurer would step in to represent your injured worker in an effort to recoup the money that they paid on the workers compensation claim.

waive the right to subrogation illustration

What Does It Mean to Waive the Right to Subrogation?

There are situations in which a third party, likely a business partner or client of yours, requests that your insurance policy covers 100% of a loss, even if they were partially at fault, and further asks you make sure that your insurer cannot attempt to recoup the loss against them in your name either.

In this type of situation, your insurer would have to waive their right to seek subrogation against the third party.

Why would a client or business partner request this? In most cases, they want the peace of mind that comes with knowing that they will not be held liable for damages, even if they were in some way responsible for them.

This type of maneuver is designed to eliminate potential business conflicts between you and your clients and partners by immediately establishing that you will be taking full responsibility for any damages that may occur as a result of your cooperation.

To obtain a waiver of subrogation, you would have to request one from your insurer. Most insurers will accommodate you, however, you can expect to pay a higher premium if you do request a waiver of subrogation in your policy.

Since you’re giving up your right to recover losses, your insurer is also giving up their rights to recover losses that they may pay to you. This makes the contract riskier for the insurance company and, therefore, more expensive for you.

benefits of subrogation illustration

What Are the Benefits of Subrogation?

Subrogation can be beneficial not just for your insurer, but for you a well. The benefits for the insurer are more obvious; if the insurer is able to engage in subrogation, there’s a better chance that they will be able to recoup the money that was paid out to you as the policyholder.

As we’ve already mentioned, this ability of the insurer to recoup their losses also enables them to offer you a lower premium for the insurance policy. That means that if the insurer has a better chance of recovering losses, they will gladly allow you to pay less for the insurance policy.

However, subrogation policies can vary greatly from insurer to insurer in terms of what the policies ask of you and how the insurer will respond in various situations that could entail a subrogation process.

To be completely sure that you have purchased a subrogation policy that best suits your business and its specific insurance needs, don’t hesitate to get in contact with one of our experienced brokers, who will clearly and thoroughly explain your options before finding you the right insurance policy.

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