In the event of an insurance claim, “subrogation” refers to the process by which your insurance company collects money from the party at fault (or their insurance company) in order to recover funds you or your insurance company have already paid, including your deductible.
Legally speaking, subrogation is when one party assumes the legal rights of another party to collect a debt or damages. It is mostly something that happens behind the scenes among insurance companies, across many different lines of insurance.
As a consumer, you’re most likely to encounter subrogation after a car accident, especially if you carry “first party” car insurance to cover your own losses. Examples of first party insurance include:
- Collision and comprehensive insurance that covers damage to your own car.
- Personal injury protection and medical payments insurance that covers your own injuries
- Uninsured/underinsured motorist insurance that protects you when the at-fault driver has insufficient insurance coverage.
Let’s say you are waiting patiently at an intersection. When the light turns green and you cross the intersection, another driver runs a red light and crashes into you, causing $10,000 in damage. The other driver denies running the red light and disputes that he’s at fault.
Since you need your car to be fixed quickly, you file a claim under your own comprehensive insurance and pay a $1,000 deductible. Using subrogation, your insurance company will file a claim with the at-fault driver’s insurance company to recover the full $10,000. Your insurer will keep the $9,000 they paid out and reimburse you for the $1,000 deductible payment you made.
Similarly, if you are at fault, the other driver’s insurance company may seek to recover from you or your insurance company any payouts it made to its policyholder.
How Subrogation Works
Your insurance company must inform you if they are going to subrogate your claim. If they do, any deductible you paid must be part of the amount your insurance company seeks to recover. If your insurance company does not pursue subrogation, you can sue the at-fault party on your own to seek reimbursement for your deductible.
Typically, your involvement with the subrogation process is minimal and more administrative in nature. Under many insurance contracts, after you file a claim you are not allowed to take any action that would negatively affect your insurance company’s right of recovery of funds, such as signing an agreement with the at-fault driver that releases him or her from liability in exchange for a payment.
In a situation where the other driver is completely at fault and has adequate insurance, subrogation can be pretty simple. But you may find yourself in a more complicated situation. We outline how subrogation might work some of these cases below.
Uninsured Drivers
Let’s imagine that the at-fault driver is not insured. While you may be able to cover your expenses using your own collision or uninsured motorist insurance, your insurance company may subsequently sue that driver directly for reimbursement of their costs and your deductible. Since they’re suing an individual, not negotiating with an insurance company, this can be a longer process that’s less likely to recover funds.
Both Drivers Are at Fault
Let’s say you accelerated into an intersection when you saw the light turned yellow. However, the light turned red before you completely cleared the intersection. The other driver also ran a red light when he drove forward and struck your car, again causing $10,000 worth of damage. While an investigation is pending, you file a collision claim and pay a $1,000 deductible.
After the investigation, the other driver is determined to be only 60% at fault, while you are determined to be 40% at fault. You can still make a claim under your insurance policy for the full $10,000. And depending on the laws of your state, you and your insurer may be able to recover part of your costs, in proportion to your degree of fault.
So in this example, under a subrogation claim, your insurance company will likely only receive $6,000 to match the 60% at fault determination. As you paid out 10% of total costs (your $1,000 deductible) compared to your insurance company’s payment of 90% (the remaining $9,000), that recovery will be divided 10%/90%. In other words, you will recover only $600 instead of the full $1,000.
Partial Recovery
Finally, let’s imagine that the other driver is at fault, but, for whatever reason, your insurance company can only recover 50 percent of the loss ($5,000) from the other driver. Like in the example above, that partial recovery will be divided between you and your insurance company to reflect the percentages of money paid to repair your car. That is, you will receive $500, while your insurance company will receive $4,500.
The Benefits of Subrogation
When your insurance company is confident it will recover some or all of its costs, it is more likely to pay bills quickly when the other driver’s insurer is slow to act. Subrogation also provides a buffer between you and the potential headaches, paperwork, and costs of a lawsuit, mediation, or some other dispute settlement process. Thanks to subrogation, you’re back on the road quickly, with your car and finances restored.
Subrogation allows insurance companies to recover a significant portion of the money they pay out in the event of a claim —12 to 22 percent overall by some estimates. If you’re a good driver, this helps keep your premiums down, since it shifts costs back to the at-fault driver and his or her insurer.
Waiving Subrogation
A waiver of subrogation is an agreement that prevents your insurance company from going after the at-fault party for reimbursement. Typically, an at-fault driver will propose a waiver when he or she wants to settle with you directly. You also may need to sign a waiver to get direct payment from another driver’s insurance company.
Not all car insurance policies will allow you to waive subrogation, and many will require you to notify your insurer before signing any waiver. So make sure you understand the provisions of your own insurance policy before signing anything. Your insurer or insurance agent can help you understand the process.
