Sometimes the topic of subrogation comes up with a claim and people aren’t quite sure what it is. Subrogation is the process through which an insurance company makes a payment either to their insured or on their insured’s behalf, and than tries to recover that payment from a more culpable party.
Many people have seen the subrogation process work but may not have heard the term. Most everyone has car insurance, and many people have been in an accident that isn’t their fault. When someone is not at fault in an accident, they can go to their own insurer and collect under their collision insurance. But since they aren’t at fault, their insurer will try and recover from the responsible party. A claimant might never realize this happens, but for the fact that they get a refund check for their deductible if the insurer is successful in making the responsible party pay.
So why should a business owner care about subrogation? Well, there are a number of reasons. First of all, if the business paid a deductible, they could receive that back. Secondly, and possibly more importantly, subrogated claims are not used when calculating policy loss ratios. Policy loss ratios are simply a calculation of losses paid divided by premium charged. Low loss ratios lead to favorable renewals and discounts; high loss ratios lead to higher rates and even non-renewals.
Sometimes a business owner might not want subrogation to occur against a particular party for some business reason. For example, a nonprofit may have a below market lease as a quasi donation. Most insurance policies grant the insurer the right to subrogate at their discretion without your explicit consent. To prevent subrogation, this must be negotiated in advance with the carrier and a small additional premium may be charged. In fact, some landlords or clients may require a waiver of subrogation before letting a business operate at their location.
As usual an ounce of preparation is worth a pound of after the fact damage control.
