Insurance the right of Subrogation Explained

The right of subrogation is an important general insurance principle, which ensures that the concept of indemnity is upheld. Subrogation is essentially the right of a legal entity to stand in place of another, if it indemnified another party under a legal obligation. In simpler terms, if A is legally obligated to compensate B for loss or damage inflicted by C, then A can sue C to recover its compensation. Subrogation is designed to prevent B from claiming money from the insurer and pursuing C for compensation as well; it prevents the insured from being over-indemnified.

For an insurance example, if an insured person gets involved in a vehicular accident, he may make a claim on his insurer or the third party. The insurer may then settle the claim with the insured. If the insured, for whom the insurer already settled a claim, is not fully liable for the accident, the right of subrogation is applicable. The insurer who paid the claim would then stand in the legal place of the insured to receive compensation from the third party or other insurance. Instead of the other insurance company or the other person involved in the accident compensating the insured, the third party in the subrogation case would be liable to the insurer who paid the claim. This prevents double payment of the claim.

Subrogation only applies to the extent of the claim. Insurers are not as unfair as some persons believe. The insurance industry also operates within a strict legal framework. If the third party has to pay a higher amount than the claim value, the balance would be returned to the insured. Insurers usually evaluate claims properly, so the reverse is not likely to happen. If the claim payment is more than the recovery cost by error, then the insured would have to return the excess compensation to the insurer. This preserves the integrity of the indemnity concept. No one should profit from a settled claim.

Depending on whether he was fully compensated by his insurer or not, the insured may only recover where limits on the insurance amount are placed. A prime example of this is the application of principles of average and excess. The amount that the insured has a right to would depend on the percentage of the risk that was insured.

If an insurer settles a claim as a non-gratia payment, then the right of subrogation cannot be invoked. This is primarily because subrogation is premised on a legal obligation and is not a voluntary payment.