Understanding Subrogation in Insurance: Legal Theories and Importance
Subrogation in insurance allows an insurer to step into the shoes of the insured to pursue claims. Legal theories of liability for subrogation include contract, law, and equity. It's important for insurers to recover payments made for harm caused by others to maintain profitability and fair compensation. Failure to pursue subrogation can impact company profits, employee satisfaction, and premiums. Recovery allocation regulations in Louisiana and Mississippi determine the distribution of funds recovered through subrogation.
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Successful Subrogation By: Doris T. Bobadilla, Esq. Presented to CEU Institute
What is subrogation? Subrogation Subrogation allows one person to step into the shoes of another, which transfers certain rights and obligations. Through subrogation, an insurance carrier can step into the shoes of the insured and pursue any claims the insured holds. The carrier will not obtain any greater rights than the insured already held. Rather, the carrier stands in the insured s place. Louisiana and Mississippi recognize that insurance carriers often have a right to subrogation for payments made.
Legal Theories of Subrogation A right to subrogation is found through one of three legal theories of liability: Contract Louisiana and Mississippi recognize an insurer s right to subrogation if subrogation is provided for in the contract. The contract in this case is the insurance policy. Law Louisiana and Mississippi have certain statutory provisions that provide for subrogation. Equity In Mississippi, but not Louisiana, subrogation may be applied through equity. Equity is applied when the proposed action is the right thing to do.
Why is subrogation important? An insurer is called upon to pay for the harmful effects of certain risks it has insured. Many times, these harms are caused by another person. Most jurisdictions require that the person who has caused the harm should be the one to pay for it. An insurance company, who pays according to its contract, is generally entitled to recover payments from the person who caused the harm.
Why is subrogation important? What happens if subrogation is not pursued? First, the insurance company pays money it will not recover. This means less profit for the company. Second, less profits means less salary raises, promotions, and bonuses. This makes adjusters and their supervisors unhappy. Finally, to compensate for lost profits, the insurance company will often raise premiums, which makes insured customers unhappy. It is best to recognize possible subrogation claims when they occur. Not every claim can be subrogated, but the more familiar you are with subrogation and the law, the more likely you are to recognize subrogation claims when they occur.
Allocation of Subrogation Recovery When recovery is made through subrogation, Louisiana and Mississippi have certain regulations concerning the allocation of those recoveries. Under Mississippi s statutory priority structure, funds are first used to pay the reasonable costs of collection. Then the funds go to discharging the legal liability of the insurer or employer. Finally, if any funds remain, the funds go to the insured. In Louisiana, if the employer or carrier intervened in the employee s suit against the third party, then the intervenor is responsible for up to 1/3 of the insured s costs and attorney s fees. These fees are called Moody fees, and they can be taken from the subrogation recovery.
Subrogation Liens A lien is a claim on property to secure the payment of some debt, obligation, or duty. A subrogation lien allows the insurer to collect on funds the employee recovers from a third party after an insurer has already paid the employee for his damages. Through tort law, an injured insured is capable of recovering from both his insurance company and from the tortfeasor for his damage caused. A subrogation lien prevents the insured from being able to double recover for the same injury. Example:In the workers compensation setting, if the employee s injury or death was caused by circumstances creating liability in a third party other than the employer: The employer or the employer s insurance carrier may maintain a suit against the third party, OR The carrier/employer holds a subrogation lien against any judgment or settlement obtained by the employee from the third party.
Areas Where Subrogation Areas Where Subrogation Claims Often Arise Claims Often Arise Negligence Contract Strict Liability
Subrogation & Negligence An insurance carrier can bring a subrogation action against a third party that harmed the insured through negligence. To succeed in a negligence claim, the insurer must prove by a preponderance of the evidence that: The third party had a duty of care to the injured insured; That duty was breached; The third party caused that breach; and The insured suffered damages. A negligence claim often arises when an employee is injured in an automobile accident.
Subrogation & Negligence The standard of care depends on the situation that caused the harm. Some negligence actions have their standards of care set in the statutes. An example of such an action is a medical negligence action. Medical negligence can only be established by expert medical testimony that the defendant breached the standard of care.
Common Negligence Defenses A defendant can first claim that an element of negligence was not met: There was no duty. The duty was not breached. Another party than the defendant was the cause of the breach. The defendant was not injured. A defendant will often claim that the insured was contributorily negligent. For contributory negligence, the defendant must prove the insured s own negligence partially or wholly caused the harm.
Subrogation in Contracts To determine subrogation rights, a court will look to the contract between the parties, the insurance policy, to learn the parties intent. In Louisiana, an insurer must specifically reserve its right to subrogation in the policy, else it is not entitled to subrogation. In Mississippi, subrogation clauses are not enforceable until the insured is made whole. A contract must also be valid to be enforced. Often, defendants will argue that a contract is invalid. Common justifications for the invalid contract defense include: fraudulent transfer, true consent was not given, and unconscionability.
Subrogation in Contracts Common contractual relationships where subrogation arises: Buyer / Seller Realty Lease Bailment
Contracts: Buyer/Seller Many sales performed today are done through a contract. When a buyer cannot pay his debt to the seller, a third party will can step in and pay the buyer s debt to the seller, unless the contract states otherwise. The third party takes the place of the seller and the buyer now owes his debt to the third party.
Contracts: Realty Leases Realty leases are leases for property, usually between a landowner and his tenant. Realty leases will often contain waivers of subrogation. waivers of subrogation. The contract must specify a waiver of subrogation. The insurance policy must agree to waive subrogation or agree to allow the insured to waive subrogation. Else the waiver is invalid. Subrogation waiver is a common defense to contractual subrogation claims, as well as invalid waiver.
Contracts: Bailments A bailment is the physical transfer of property from one person to another, often done for safe-keeping. This is called a deposit in Louisiana. A constructive bailment is a bailment created in contract. When a person accepts payment for holding another s property, he is required to take the same care of the property in his possession as would a reasonable and prudent owner and is responsible for any damage to the property caused by his negligence.
Contracts: Bailments Bailments can have important effects for subrogation. If the holder of the property damages the property, the insurer of the owner of the property can assert a right of subrogation against the holder. The holder of the property has the burden of proof to show that he did not damage the property through negligence.
Contracts & Liability Waivers Defendants will sometimes attempt to obtain legal protection through a waiver of liability for negligent conduct. Such waivers are intended to shield the defendant from suits by parties injured through their negligence and can also work to shield defendants from the insurers subrogation claims.
Contracts & Liability Waivers Both Louisiana and Mississippi rarely permit waivers of liability for the defendant s negligence. In Louisiana, any clause that limits or excludes liability for the physical harm on party causes the other is null. In Mississippi, a waiver of the defendant s liability will only be upheld if the parties understood the terms and specifically negotiated for that provision. The court will also strictly construe the clause against the party seeking to enforce it.
Subrogation & Strict Liability Subrogation often arises with strict liability claims in three contexts: Dangerous instrumentalities Ultrahazardous operations Products liability
Dangerous Instrumentalities A dangerous instrumentality is a product or device that is inherently hazardous or has a high potential for harming people through careless use. When the damages complained of were caused by use of a dangerous instrumentality, subrogation may be available. Dangerous instrumentalities demand a higher degree of care than other devices. The insurer can allege that a third party s negligent use of a dangerous instrumentality caused the damages the insurer paid. The insurer could also bring a products liability action against the manufacturer for a defective dangerous instrumentality.
Ultrahazardous Operations Louisiana and Mississippi define certain operations as ultrahazardous. Ultrahazardous activities in Louisiana are limited to pile driving and blasting with explosives. Mississippi has only recognized liability for ultrahazardous activities in activities involving the disposal and use of dynamite and other explosives. For these ultrahazardous activities, the user/owner is strictly liable for whatever harm they cause, regardless of negligence. However, subrogation may be available if a third party caused the harm occasioned by the ultrahazardous operations.
Products Liability A manufacturer is generally held strictly liable for the damage his product causes. A manufacturer that is found liable for a design defect shall indemnify a seller, unless the seller had actual strict liability. In Louisiana and Mississippi, a product is unreasonably dangerous either by: A mismanufacture defect A design defect, or Inadequate warning or instructions
Products Liability For ineffective warning, the claimant must prove that at the time of manufacture, the manufacturer knew or should have known of the danger that caused the damage and that the ordinary consumer would not realize the danger. The manufacturer or seller is not liable if the plaintiff knew of the defective condition, appreciated the danger, and deliberately and voluntarily chose to expose himself to the danger.
Products Liability Products Liability Louisiana also considers whether there existed an alternative design for the product. A product is unreasonably dangerous in design if, at the time the product left the manufacturer s control, there existed an alternative design that would have prevented the claimant s injury and the likelihood the design would cause injury and the gravity of that injury outweighs the burden of adopting the alternative design.
Common Defenses to Strict Liability Common Defenses to Strict Liability Because negligence is not a factor in strict liability, an award cannot be lessened for the contributory negligence of the plaintiff. In Mississippi, comparative negligence is a defense to strict liability. A defendant can allege that the damages were caused by the fault of a third party.
Common Defenses to Common Defenses to Strict Liability Strict Liability A defendant can allege the accident was the fault of the victim, such as when the victim misuses the item. For example, in products liability, a manufacturer is not strictly liable when the product was misused. If this misuse was not reasonably foreseeable, then the manufacturer did not have a duty to warn either.
Subrogation Claim Investigation Identify all causes of loss Recognize the relationships between all the parties and their responsibilities to each other Document your investigation Use experts as needed
Identify Causes of Loss Because the policy defines the law between the parties, the policy is what will control payment of claims as well as what the insurer can assert its subrogation right through. If a certain harm is not covered through the insurance policy, then the insurer is not required to pay it and thus would not recover funds through subrogation. However, if the insurer does pay the insured for their damages, the insurer should look to any causes of loss that could allow the insurer to recover against a third party.
Recognize Party Relationships In workers compensation subrogation, if either the employer or employee or his dependents files suit against a third person, then that party is required to notify the other in case the other wishes to intervene in the action. The Louisiana statutes also require employer approval of any settlements between the employee and the third parties. Failure to do so will result in the employee s or his dependent s right to compensation in the future, including medical expenses.
Document the Investigation Some helpful documents may include: Reports of official investigations Relevant appraisals Invoices Interviews with the insured and any potential witnesses to the damage would be advisable. Sometimes these documents are not available at the time of making coverage decisions; however, they should be retained for subrogation purposes.
Judicious Use of Experts Picking the expert Pick an expert based upon his or her expertise. Do not retain an expert who is offering opinions outside his or her area of expertise. Resist the do-it-all expert who has expertise in everything or has offered opinions in numerous areas. It is better to pick experts who regularly practice in their field and whose workload is less than 50% litigation based. It is also helpful to have an expert whose litigation is split between defense and plaintiff s work, rather than one or the other.
Judicious Use of Experts Using the expert Listen to the expert. Often, an expert can give you insight into other areas of inquiry you may need to make. It is best to instruct experts in a way that will not suggest the outcome. When an expert asks for additional information, be careful what information you give them to avoid predisposing him or her to one conclusion or another. Ask them to do a physical exam first, and then afterwards forward questions to you that they need answered.
