What is Subrogation and How Does It Affect You?

If you’ve ever read a Product Disclosure Statement, you might have seen a clause relating to Subrogation.

It’s a little understood insurance concept and you’d be forgiven for glossing over when reading it.

So, what is it exactly?

The dictionary definition of subrogation is:

“the substitution of one person or group by another in respect of a debt or insurance claim, accompanied by the transfer of any associated rights and duties”.

Putting this into English, the concept of subrogation means that once an insurance company has paid the claim, if the loss was caused by a third party, the insurance company can stand in the shoes of the insured person and sue the third party to recover the loss.  If this happens, the insurer is “subrogated to the rights of the insured person”.

Subrogation essentially means that once the insurance company has paid the claimant, any rights in relation to the loss transfer to the insurer and it can then seek to recover the loss from the party responsible.

Let’s put it into context.

John has a motor vehicle policy with ABC Insurance Company.  John is driving his car and another driver runs a red light and collides with John’s car.

John’s car is written off and he lodges a claim with ABC Insurance Company.

ABC Insurance Company pays John’s claim in full.

In paying John’s claim in full, the loss transfers to ABC Insurance Company.  They then exercise the policy clause entitling them to subrogation rights and sue the other driver for the damage to John’s car.  If ABC Insurance Company is able to recover any funds from the At Fault driver, they are entitled to retain this as they have fully compensated John for the loss of his car.

It is fairly standard for all types of insurance policies to include subrogation clauses entitling the insurer to seek recovery of any losses they sustain from responsible third parties.  Those policy terms will also require that the policyholder provide all reasonable assistance to the insurance company in those endeavours.

Subrogation is mostly used in insurance matters and the Insurance Contracts Act sets down certain circumstances in which an insurance company may not be able to exercise subrogation rights.  For instance, if the loss was caused by a relative or employee of the policyholder and it was not caused by willful misconduct, the Act holds that an insurer cannot force subrogation rights.  Similarly, there are circumstances where subrogation is not enforceable if the third party is not insured.  Also, an insurance company cannot withhold settlement of a claim because the policyholder refuses to assign subrogation rights to allow the insurer to attempt recovery of their loss.

Subrogation is a fairly technical legal concept and fortunately, it is not often that a policyholder is asked to assign their subrogation rights to their insurer.  It does happen though, and it is a legally supported process.



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