WHAT IS SUBROGATION IN INSURANCE

Insurance companies in India provide financial protection against risks such as property damage, health issues, or vehicle mishaps in exchange for regular premiums. This financial safeguard shifts the burden of potential losses from policyholders to insurers. Among the various principles that make this possible, subrogation plays a critical role.

 

What is Subrogation in Insurance?

Subrogation in insurance refers to the insurer's legal right to recover costs from the third party responsible for a policyholder's loss. This principle is particularly important in scenarios involving health insurance, property insurance, or vehicle insurance.

Example:
If you are injured in a car accident caused by another driver, your insurer may cover your medical expenses upfront. The insurer then seeks reimbursement from the at-fault party to recover the costs.

What is the Principle of Subrogation in Insurance?

The principle of subrogation in life insurance is overtaking policyholder’s legal right to recover damage cost whether it is related to health or a property. In short, the insurance company gains the legal right to pursue any third-party responsible for causing loss.

 

Key Features of Subrogation

1. Transfer of Rights

After indemnifying the insured, the insurance company obtains the legal rights of the policyholder to recover their loss from the third party responsible for causing it.

2. Applies Post-Indemnification

Subrogation rights arise only after the insurer has compensated the insured for the loss.

3. Avoid Unjust Enrichment

Subrogation prevents the insured from benefiting financially by recovering from both the insurer and the responsible party.

4. Legal Action

If the third-party refuses to pay, the insurer can initiate legal action against them in the name of the insured. 

5. No Double Recovery

Subrogation ensures the insured does not receive double compensation- one from the insurer and the again from the at-fault party.

 

Types of Subrogation in Car Insurance

When an insurance company prefers to recover reimbursement from a third party who is responsible for causing a loss, then the subrogation in car insurance occurs.

Here are the three main types of subrogation explained below.

1. Equitable Subrogation

It is a most general type of subrogation. In this, a fair action and equity is more important than a written contract. It lets the insurance company seek reimbursement if the third-party is absolutely responsible for the policyholder's loss.

For example, if your neighbor’s tree falls on your house, causing damage to your property, then the insurance company will recover that cost of repairs from your neighbors.

2. Contractual Subrogation

As per the name suggests, contractual subrogation is a type of subrogation where a policyholder makes a contract with outlined terms and conditions with the insurance company. It permits insurers to reclaim costs from the third-party car insurance.

For example, if you get insured in a car accident, and it was not your fault, and your insurer pays for the damages, then they can try to retrieve the amount from the at-fault.

3. Statutory Subrogation

In this type of subrogation, policyholders can get in touch with the third-party directly. It is provided by specific laws and regulations in favour of the worker’s compensation.

Here, the role of the insurance company will be zero. They don't need to pay any charges for the losses caused by the third-party. It’s a kind of deal that is made between the policyholder and third party to reimburse for the loss.

Understanding these types of subrogation helps to clarify how insurance companies recover costs and how it may impact the insured.

 

How Does Subrogation in Insurance Work?

A subrogation in insurance law involves three parties: The insurance company (insurer), the policyholder (who purchases a health insurance policy), and the party that is responsible for the damage.

The subrogation process starts when a policyholder files a claim against the insurer. The insurer verifies the details and pays the amount to the policyholder. After receiving the amount of money for the claim, insurance companies get in action to reclaim that amount from the third-party that caused the damage. Let’s have a look at the example of subrogation.

Samir and Raksha were met with a car accident. It was Samir’s car and got severely damaged. 4000 Rs were the repairing charges and got covered under insurance. 

But, later, on investigating the event, Raksha was caught responsible for the accident as she overshot the speed limit. Samir’s insurance company decides to reclaim the amount from Rasha, as the cause was incurred by her.

In such a situation, the insurance company in which Samir has invested makes use of the subrogation to recover his loss from the third party who was Rasha.

In this way, the subrogation works in car insurance. It confirms fairness in the claim process by holding the responsible party accountable while minimizing financial strain on the policyholder.

 

Why is the Subrogation Principle Important in Insurance?

Following are the key reasons that signify the subrogation principle in insurance.

1. Prevents Double Recovery

Subrogation ensures that the insured does not reclaim twice, once from the insurer and again from the responsible third-party.

2. Reduces Insurer’s loss

By recovering the claim amount from the at-fault third party, insurers can offset their expenses. It helps to maintain the insurer’s financial health and keep premiums more affordable for policyholders.

3. Make Certain Accountability

Subrogation holds the negligent or at-fault party financially responsible for their actions. Also, it discourages reckless behavior and promotes accountability in society.

4. Promotes on Time Compensation

Policyholders receive compensation from their insurer promptly, without having to wait for the resolution of disputes with the third party. Additionally, subrogation allows insurers to handle recovery efforts on behalf of their policyholders.

5. Encourages Legal and Efficient Recovery Processes

Insurers often have the resources and expertise to pursue recovery from third-party more effectively than individuals. Moreover, subrogation streamlines the legal process and reduces the burden on policyholders.

Subrogation is very essential to uphold the principles of indemnity, fairness, and accountability, ensuring that insurance systems function efficiently for both policyholders and insurers.

 

What is Waiver of Subrogation?

Waiver of Subrogation is a clause in insurance agreement. In this, the insurance company agrees to waive its right to pursue recovery from third-party who is responsible for loss. It's a two way contract between the insurer and the third party where they give up their rights to subrogation against each other.

Waiver of Subrogation is commonly used in construction contracts, commercial leases, professional services agreements, and employment situations.

For Example: A contractor working on a building, accidentally damages the property. The insurance company for which the building owner has paid premiums pays for the repairs.

Generally, the insurer would pursue the contractor to recover the cost. 

If the building contract includes a waiver of subrogation clause, the insurance company cannot pursue the contractor to reimburse, even if the contractor was negligent.

From this explanation, it is cleared that a Waiver of Subrogation is a strategic tool to manage risks. It streamlines relationships and reduce disputes but comes with financial and accountability trade-offs.

 

Final Thoughts

The principle of subrogation is a cornerstone of the Indian insurance industry, ensuring fairness, accountability, and efficient claim processing. It upholds the integrity of the insurance system while protecting the rights of policyholders.

 

FAQs

1. Does Subrogation Affect Insured Victim?

No, subrogation generally does not affect the insured victim negatively. Instead it benefits the insured victim in several ways.

2. What is Waiver of Subrogation?

It is a condition in Car insurance policy. Through this, an insurance company relinquishes its right to pursue recovery from a third party responsible for a loss after compensating the insured.

3. Is Subrogation in Insurance Good or Bad?

Subrogation is considered good in insurance. It benefits both the insured and the insurance system as a whole.