Written by The term subrogation literally means substituting a different person in place of another with respect to a lawful claim.
However, in insurance, subrogation is used to refer to a situation where the insurer who has extended indemnity to the insured under the policy of insurance, becomes entitled to exercise the rights that the insured has against a third party who caused or contributed to the harm/damages sustained by the insured.
In other words, subrogation is the substitution of the insurer in place of the insured for the purpose of claiming indemnity from a third-party wrongdoer for a loss paid by the insurer.
It is a fundamental concept in insurance that allows an insurer to step into the insured’s shoes and pursue a claim against a third party responsible for the loss.
Subrogation allows the insurer to recover the amount it paid out to the insured for the loss caused by the third party.
The principle of subrogation is one of the principles that complement indemnity. It is the principle that allows the insurance company to legally pursue a third party that caused an insurance loss to the insured
When an insurance company pursues a third party for damages, it is said to act on behalf of the policyholder.
As a result, it will have the same right and legal standing as the policyholder when seeking compensation for losses.
If the insured party does not have legal standing to sue the third party, the insurer also does not have the right to pursue a lawsuit.
Essentials of Subrogation
1. Corollary to the principle of indemnity: The principle of indemnity states that an insured person should be restored to the same financial position he were in before the loss or damage occurred, and no more.
That is, the compensation received should only cover the actual value of the loss or damage suffered, and not exceed it.
The doctrine of subrogation derives from the principle of indemnity. It states that if the damaged property has any value left or any right against a third party, the insurer can subrogate the property or right of the property.
This means that the insurer can step into the shoes of the insured person and seek compensation from any third party who may have caused the loss or damage.
The reason for this is that if the insured person is allowed to retain any value or right related to the damaged property, they would have realized more than the actual loss suffered.
This would be contrary to the principle of indemnity, as it would result in the insured person receiving more than what is required to restore them to their
Therefore, the insurer has the right to subrogate any value or right related to the damaged property to ensure that the principle of indemnity is upheld.
2. Subrogation is substitution: When an insurer pays a claim for a loss or damage suffered by an insured person, they become entitled to all the rights that the insured person had in relation to the subject matter of the insurance policy.
This means that the insurer is substituted in place of the insured person and can pursue any claims or remedies that the insured person may have had against a third party.
The principle of subrogation enables the insurer to recover the amount paid out to the insured person as a result of the loss or damage suffered, by pursuing claims or remedies against the third-party responsible for causing the loss.
3. Subrogation is only up to the amount of payment: When an insurance company pays out money to the insured for a loss or damage, it gains the legal right to recover that money from whoever caused the loss or damage.
However, the insurance company can only recover up to the amount paid out to the insured.
So, if the insurance company paid N50,000 to the insured for a car accident, they can only try to recover up to N50,000 from the other party involved in the accident.
Similarly, If the insured receives additional compensation from the other party involved in the accident after the insurance company had paid out the N50,000, then the insured must give the insurance company the money received from the other party.
4. Subrogation may be applied before payment: If the insured has already received certain compensation, from a third party before being fully indemnified by the insurer, the insurer will only pay the balance of the loss.
So, if the insurance company owes the insured N600,000 but the customer already received N400,000 from the third party, the insurance company will only pay the remaining N200,000 to fully indemnify the insured.
Purpose of the Principle of Subrogation
1. Prevent the insured from being recompensated twice: In the absence of subrogation, the insured could collect the same amount of money from the insured and the person who caused the loss.
In such cases, the principle of indemnity would be violated because the insured would be profiting from a loss.
The principle of subrogation ensures that the insured does not profit from the loss by receiving money twice from the same loss.
2. Hold third-party responsible for the loss: Subrogation allows the insured to hold the negligent person responsible for the loss.
By exercising subrogation rights, the insurer can collect claims from a negligent person who caused the loss.
Rights of the Insurer in Subrogation of Insurance
The principle of subrogation bestows the insurer with certain rights. These rights are
- The right to pursue legal action: This is perhaps the most important right of an insurer in subrogation. An insurer has the right to pursue legal action against a third party who is responsible for the loss covered by the insurance policy. The insurer can sue the third party in court to recover the amount of money it paid to the insured.
- Salvage the damaged Property: The insurer also has the right to salvage the damaged property in full or to the extent reimbursed to the insured.
- Recover compensation from the insured: If the insured recovers the lost asset that he has already been compensated for, the insurer has the right to be reimbursed for the amount he has initially paid to the insured before the recovery of the assets.
Before we conclude, here are additional things you should note about the principle of subrogation:
- The principle does not apply to life insurance because life insurance is not a contract of indemnity.
- The insurer cannot subrogate against its own insured. For example, if you have car insurance and you get into an accident that’s covered by your policy, your insurance company cannot seek reimbursement from you for the damages they paid out.
