The principle of subrogation under an insurance policy is the device by which an insurer having paid out a claim under a policy to an insured can then avail themselves of the legal rights of that policyholder to seek a remedy against another party, or more generally the insurers of another party, in respect of the indemnity they have provided to the policyholder.
Whilst this may sound overly complicated, most will be familiar with it’s daily usage in the handling of motor insurance claims.
Under a policy an insurance company will have a legal obligation to indemnify the policyholder in respect of certain claims. Once this legal obligation has been met the insurer will seek to recover, by way of subrogation, their loss in respect of that claim from any other party that may be legally liable for the loss. This right of recovery that lay with the policyholder is assumed by the insurer in respect of their interests in the matter.
An example of the application of this in private car insurance is where an accident occurs that is not the fault of the policyholder but of a third party then the policyholder, if insured on a comprehensive basis, will claim under their own insurance, the insurer will settle the claim and then seek to recover their loss from the third party insurers.
It is important to note that if the policyholder seeks recovery directly from another party after the insurance company has indemnified them in respect of a claim, then the insurer will recover the monies directly from the policyholder. If the policyholder were to recover from the insurer and the third party this would mean that they had benefited from the loss and this is strictly against the principles of indemnity.
What is a knock for knock agreement?
This is widely misunderstood and knock for knock agreements are no longer in common usage by insurance companies. Historically insurance companies would make mutual agreement with other insurance companies that on motor insurance policies they would not seek to recover the cost of any claims they paid out on their own policyholders against the motor insurance of another party that may be liable. the logic behind this being that the overall effect of the thousands of motor claims that happen each year would be neutral to each insurer and in by entering into this knock for knock arrangement then significant costs in making recovery could be achieved.
These agreements effectively bypassed the principle of subrogation.
In the 1980’s the private car insurance market changed quite considerably with the introduction of new direct writers, who’s business model was centred around fast growth and greater price sensitivity. The effect on the car insurance market was quite dramatic with many companies growing policy numbers rapidly and these underwriters did not consider the “swings and roundabouts” approach of knock for knock agreements to be in their interests. This, over a fairly short period of time, brought about the practical end of knock for knock….at least for the time being.
What is a subrogation waiver?
In practice insurers will often agree to a waiver of subrogation rights and this may be included in the policy where the insurer will agree to waive these rights in respect of an associated or subsidiary company to the policyholder.
In construction insurance it is commonplace for a policyholder to effect an insurance on in respect of works carried out by a number of separate entities but where the policyholder has agreed to arrange the insurance on behalf of the whole enterprise. Whilst the policyholder has agreed to arrange the insurance in the absence of a subrogation waiver the insurer could still enforce the rights of the policyholder against another party engaged in the enterprise.