Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Oct 26, 2021

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The key to settling insurance claims is determining who is at-fault for causing the bodily injury or property damage and ensuring they are the ones who end up paying.

This concept is not as cut and dry as you might think. In some cases, the insurer will indemnify the insured and sue the real at-fault party to recover money for the damages they paid out.

The process of an insurance company recovering money they paid out on a claim from the true at-fault party is known as subrogation.

What is property damage subrogation?

There are actually a few types of subrogation, so we have a few examples.

Imagine your home burns down and is deemed a total loss.

Your insurer will begin to settle your claim as soon as they are made aware, regardless of what caused the fire. That’s what your policy is for.

Perhaps after investigating the scene, it is determined faulty wiring for a stereo caused the fire.

For validation purposes, you inform your insurer that a contractor recently updated the wiring for a stereo system you purchased.

Your insurer will, in turn, subrogate against the contractor’s commercial general liability (CGL) insurance company to recover their expenses associated with settling your claim, as the contractor was the real at-fault party.

In this example, subrogation will end up being for the cost of the losses you face due to your home burning down.

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What is bodily injury subrogation?

Imagine you’re driving down the freeway after purchasing new tires and one falls off, causing you to collide with another car and run the other car into the cement lane divider.

The individual is injured in the accident, and will likely sue you for bodily injury damages. Your insurance company will pay for the damages according to your policy.

However, it is determined that your wheel fell off because the tire store forgot to put your lug nuts back on (don’t laugh, it happens all the time).

In this instance, your insurance company will subrogate against the tire store’s insurance company to recover the money they paid to settle the original claim. The subrogation in this example will be for any money used for compensation purposes with regards to the other driver, be it medical bills or repair costs.

So why don’t we hear about subrogation more often?

In both scenarios above, it was clear that although you were the one filing the initial claim, another party was actually at fault. At the end of the day, the at-fault party is responsible for damages.

Your insurer held up their end of the deal by paying money out regardless, but subrogation allows them to recover the cost they had to use to fulfil the terms of the insurance claim.

Subrogation is common practice in the industry, but not well know because it normally takes place after a claim has been paid and the insured is no longer involved.

It’s not often that a driver would have to be involved in subrogation claims, if they end up becoming involved at all. The benefit there being less work for the insured party. After your house burns down, you’re going to be more concerned about your own financial recovery rather than that of your provider.

That being said, the subrogation process is important, because it’s one of the ways that insurance carriers make their money back. By doing so, it allows them to stay in business, which means you still have coverage on your personal property.

If a provider doesn’t utilize subrogation, they won’t be able to collect, and if they’re unable to turn a profit, not only do they go out of business, but you’re out of a policy.

You may want to immediately contact your provider to see if this is part of their insurance process, but it’s not really that necessary. Think of it as the behind-the-scenes portion of your policy.