# Understanding Subrogation in Insurance: Importance & How It Works

![Subrogation: The right of an insurer to pursue the party that caused the loss to the insured and recover funds paid in the claim.](https://www.investopedia.com/thmb/YGh7na2qlkiKvx5pDXmRUiwTw3s=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/subrogation.asp_final-5b57bc7e73f34722a43e07b0b946fcd4.png)

*— Investopedia / Ellen Lindner*

> **Definition**
>
> Subrogation is the legal right of an insurance company to request reimbursement from the at-fault party after it has paid a covered claim.

## What Is Subrogation?

Subrogation describes the right of an insurer to seek damages from a third party that caused a loss. If someone is injured and files a [claim](https://www.investopedia.com/terms/i/insurance_claim.asp), subrogation allows the insurance carrier to recover the amount it paid out for the loss. This reduces the risk for the insurer, allowing it to charge lower premiums.

Subrogation is prevalent in auto insurance, healthcare, and property insurance. Understanding how it works is essential to managing claims effectively.

### Key Takeaways

*   Subrogation allows insurance companies to quickly pay out claims to their policyholders and then pursue reimbursement from the at-fault party's insurer, which helps in reducing the insured's financial burden and keeping insurance rates low.  
    
*   The subrogation process is common in various types of insurance policies, including auto, property/casualty, and healthcare, making it a crucial aspect of the insurance industry.  
    
*   Policyholders benefit from subrogation by receiving swift claim payments, while the insurance company does the work of recovering costs from the responsible party, protecting the insured from lengthy dispute processes.  
    
*   A waiver of subrogation is a contractual provision where the insured agrees not to allow their insurer to pursue recovery against a third party, often included in construction contracts and leases, and can result in increased insurance costs.  
    
*   Understanding subrogation's legal and procedural aspects is important for policyholders to navigate claims efficiently and utilize their insurance coverages effectively.

## How Subrogation Protects Policyholders

Subrogation refers to the act of one person or party standing in the place of another person or party. It effectively defines the rights of the insurance company both before and after it has paid claims made against a policy. Also, it makes the process of obtaining a settlement under an insurance policy easier.

When an [insurance](https://www.investopedia.com/insurance-4427716) company pursues a [third party](https://www.investopedia.com/terms/t/third-party.asp#) for damages, it is said to "step into the shoes of the policyholder." Thus, the carrier will have the same rights and legal standing as the policyholder when seeking compensation for losses. If the insured party does not have the legal standing to sue the third party, the insurer will also be unable to pursue a lawsuit as a result.

## The Subrogation Process Explained

Usually, your insurance pays your claim first and then seeks reimbursement from the other party's insurance. In such cases, the insured typically receives prompt payment. Then the insurance company may pursue a subrogation claim against the party at fault for the loss.

Insurance policies may contain language that entitles an insurer, once losses are paid on claims, to seek recovery of funds from a third party if that third party caused the loss. The insured does not have the right to file a claim with the insurer to receive the coverage outlined in the insurance policy or to seek damages from the third party that caused the losses.

> **Fast Fact**
>
> Subrogation helps victims get their claim payments faster.

In insurance, often in [auto policies](https://www.investopedia.com/terms/a/auto-insurance.asp), subrogation lets insurers pay your claim and then collect from the at-fault party. Subrogation can take a long time, varying with case complexity, state laws, and other factors.

## Real-World Examples of Subrogation

One example of subrogation is when an insured driver's car is totaled through the fault of another driver. The insurance carrier reimburses the covered driver under the terms of the policy and then pursues legal action against the driver at fault. If the carrier is successful, it must divide the amount recovered after expenses proportionately with the insured to repay any [deductible](https://www.investopedia.com/ask/answers/071515/why-do-insurance-policies-have-deductibles.asp) paid by the insured.

Subrogation is not only relegated to auto insurers and their policyholders. Subrogation also occurs within the health care sector. If, for example, a [health insurance](https://www.investopedia.com/terms/h/healthinsurance.asp) policyholder is injured in an accident and the insurer pays $20,000 to cover the medical bills, that same health insurance company is allowed to collect $20,000 from the at-fault party to reconcile the payment.

## What the Subrogation Process Means for You

Luckily for policyholders, the subrogation process is extremely passive for the victim of an accident when another party is at fault. The subrogation process is meant to protect insured parties; the insurance companies of the two parties involved work largely behind the scenes to mediate and come to agreement over the payment.

Policyholders are simply covered by their insurance company and can act accordingly. The insured party benefits because the at-fault party must make a payment during subrogation to the insurer, which helps keep the policyholder's insurance rates low.

> **Tip**
>
> Insurance companies do most of the work during subrogation, freeing the insured from having to participate in the process.

In the case of any accident, it remains important to stay in communication with the insurance company. Make sure all accidents are reported to the insurer in a timely manner and let the insurer know if there should be any settlement or legal action. If a settlement occurs outside of the normal subrogation process between the two parties in a court of law, it is often legally impossible for the insurer to pursue subrogation against the at-fault party. This is due to the fact most settlements include a waiver of subrogation.

## Advantages of Subrogation for Policyholders and Insurers

In insurance, subrogation allows your insurer to recover the costs associated with a claim, such as medical bills, repairs costs, and your deductible, from the at-fault party's insurer (assuming you were not at-fault). This means that both you and your insurer can recoup the costs of damage or harm caused by somebody else.

It also means improved [loss ratios](https://www.investopedia.com/terms/l/loss-ratio.asp), profits, and [underwriting](https://www.investopedia.com/terms/u/underwriting.asp) revenue for the insurer, plus added customer satisfaction and protection.

## Understanding Waivers of Subrogation

A [waiver of subrogation](https://www.investopedia.com/terms/w/waiver-of-subrogation.asp) is a contractual provision where an insured waives the right of their insurance carrier to seek redress or compensation for losses from a negligent third party. Typically, insurers charge an additional fee for this special [policy endorsement](https://www.investopedia.com/terms/e/endorsement.asp). Many construction contracts and leases include a [waiver of subrogation clause](https://www.investopedia.com/ask/answers/031615/waiver-subrogation-clause-better-tenant-or-landlord.asp).

Such provisions prevent one party’s insurance carrier from pursuing a claim against the other contractual party 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, the insurance company cannot "step into the client's shoes" once a claim has been settled and sue the other party to recoup their losses. Thus, if subrogation is waived, the insurer is exposed to greater risk.

## What is the Legal Definition of Subrogation?

Subrogation, in the legal context, refers to when one party takes on the legal rights of another, especially substituting one creditor for another. Subrogation can also occur when one party takes over another's right to sue.

## Does Subrogation Affect the Insured Victim?

The subrogation process, which is meant to protect insured parties, is a passive experience for the insured victim of an accident when another insured party is at fault. The insurance companies of the two parties involved work to mediate and legally come to a conclusion over payment. The insured benefits when the at-fault party makes payment during subrogation to the insurer, which helps keep the policyholder's insurance rates low.

## What is a Waiver of Subrogation?

A waiver of subrogation is a contractual provision where an insured party waives the right of their insurance carrier to seek redress or seek compensation for losses from a negligent third party. Typically, insurers charge an additional fee for this endorsement, as waiving exposes the insurer to greater risk.

## How Does Subrogation Affect Claims Payments?

Subrogation allows the accident victim's insurance company to pay claims immediately to their client, allows the insured to receive payments more quickly. Their insurance carrier then seeks to recover that amount from the at-fault party or their insurer.  

## The Bottom Line

Subrogation lets insurance companies sue third parties responsible for losses to recover their costs. This enables the insurer to pay claims files by its insurers sooner, and then recover the claim amount from the parties who are at fault for the loss. Subrogation allows insured to receive payments sooner and helps keep their premiums low.

Subrogation is common in auto, property, casualty, and healthcare insurance and helps streamline settlements.

> **Article Sources**
>
> 1.  Washington State Office of the Insurance Commissioner. "[What Is Subrojation?](https://www.insurance.wa.gov/what-subrogation)"
>     
> 2.  Progressive. "[What Is Subrogation?](https://www.progressive.com/answers/what-is-subrogation)"
>     
> 3.  Allstate. "[Subrogation: What Is It and Why Is It Important?](https://www.allstate.com/resources/what-is-subrogation)"
>     
> 4.  National Subrogation Services. "[Benefits of Subrogation](https://www.nationalsubrogation.com/benefits-of-subrogation)."
>     
> 5.  Legal Law Institution. "[Subrogation](https://www.law.cornell.edu/wex/subrogation#:~:text=When%20one%20party%20takes%20on,over%20another's%20right%20to%20sue.)."