Subrogation – removing the confusion

By Jack Durrant, BA (Hons), ACII > While I’ve enjoyed reading many online articles on subrogation, for every piece that does an excellent job of explaining, there are many more that do an equally good job of simply confusing the reader via a meandering case study while throwing in a whole lot of other glossary terms.

Subrogation in insurance

Subrogation is where an insurer seeks to recover its own losses (paid to a policyholder on a non-fault claim for speed and efficiency), back from the fault party or their insurer.

The main purpose of subrogation is to put the cost to the ultimate owner of the loss (the party who should be ultimately responsible to bear the cost). It’s pretty straightforward, but the mechanism does have some intricacies that can get overlooked.

By posing two questions, most uncertainties and confusion can be addressed.

1. Why might an insurer pay for a non-fault claim and risk losing out on cash if it cannot recover the money though?

The answer is twofold. Firstly, it makes the claims process a lot faster for parties who suffered the claim. Think of small motor claims –  if the insurers were to dispute where the fault should be held, then the intervening legal and operational cost might soon become greater than just settling the claim. It’s therefore best to work out who should bear the loss later.

Secondly, the insurers know that they need to serve their customers and give a good service, which sometimes includes taking responsibility of bearing the cost in the short term.

2. If I have a non-fault claim that I benefit from fast settlement through my insurer, will the claim cost sit on my claims experience?

The likelihood is that until the loss is indemnified and the proximate cause established, the claim will often sit on the experience. However, this is where great brokers really earn their keep. Brokers are deft at explaining the claims experience to underwriters, ensuring they rate kindly on the risk as if a loss never occurred. In addition, a broker claims team should push claims at insurers, so the claim itself is correctly apportioned against the appropriate owner.

Meaning and consequences for customers

To most customers, this push and pull process is all “background noise.” if it works well, only the insurers and brokers usually know of subrogation and how it affects policies. The ABI (Association of British Insurers) does an excellent job of greasing the wheels of subrogation between insurers, with the majority of insurers recognising that subrogation is basically “swings and roundabouts” – where in most cases, none of them really benefit or lose from appropriating claims.

So, that’s it. No meandering, no confusion, and no irrelevant side bars. Just subrogation explained.

If you’d like to discuss more about subrogation or have any other questions, call 020 7543 2807 today.