For every wrong there is a remedy. Our system of civil law is premised on this seven-word maxim. It is generally accepted that wrongdoers should pay for the damages they cause. In the insurance world, this principle is usually applied through subrogation.
Subrogation is often misunderstood. There’s a notion that heartless insurance carriers are out to stick it to the little guy, suing them to get back insurance proceeds. That subrogation only serves the interest of lawyers who drive up litigation costs while the defenseless foot the bill. Insurance carriers and their lawyers, according to this popular notion, conspire to serve their own selfish interests.
The reality is less dramatic. The most basic definition of subrogation is the right of one entity to stand in the shoes of another to assert a claim or right. People buy insurance to get themselves back to where they would have been had a loss never occurred. Often, insurance companies use the right of subrogation to recover from the wrongdoer the insurance proceeds that it paid to its insured – including its insured’s deductible, which is then returned to the insured.
Subrogation Actually Helps Lower Premium Costs
Say someone’s car is rear-ended. Or they have an indoor swimming pool where their kitchen used to be. Insurance payments can get the car fixed and kitchen restored. Subrogation allows the insurance company to pursue the bad driver and careless plumber; to put responsibility where it belongs, thus recouping what it had paid to the insured. If insurance companies were required to absorb these losses and the wrongdoers were allowed to skate free, premiums would have to be increased to reflect that risk. Consequently, subrogation actually lowers the cost of insurance for everyone.
At a minimum, every carrier investigates its claims for subrogation potential. Indeed, the benefit to policyholders is so substantial that some states require an insurance company to tell an insured if they are not pursuing subrogation. As with our car example, if the insured had a $500 deductible, the only way for the insured to recover his/her $500 is for the insurance company to exercise its subrogation rights to hold the liable party responsible.
The Right to Aggressive Pursuit and Tenacious Defense
What if the same insurance company insures both the homeowner whose house burned down and a contractor named in the suit? This isn’t as rare as it sounds. Both the law and fundamental fairness prohibit a carrier from giving preferential treatment to one insured over another.
In other words, a carrier can’t shield or favor one customer over the other. The same duty is owed to everyone. As a result, the insurance company should aggressively pursue its subrogation rights on behalf of the homeowner against the contractor. At the same time, the insurance company should and will provide a tenacious defense for the contractor against the homeowner.
Alarm contractors need to partner with their carriers to ensure tenacious defense. They can do this by:
- Taking responsibility only for the work they perform; never for something they have no control over.
- Keeping good records. Liability claims often arise long after the job is done or accident takes place.
- Preventing people outside the team from interfering with their work. Keep it contained.
- Contractually limiting their liability to the value of the goods or services they are providing.
- Adding subrogation waivers to contracts where appropriate.
Subrogation will always be a piece of the insurance industry. But for companies that are prepared, and work with their insurance carriers; it is not something to be alarmed by.
The information provided in these materials is intended to be general and advisory in nature. It shall not be considered legal advice. The Hartford does not warrant that the implementation of any view or recommendation contained herein will: (i) result in the elimination of any unsafe conditions at your business locations or with respect to your business operations; or (ii) will be an appropriate legal or business practice. The Hartford assumes no responsibility for the control or correction of hazards or legal compliance with respect to your business practices, and the views and recommendations contained herein shall not constitute our undertaking, on your behalf or for the benefit of others, to determine or warrant that your business premises, locations or operations are safe or healthful, or are in compliance with any law, rule or regulation. Readers seeking to resolve specific safety, legal or business issues or concerns related to the information provided in these materials should consult their safety consultant, attorney or business advisors. All information and representations contained herein are as of July 2014.