What is Principle of Subrogation in Insurance?
Principle of Subrogation in Insurance means transfer of legal rights of the Insured to pursue recovery against a Third Party who is responsible for causing loss to the Insurance Company. The Principle of Subrogation is one of the fundamental principles of Insurance.
In simple language, when an Insurance Company compensate the Insured for his loss, the Insured, in return, transfers his legal rights to pursue recovery against the third party who is responsible for the loss. This means that the Insurance Company can sue the Third Party on behalf of the Insured who caused the loss to recover money paid for losses.
How does Subrogation work?
The working of Subrogation is very simple:
The Insurance Company first settles the Claim of the Policyholder for damages caused by the Third Party.
After settling the Insurance Claim, the Insurance Company pursues recovery against the Third Party in courts. The Insurance Company sues the third party on behalf of the Insured since the Insurance Policy gives Subrogation rights to the Insurer on payment of the Claim.
One important point to note is that the Insurance Companies include the deductible amount when claiming the damages from the Third Party. If recovered, the Insured will also get reimbursed for the deductible amount.
Subrogation is the method used by Insurance Companies to recover money that they have paid out as Insurance Claims.
Consider an example where a Vehicle is damaged by a bike driver. The Vehicle Owner claims damages from the Insurance Company. The Insurance Company pays out the Insurance Claim to the Policyholder and begins the process of recovery from the bike driver who damaged the vehicle.
The Subrogation rights granted by the Insurance Policy places the Insurer in the shoes of the Insured and allows him to pursue recovery against the Third-Party
What is Waiver of Subrogation in Insurance?
There is a provision in Insurance Policies where the Insurers waive their rights of recovery against a third-party by means of an Insurance Endorsement known as Waiver of Subrogation.
If an Insurance Policy contains a Waiver of Subrogation Endorsement, then Insurance Companies cannot exercise recovery rights against the third parties.
Insureds generally demand Waiver of Subrogation Rights as they do not want Insurance Companies to press for recovery against their clients or customers as it might spoil the relationship.
Important Points to remember about Subrogation in Insurance
There are a few important things to remember about Subrogation in Insurance:
- The Insurance Company gets the recovery rights under Subrogation only after settling the Insurance Claim with the Insured
- The Insurance Company usually charges additional Insurance Premium for Waiver of Subrogation Endorsemen
- Under Subrogation, the Insurance Company sues the Third Party for the complete amount, that is, the amount it paid as the Insurance Claim plus the amount of loss that the Insured bore out of his own pocket. If the amount is recovered, the Insurance Company refunds the amount to the Insured to the extent of loss that the Insured paid out his own pocket.
- The Insurance Company is entitled to recover the money from the Third-Party, but only to the extent that it has paid as compensation to the Insured. It cannot keep more than what it has paid out as Claim. So, Subrogation ensures that the Insurance Company also does not make profits out of the Policy.
The Principle of Subrogation is one of the fundamental principles of Insurance. Subrogation ensures that the Insurance Company does not suffer due to negligence or mistake of the Third Party. The Objective is to make the Third-Party pay the losses for his fault.
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