A ‘how to’ for subrogation recovery claims
INSURANCE – WHAT’S THE POINT?
Insurance, a necessary evil, or the key that unlocks economic growth? How do ‘Subrogation Claims’ fit in?
Views vary of course. For some, insurance is something that they just ‘have’. For others, it is an intricate part of their business, the absence of which would stem innovation and put a halt to daily commercial activities. One thing’s for sure, it is one of the most important UK industries – a gentle stroll through the City of London will confirm that! In many ways, subrogation claims can keep balance – read on…
The Benefits
Payment of claims by insurance companies offers several benefits to businesses, helping them mitigate risks and protect their assets. Some of the benefits include:
1. Asset Protection:
Providing coverage for physical assets such as buildings, equipment, inventory, vehicles etc. In the event of damage or loss due to unforeseen events like fire, escape of water, theft, or natural disasters, insurance can help businesses recover and rebuild without facing significant financial setbacks.
2. Liability Coverage:
Businesses are exposed to various liability risks, such as property damage, product claims, customer/employee injuries, or legal claims for a breach of a professional duty or contract. Commercial insurance offers liability coverage, protecting businesses from potential lawsuits, legal expenses, and settlement costs. This coverage can be essential for businesses, particularly those that interact with the public or provide professional services.
3. Business Interruption Coverage:
If a business is temporarily unable to operate due to an unexpected event like a fire, flood or natural disaster, insurance can provide cover for lost income, ongoing expenses, and additional costs incurred during the downtime, ensuring the business can continue to meet financial obligations and recover more quickly.
4. Contract Requirement Fulfilment:
Some contracts (for example Construction contracts) require businesses to have specific types of insurance coverage (such as professional indemnity, public liability or product liability insurance). Insurance can enable contracting partners to have the reassurance that they can proceed with fewer legal or financial hurdles.
The claims function of insurance reduces losses and risks, provides more certainty and drives industry and economic growth. However, this can be expensive, and subrogation can enable an insurer to improve its loss ratio and revenue. For insureds, it can (amongst other things) enable the recovery of their policy excess and facilitate payment of uninsured losses.
SUBROGATION… EXPLAIN?!
A subrogation claim is where an insurer seeks recovery for claims paid out to policyholders/insureds when a third party is responsible for the loss or damage.
The right to subrogation arises in a number of scenarios:
- Expressly provided for in the insurance policy;
- As a statutory right under section 79 of the Marine Insurance Act 1906;
- As a common law right.
In its basic form, subrogation can be summerised as follows:
1. Process: When an insurance company pays out a claim to its policyholder, it has the right to step into the shoes of the insured to bring a claim in the insured’s name against a third party responsible for the loss.
After paying out on the Insured’s claim, the insurer will investigate the circumstances, gather evidence and consider whether a third party may be liable. If the insurer believes there is a valid subrogation claim, it may attempt to negotiate a settlement with the responsible party directly or through their insurance company before proceeding with a formal claim.
2. Types of subrogation claims: they can arise in various insurance contexts, including property insurance (e.g., fire or water damage), motor insurance (e.g., accidents), liability insurance (e.g. professional indemnity, products liability, directors & officers, public liability etc), and more. The principle of subrogation applies to both personal and commercial insurance policies.
3. What about the policy holder: Subrogation offers a number of benefits to the insured as well as the insurer. For example, an excess, or deductible, is often payable by the insured and uninsured losses can at times be extensive – the recovery of these can offer an insured a real benefit and an incentive to participate in the recovery process.
So, insurance is a good thing and the recovery of insured (and uninsured) losses is favourable generally, how then does the process operate?
EIGHT STEPS TO SUBROGATION
Only eight steps to subrogation?
As a general outline yes, but as ever, each case turns on its own facts – many recoveries are simple and straightforward – others, not so much. Often something which seems clear at the outset is a gordian knot is disguise – riddled with complexity, contentious facts, missing evidence and technical legal points.
When it comes to insurance claims, subrogation is a crucial process that allows insurance companies to recover funds paid out to policyholders from responsible third parties. Subrogation claims can be complex, involving legal intricacies and meticulous attention to detail is needed, ensuring costs are proportionate and the investigation focused and targeted.
To ensure a smooth as possible and successful subrogation process, it helps to follow a framework checklist:
1. Review Insurance Policy and Position with Claim:
- Check the terms, conditions, and provisions related to subrogation rights to ensure that a claim can be made.
- Are there any restrictions which may affect a claim against a potential recovery target?
2. Obtain the Insured’s cooperation:
- Are there uninsured losses, an excess, a reputational or other reason for the Insured to cooperate early?
- Consider discussions with the Insured early to secure evidence.
3. Promptly Investigate the Claim: As with all disputes, evidence is key –
- Identify facts, documents, materials/goods involved, statements, issues on which expert evidence may be required and further evidence needed on liability and quantum.
- Identify potential targets.
- Move quickly to preserve the evidence.
4. Limitation:
- Realistically this can be checked at the outset as it is often clear from the circumstances who the recovery target(s) may be and the basis of the potential claim. Review the causes of actions which apply.
- Check the claim is still within limitation.
5. Viable Recovery Target:
- Is the target solvent?
- Are they likely to be Insured?
- If not, are there sufficient assets to cover a claim for damages and costs?
- Is there anything else to suggest the target may have other claims against it which affect its financial standing?
6. Establish Liability:
- Analyse the evidence, identify the causes of the loss or damage and consider which third party(ies) are responsible.
- Consider instructing external legal advisers to try to preserve privilege (and choice/discipline) of experts and adjusters reports (adjusters should be instructed to consider subrogation in addition to adjustment of the claim for insurers) and to assist with costs recovery.
7. Agree Basis of Recovery:
- Insurers and the Insured should agree the distribution of the recovery – will it follow to ‘Top Down’ principle, be on a proportional or some other basis.
8. Initiate Recovery:
- Check whether a pre-action protocol applies.
- Consider whether the dispute can be resolved through Alternative Dispute Resolution without the need for formal litigation.
- If necessary, ensure the case is ready for litigation and issue proceedings.
SO WHAT?
Subrogation claims are an essential part of the insurance process, allowing insurers to recover funds from responsible third parties. By following a framework checklist, insurers can navigate the subrogation process effectively and proportionately.
Judgments on Subrogation Claims: British and Irish Legal Information Institute (bailii.org)
