What is subrogation in insurance?
If you’re reviewing an insurance policy, see the word “subrogation,” and wonder what it means, you’re not alone. It’s not a term you hear in everyday conversation, so many people aren’t familiar with it. But subrogation in business insurance is a crucial concept that every business owner should understand.
What is subrogation in insurance? How does subrogation affect insurance claims? Does subrogation affect insurance rates? Read on for answers to these important questions.
Understanding business insurance and subrogation
In business insurance, subrogation refers to the insurer taking the place of the insured to pursue compensation from an at-fault party.
Let’s say a fire damages your company’s office, and the cause is faulty wiring installed by an electrician you hired. Your business owners policy (BOP) covers the damage, and your insurance provider pays your claim. Then, your insurer contacts the electrician’s insurance company to get them to cover the amount paid to you.
Here’s another example. Your business vehicle is struck by another driver who runs a stop sign. Here, your insurer pays your claim under your commercial auto insurance policy and then goes back to the other party’s insurance provider to recoup the cost.
Subrogation and insurance claims: how your business benefits
The concept of subrogation in insurance benefits your business in multiple ways, including:
So, while subrogation may be a confusing or even intimidating term when you first hear it, the concept can definitely be to your company’s advantage in many circumstances. You get paid quickly, and your insurance company takes things from there while you focus on your business.
What is a waiver of subrogation in business contracts?
Another subrogation-related term you might hear, specifically in your dealings with other companies, is “waiver of subrogation.” It’s the concept of agreeing in a contract to waive (meaning give up) your insurance company’s right to recoup losses from the at-fault party or their insurer. It’s not uncommon in business relationships for one party to request that another sign a waiver of subrogation. However, you shouldn’t do that without 1) understanding the consequences, 2) confirming your right to do so, and 3) ensuring your insurance policies have a provision that the insurer agrees to a waiver of subrogation from the specific third party.
Here’s an example of how a waiver of subrogation works. A building owner hires a contractor and gets them to sign a waiver of subrogation regarding workers' compensation. That way, if the contractor gets hurt on the building owner's property, the owner can’t be sued by the contractor’s workers' comp provider.
Why does the concept of waiving the right of subrogation exist? That’s a great question. Parties might agree to do so for several reasons, including:
- To keep costs down. A party might receive a lower insurance premium by getting the businesses they engage with to waive subrogation because their insurer then faces less risk.
- To avoid legal hassles. A waiver of subrogation simplifies interactions and helps the parties avoid potentially costly and time-consuming lawsuits.
- To maintain good relationships. Waivers of subrogation can promote trust and cooperation between businesses.
Important note: Waiving the right of subrogation has significant legal consequences! In fact, a business insurance policy might have language expressly forbidding you from doing so. Consequently, it’s critical to take the steps below before you sign this type of agreement.
Read your insurance policy carefully. You might find that you aren’t allowed to sign a waiver of subrogation. If that’s the case, you can’t agree to that aspect of a contract.
Talk with your insurance provider. Even if you think there’s nothing preventing you from signing a waiver of subrogation, it’s best to talk with your insurance company first. You might have misread your policy, and again, signing a waiver can have serious implications. biBerk has an option where we will honor customers with signed written contracts requiring waivers of subrogation. Sometimes the provisions are automatically included with no additional cost. In other cases, there is a charge.
Consult a lawyer. Whenever someone asks you to sign a business contract, it’s a good idea to have a lawyer review the document. They can alert you about anything in the contract that might be unclear or problematic.
In other words, proceed with caution if anyone asks your business to sign a waiver of subrogation.
Get clarification on subrogation in insurance from biBerk.
At biBerk, our goal is to simplify business insurance. We make it easy to get quotes, buy policies, and report claims online without ever talking to one of our representatives if that’s your preference.
Still, we’re here for you if you have any questions about insurance coverage. Subrogation tends to be one of those topics that business owners want to get a better handle on. That’s wise since there are legal ramifications associated with it.
If you understand subrogation and waivers of subrogation, that’s great! But if you’re unclear about those concepts and want to know more, we encourage you to reach out to us. Our licensed insurance experts can explain them as they relate to your business and interactions with customers, service providers, and others.