Subrogation Clauses and Policies

Subrogation is a legal procedure that lets an insurance company make a claim against a third party, to recover benefits that the insurer paid to its insured. The purpose of a subrogation claim is to force the person or company that was at fault for an accident to reimburse the insurance companies that paid insurance benefits as a result of that accident.

To elaborate further, let’s see subrogation at work. Suppose that Jenny’s home burns down. Jenny’s property insurer in turn pays $2 million for damages and the cost to replace the house. The insurer then discovers that the fire was caused by the negligent use of a bonfire pit by Jenny’s neighbor, Robert.

The insurer sues Robert to recover the $2 million it paid to Jenny for the fire damage.

However, if Jenny did not have property insurance, she would have the right to sue Robert for the cost to replace her home because he was responsible for the fire. Since Jenny’s insurer compensated her for the damage to her home, Jenny’s right to sue Robert is transferred to the insurer. The insurer then stands in for Jenny, and obtains whatever rights Jenny has to sue Robert.

Insurers are able to gain their right of subrogation from a law or contract, because of a subrogation clause. Most insurance policies contain a subrogation clause that applies when the insurer has paid a loss. The clause gives the insurer the right to recover the amount it has paid to the insured from the party that caused the loss. An insurer might have this right even if it was not stated in the policy. Many states have enacted subrogation laws that allow insurers to pursue recovery once they have fully compensated their insured for a loss.

Subrogation Clauses Found in ISO Policies

Most business insurance policies contain a clause that explains the insurer’s subrogation rights. This clause is usually found in the policy conditions. In ISO policies, the subrogation clause is usually located under the heading Transfer of Rights of Recovery Against Others to Us. Subrogation clauses can be written in many forms, but they all have the same general purpose:

They allow the insurer to recover a loss payment from the party that caused the loss. In this case, this clause allows Jenny’s Insurer to sue Robert for his negligence that lead to burning her house down.

1. Commercial Property Policies

To explain commercial property policies, let’s go to another example:

Rebecca owns a small commercial building that she uses to operate her bakery. Rebecca has insured the building under a commercial property policy. One day, Rebecca is checking inventory in her bakery and hears an explosion. A moment later, one wall of her building collapses and then bursts into flames. The fire department soon arrives to extinguish the fire.

Rebecca’s building has sustained significant damage. The fire was the result of a boiler explosion in the building next door. The boiler exploded because Gerald, the building owner, failed to maintain it properly.  Rebecca’s property insurer pays for the fire damage to her building and then subrogates against Gerald for the negligence of maintaining his boiler room.

The insurers will  file a suit against Gerald seeking recovery for the amount it paid to Rebecca. Since the insurer has reimbursed Jennifer for the loss, they are now able to substitute for Jennifer and sue Gerald for the loss. The insurer has the right to sue Gerald only for the amount it paid to Rebecca.

2. Commercial Liability Policies

Most business liability policies contain the same subrogation clause that appears the standard ISO general liability policy. The clause states that if the insured has rights to recover all or part of any payment the insurer has made under the policy, those rights are transferred to the insurer. This would happen in the event of an injury on the premises of a commercial building. This is familiar with a wet floor injury at a McDonald’s. A patron breaks their leg due to a crack in the floor at a McDonald’s location. The injured patron would sue McDonald’s, whose liability insurer would pay the claim. The insurer would then sue the contractor that installed the floor for the amount it paid to the injured patron.

The insurer contends that the contractor installed the floor improperly and that its negligence caused the customer’s injury. Because the insurer has reimbursed the injured customer for the cost of the claim, it assumes the customer’s rights to sue the negligent contractor.

3. Commercial Auto Policies

The standard business auto policy contains a subrogation clause similar to the one found in the ISO property policy. The clause essentially states if the insurer pays an auto liability or physical damage claim, and someone other than the insured is liable for the injury or damage, the insurer may sue that party to recover the amount of its claim payment.

4. Workers Compensation Policies

The standard NCCI workers compensation policy contains two subrogation clauses: one under Part One, Workers Compensation, and another under Part Two, Employers Liability. Both are entitled Recovery From Others

The subrogation clause that appears in Part One gives the insurer your rights, as well as the rights of your injured employee, to recover payments it has made from anyone liable for a worker’s injury. For example, suppose that your firm has purchased a workers compensation policy. One of your employees is injured in an auto accident caused by the negligence of another driver. Your insurer provides workers compensation benefits to the worker. It then sues the negligent driver for the cost of the benefits it paid to your employee.

Fortunately, Florida requires most employers to provide workers’ compensation insurance for their employees. These compensation benefits are typically made in the form of wage replacement. How much a worker is entitled to receive depends on how much their ability to work is impacted by the injury. In Florida, you do not need to prove that your employer was at fault for your injury—only that the injury occurred while you were working.

Most accidental injuries or occupational diseases that can occur within the scope of employment is covered by workers’ compensation. However, mental or nervous injuries are not eligible for worker’s compensation unless they stem from a physical injury onsite.

The subrogation clause that appears in the Employers Liability section gives the insurer the right to seek recovery from anyone liable for an injury for which the insurer has paid damages under the policy. That is, if the insurer has paid damages as a result of an injury to an employee, it may sue the party that caused the injury to recover its payment.

Finding the right lawyer in matters of insurance subrogation and the impact on you cannot be overstated. The law offices of Stephen Barker can provide the guidance and support needed to help with your claim. This subrogation law office has more than 15 years of property damage experience. Each case handled individually and with expertise. Other areas of practice for the Stephen Barker Law Offices are business litigation and condo/homeowners property disputes. Graduating from law studies at George Washington University in Washington D.C. Stephen has been involved in law for over 30 years. His experiences led him to his own litigation firm in Florida. His practice has expanded into all areas of property management law.

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