Subrogation is a common term in the insurance industry but not a common one outside of it. So what is subrogation?
Subrogation is a legal right the insurance company holds to pursue a third-party responsible for the damages caused to the policyholder. Practically speaking, your insurance company may cover your claimed damages for which another party is responsible. You then subrogate your rights to the insurance company who has the legal right to sue the responsible party to recover money for you. This right of the insurer to “stand in the shoes” of the policyholder is derived from the policy language.
Insurance policies contain an insurance condition for subrogation that will usually indicate if a policyholder has a right to waive subrogation prior to a loss. It will also outline the policyholder’s responsibility in cooperating with the insurance company in their subrogation efforts. Finally, it will indicate the insurance company’s right to an assignment against liable parties for losses for which the company pays.
Let’s take a look at another practical example to see how subrogation is applied in a property claim. Suppose a person arrives at his or her place of business to find the building completely burnt down. The cause of the fire is determined to be a faulty furnace. The policyholder’s insurance company would pay for the covered losses per the terms and conditions of the policy. Since the fire is attributable to the furnace, the insurance company would then initiate a subrogation action against the manufacturer of the furnace under a theory of product liability.
Now that we have covered the basics, it is important to understand the benefit to you, the policyholder. A robust subrogation department can keep your costs down in two ways: recovery of your deductible and inhibiting unnecessary rate increases. An insurance company will reimburse your deductible if it later recovers from the responsible party. In addition, any money recovered by the insurance company goes directly to its bottom line, which is passed on to you in the form of lower premiums.
You can also prepare for these situations. Let’s assume your neighbor is burning brush that blows onto your property. Your house burns as a result of your neighbor’s negligence and is a total loss. How do you go about proving the contents of your house to justify either an insurance claim or to support damages in a subrogation action against your neighbor? Properly taking inventory of your household items prior to a loss can save you many headaches if a loss were to occur down the road. Walking through your house and documenting your home’s contents via video recording is a great way to protect yourself.
Now that we have discussed the basics and the benefits of subrogation to policyholders, it is also important to understand that some companies are beginning to utilize analytics and artificial intelligence to assist in identifying subrogation opportunities. As technology advances, companies on the cutting edge of this movement are implementing processes to make the subrogation function more robust and efficient.
Analytics and AI technology allow an insurer to instantly possess relevant data for each file to give its subrogation department a much better picture of the subrogation potential as well as the recoverability of the at-fault party. It allows a subrogation department to implement the right combination of technology and technical excellence to set files up for optimal recovery opportunities. More efficiency leads to lower premiums and better service to you, the policyholder.