Subrogation Laws

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 What Is Subrogation?

Subrogation is an equitable remedy. The right of subrogation allows a party other than a creditor to be substituted in place of a creditor in order to obtain compensation for losses from a debtor. The party who substitutes for the creditor then acquires all the rights of the creditor against the debtor and can recover directly from the debtor. The third party obtains these rights from the creditor by paying the creditor the entire amount owed by the debtor.

The main purpose of subrogation is to allow the party who is substituted for the creditor, known as the “subrogee” in legal terminology, to obtain reimbursement for the payment they have made in connection with a legal claim or debt. The original creditor is called the “subrogor.” The subrogor’s right to recover from the debtor passes to the subrogee. The subrogee is said to “step into the shoes” of the subrogor in terms of their legal rights.

Subrogation is most common in connection with insurance issues. It is also common in cases involving mortgages, surety and guaranty, tax debts, and any situation in which a legal obligation has been paid by a party other than the person who is liable to pay it. The party who pays the obligation then assumes the rights of the person who was initially liable.

Subrogation is similar to the legal principle of contract assignment. Contract assignment is a process in which the existing party to a contract wishes to transfer their contract rights and obligations to another party. The original party who assigns their contract to another is then relieved of their contractual obligations, and their role is assumed by the party who steps in to take on the contractual responsibilities.

What Is an Example of Subrogation?

A common example of subrogation involves insurance coverage. Sometimes, an insurance company compensates their insured for losses suffered by the insured in an accident. Thus, the insured’s claim against the party who is legally responsible for the covered loss is subrogated to the insurance company. The right to recover from the person whose negligence caused the loss to the insured person passes to the insurance company. The insurance company is then able to pursue compensation from the negligent party that caused the loss. The insured gives up the right.

In other words, suppose that defendant D has damaged person X’s car in a car accident. Then, X’s insurance company, “IC”, pays to repair or replace X’s car. In this situation, IC has become the subrogee and X has become the subrogor. This means that IC is entitled to recover the compensation from D that X would normally have had to pursue, since IC paid for the repairs. The insurance company is now the party that has suffered a loss, because it paid X’s claim.

Of course, if the insurance company is successful in recovering from D, it must pay a portion of the amount recovered after expenses over to the insured if the insured had to pay the deductible portion of their loss. So, in other words, if X had a policy that required X to pay the first $500 of their repair costs, and IC recovers the full cost of repairs from D, then IC should forward to X the $500 to cover the deductible.

In this way, the insurance company assumes the rights and benefits that X has with respect to D, because D caused an accident that damaged X’s car. In this example, the insurance company is entitled to recover from D, although the amount of damages would be limited to the amount that the insurance company spent on the repairs. As you can see, X can no longer recover from D, since X has already been reimbursed by their insurance company. Thus, subrogation prevents X’s “double recovery.”

Subrogation is also common when a person makes a claim under their homeowner’s insurance or if they suffer injury due to the negligence of another and their health care insurance pays the cost of their medical treatment.

Insurance policies sometimes include provisions which entitle the company to seek recovery of funds from a third party if the company has paid the claim of an insured and the third party caused the insured’s loss. An insurance policy may even provide that the insured does not have the right to file a claim with the insurer to receive the coverage provided by the policy or to seek damages from the third party that caused their losses.

What Are the Different Types of Subrogation?

Subrogation can occur through several different means. Some of the different types of subrogation are:

  • Legal: Legal subrogation takes place by operation of law. This means that it can happen even without a formal agreement between the parties. It may also be modified by a contract;
  • Conventional: In a conventional subrogation, there is an agreement between parties to the effect that one of them assumes the rights of the other, having become entitled to the rights when they pay an obligation owed by the other party. Conventional subrogation rights are considered to be more narrow than traditional equitable subrogation, because they have been modified by the two parties by the terms of a contract entered into by them;
  • Statutory: This type of subrogation is based on a state statute that has been enacted by a state legislature.

The law in some states requires that subrogation agreements be in writing if they are to be enforced in a court of law. This is especially true for situations involving real property or taxes.

Subrogation can be waived by contractual agreement. In a waiver of subrogation, an insured waives the right of their insurance carrier to seek redress or seek compensation for losses caused by a negligent third party.

A waiver might be made in the case of a workers’ compensation insurance company. If an employer’s workers’ compensation insurance company pays benefits to injured employees and another party is responsible for the injuries to the workers, the insurer should get the legal right to sue the responsible party to compensate them for the benefits they have paid.

A waiver provision could prevent one party’s insurance carrier from pursuing a claim against the other party to the contract in an attempt to recover money paid by the insurance company to the insured or to a third party to resolve a covered claim.

In other words, if subrogation is waived, it could operate in such a way as to prevent the insurance company from stepping into the shoes of the insured once a claim has been settled. If subrogation is waived, the insurer might be exposed to greater risk. Whether a waiver of subrogation is a good move in a given situation is something a person would want to discuss with an experienced insurance attorney.

Who Is Held Liable in a Subrogation Situation?

Basically, the party that was negligent or otherwise caused some kind of loss, e.g. a debtor who has not paid their debt, remains legally liable to pay compensation in a subrogation situation. The only difference that subrogation makes is that the party receiving the compensation is different from the party that originally suffered the loss. Subrogation basically means that a different party can pursue the party who caused the loss in a lawsuit if necessary.

Because subrogation is an equitable legal remedy, all the requirements of equity must be satisfied. And if there is an objection to subrogation, all the equitable defenses apply, such as clean hands and laches.

Do I Need a Lawyer for Subrogation Disputes?

Though it may seem straightforward, subrogation is actually considered to be one of the more technical aspects of the law of equity. Therefore, it is highly recommended that you work with a qualified lawyer if you are involved in a subrogation issue.

An experienced credit attorney can help explain your state’s subrogation laws, as well as your role as the subrogee or subrogor.

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