Insurance Policy Conditions (a/k/a/ Land Mines): Part 29 - Subrogation

Most insurance policies contain a subrogation condition. Subrogation is “[t]he principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.”1

Previous posts in this blog series have touched upon the interplay of subrogation and mitigation conditions. This post is dedicated solely to subrogation,2 and here is what a well-respected insurance treatise has to say, in part:3

In general, absent a statute to the contrary, an insurance company will, on making a payment to the insured required under the policy, always be subrogated, either totally or partially (if the insurer pays less than the insured’s entire loss), to the insured’s rights and remedies against the wrongdoer. There are, however, … limitations on the preceding rule.

[One such limitation is that] a release from the insured to the wrongdoer will ordinarily destroy the company’s subrogation rights. Such a release will not, however, be effective against the insurer if the wrongdoer was aware of the company’s subrogation rights prior to obtaining the release.

***

[Another limitation on] an insurance company’s right to subrogation is that no right to subrogation is created when the [damage] was caused by the policyholder. By definition, subrogation exists only with respect to any rights that the person compensated might have against third parties. A limited exception has been recognized to this rule, however, when the insured against whom the carrier seeks subrogation is provided coverage under a policy other than the one pursuant to which the policy benefits were paid. Under those circumstances, subrogation may be appropriate.

The correct exception to the anti-subrogation rule is broader. Subrogation should be allowed against an insured when the insured is not entitled to coverage under its policy by reason of the … damage caused by the insured.

The general rule prohibiting an insurer from suing its own insured for subrogation is intended to prevent an insurer from recovering back from its insured that loss or damage the risk of which the insured had passed along to the insurer under the policy.

Obviously, therefore, the rule should be inapplicable as to any loss or damage the risk of which the insured has not passed along to the insurer.

***

[Another limitation, based] on equitable grounds, [is] that an insurer can seek subrogation from a named insured’s social guest but cannot, on equitable grounds, seek subrogation from a named insured’s tenant.

To read previous posts in my series on insurance policy conditions, click here.


1 Bryan A. Garner, Black’s Law Dictionary 674 (2001 2d pocket ed.).
2 Next week’s post will address an insurer’s subrogation rights (or lack thereof, depending on how you look at it) against an individual or entity listed in the policy as an additional insured.
3 2 Insurance Claims and Disputes § 10:7 (6th ed.) (West, April 2013).

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