What subrogation means
Subrogation is the principle that a party who has paid a loss on behalf of another takes over that other's rights against whoever caused it.
In insurance it works like this. Your property is damaged by somebody else's negligence. Your insurer indemnifies you under the policy. The insurer is then subrogated to your rights and may pursue the person responsible, recovering what it paid out.
The insurer usually sues in your name rather than its own, which is why a claimant sometimes finds proceedings brought in their name over a loss they have already been paid for.
The principle exists to prevent double recovery. Without it, an insured could be paid by the insurer and again by the wrongdoer, which would be a profit from a loss.
It applies to contracts of indemnity, which covers motor, property, marine, goods in transit and liability policies. It does not apply to life or personal accident cover, because those are not indemnity contracts.
How it is used
The practical consequence for an insured is a duty not to prejudice the insurer's position, and it is the part people breach without realising.
Do not settle privately with the person who caused the loss before dealing with your insurer.
Do not sign a release, a waiver or a discharge in their favour.
Do not agree that nobody was at fault in order to move a vehicle or resolve a dispute at the scene.
Do not destroy or dispose of damaged property before the insurer has seen it.
And do co-operate with the insurer afterwards, including by lending your name to proceedings and providing evidence.
Breaching these can entitle the insurer to decline the claim or to reduce what it pays, because you have destroyed the right it would otherwise have had.
On recovery, the insurer takes what it paid out plus its costs, and any surplus belongs to the insured. Where the insured bore an excess or was underinsured, the recovery is apportioned.
Commercial contracts frequently address this directly through a waiver of subrogation, in which the insurer agrees not to pursue a named party, commonly used between contractors, landlords and tenants who are insured under the same project or building policy.
Key features
- The insurer succeeds to the insured's rights after paying a claim
- Prevents the insured recovering twice for the same loss
- Applies to indemnity policies, not to life or personal accident cover
- The insurer usually sues in the name of the insured
- The insured must not prejudice the right by settling or waiving
- A surety who pays a debt is subrogated to the creditor's rights
How this works in Nigeria
The situation that produces most difficulty is the motor accident.
Two vehicles collide. The drivers resolve it at the scene, sometimes with a payment, sometimes with an agreement that each will fix their own. The insured then makes a claim on their comprehensive policy.
They have already given away the insurer's right of recovery, and the insurer is entitled to take that into account. The correct sequence is to report the incident, obtain a police report where required, notify the insurer promptly, and let the insurer decide whether to pursue the other party.
The second Nigerian point is documentation. An insurer pursuing recovery needs evidence of the other party's responsibility, and where nothing was recorded at the scene, the recovery fails and the insurer bears the cost. That does not always affect the insured directly, but it affects premiums and the willingness to renew.
The third is that subrogation is not confined to insurance. A guarantor or surety who pays the debt of a principal debtor is subrogated to the creditor's rights, including any security the creditor held. That is why a guarantor who pays should take an assignment of the creditor's rights and any security rather than simply paying and hoping to recover from the borrower.
And in commercial construction and property arrangements, a waiver of subrogation is often the right answer. Where a landlord insures a building and a tenant contributes to the premium through service charge, allowing the insurer to sue the tenant for causing damage covered by the very policy they funded is unattractive, and a waiver deals with it.
Subrogation vs contribution vs assignment
Three insurance and finance concepts that describe different movements of rights.
Subrogation moves the insured's rights against a third party to the insurer that paid the claim. It looks outward, at whoever caused the loss.
Contribution operates between insurers. Where the same loss is covered by more than one policy, an insurer that has paid can require the others to bear their proportionate share. It looks sideways, at other insurers.
Assignment is a transfer of rights by agreement. A creditor can assign a debt, and a party can assign the benefit of a contract, subject to whatever the contract permits.
Subrogation arises by operation of law once the indemnity is paid. Assignment requires a document. A guarantor who pays gets subrogation automatically and is still better off taking an assignment of the security as well.
Limits and risks
Recovery depends on the wrongdoer being identifiable, solvent and worth pursuing, which frequently they are not.
The insurer also cannot recover more than it paid, and any surplus belongs to the insured, so it is not a source of profit.
It does not apply to non indemnity policies such as life cover, where the principle of preventing double recovery does not fit.
And where the insured is underinsured or bore an excess, the apportionment of any recovery becomes a further matter to resolve between them and the insurer.
Worth knowing
Do not settle at the scene of a Nigerian road accident before calling your insurer. Agreeing that each side will fix their own vehicle destroys the insurer's right of recovery, and the insurer can decline or reduce your claim because of it.
Questions people ask
What is subrogation?
The principle that an insurer which has paid a claim takes over the insured's rights against whoever caused the loss, and may pursue that party to recover what it paid out.
Why does the insurer sue in my name?
Because it is exercising your rights rather than its own. The claim against the wrongdoer belongs to you, and subrogation entitles the insurer to bring it.
Can I settle with the other driver myself?
Not before dealing with your insurer. Settling, signing a release or agreeing that nobody was at fault destroys the insurer's right of recovery and can entitle it to decline or reduce your claim.
Does it apply to life insurance?
No. Subrogation applies to contracts of indemnity such as motor, property, marine and liability cover. Life and personal accident policies are not indemnity contracts.
Who keeps a recovery larger than the claim?
The insurer takes what it paid plus its costs, and any surplus belongs to the insured. Where the insured bore an excess or was underinsured, the recovery is apportioned.
Does subrogation apply to guarantors?
Yes. A surety who pays the debt is subrogated to the creditor's rights against the principal debtor, including any security. A guarantor who pays should also take an assignment of that security.