Reviewed by Stefan Tirschler
Updated September 9, 2022
sub·ro·ga·tion | ˌsə-brō-ˈgā-shən
Definition: The right of an insurer to pursue legal action against a third party on behalf of an insured.
After repairing Mary’s house, her home insurance company subrogated against the manufacturer of the defective dishwasher.
Subrogation is when an insurance company steps into the legal shoes of one of their customers. They do this to seek payment from a third party that’s responsible for harming their customer or damaging their properties.
When you have to make an insurance claim for something that isn’t your fault, but is someone else’s fault, you could theoretically sue that person to cover the loss. Subrogation, however, is when your insurer sues them on your behalf.
Many insurance policies have a subrogation clause, which grants the insurance company the right to seek damages from at-fault third parties on behalf of their customers. When an insurance company exercises their right of subrogation, they get the same legal rights as the customer (also known as the insured) for whom they are subrogating. They’ll cover the legal costs, and they’ll receive any damages awarded in the case.
The at-fault party may have their own insurance provider that steps in, so subrogation often ends up being legal proceedings between two insurance companies.
One purpose of subrogation is to simplify the claims process.
When you make a claim for damage that someone else caused, you probably don’t want to wait weeks or months for a legal case to play out before you get your claim settlement. Subrogation allows the insurer to pay your claim right away, and then go after the at-fault party on their own to cover that expense.
Additionally, subrogation helps keep insurance premiums low. Since insurance companies can recover damages from responsible third parties via subrogation, they reduce the overall cost of claim settlements. Without subrogation, insurance customers could get a claim settlement from their insurer and go after the responsible third party for legal damages, getting paid twice for the same loss.
With subrogation, the customer gets compensated for their loss, and the insurer gets compensated for paying the claim. Everybody gets restored to the same financial position they were in before the loss, and the party responsible for the damage ends up paying for it, as they should. Lower costs for insurers mean lower premiums for their customers.
Subrogation happens a lot in auto insurance, but it exists in the home insurance world as well.
A fire recently caused considerable damage to Matilda’s house. The fire started on her neighbour Stephen’s property when Stephen was burning dry leaves and grass clippings on a windy day. Stephen thinks he shouldn’t be held responsible for the fire, since their town has no bylaws against such fires. It’s going to take a court case to settle whether he’s responsible for paying to repair Matilda’s house.
In the meantime, Matilda’s home insurance provider pays to repair the damage. It’s her home, and she can’t wait weeks or months for a legal battle to play out before she gets the repairs underway. She certainly doesn’t have the money to pay for it out of pocket.
The repairs to Matilda’s house get underway at once. Her insurance company exercises its right to subrogate on her behalf and launches a lawsuit against Stephen to recover the money they paid to fix her house. Since Stephen has his own home insurance policy with liability coverage, his insurance company steps in to take part in the case on his behalf. Eventually, Stephen’s home insurance company ends up paying Matilda’s home insurance company for the damage to her home.
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About the expert: Stefan Tirschler
Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.
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