Insurer’s Right to Subrogation

When one person pays to another person an amount due to the second person by a third person, the first person has a right to recover from the third person the amount paid to the second person. This right of payment is called a subrogation. Subrogation is a doctrine of equity. It is the substitution of the first person in the place of the second person, who had a claim upon the third person. When an insurance company pays its insured for a loss under an insurance policy that was caused by a third party, the insurance company acquires the right of subrogation against the third party.

There is no automatic right to subrogation. The existence of the right of subrogation depends on the facts of each case. An insurance company's right to subrogation is not limited to cases where a third party is found liable. The right of the insured to payment passes to the insurance company upon its payment of the insured's loss. Until the insurance company pays the insured's claim under the policy, it has no subrogation rights. The doctrine of subrogation in insurance does not depend on statutes or contract terms. It is applied according to the dictates of equity and good conscience. Courts must consider the public policy that no one should profit by another's loss.

An insurance company may not assert subrogation rights unless its insured is fully compensated for its loss. A recovery under a third party's automobile insurance in the amount of $100,000, less attorney fees, was found to be insufficient to make whole an insured, who was young and had suffered severe, disabling injuries in an automobile accident. The insured's insurance company could not exercise its right to subrogation against the payment made to its insured.

An automobile collision insurance company's advancement of money to its insured, which was to be repaid from funds recovered from another insurance company, was not a payment of loss. Therefore, no subrogation right arose. In an action for damages arising out of an automobile accident, where an insured had been paid for the loss by the insured's insurance company and had executed a loan agreement, the intentions of the parties to the transaction determined whether the agreement was for a loan or a payment on the loss. If the parties treated it as a loan, so would the courts.