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.”
Let’s look at examples:
Property Damage Subrogation
Imagine your home burns down and is deemed a total loss. Your insurance company 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. You inform the insurance company that a contractor recently updated the wiring for a stereo system you purchased.
Your insurance company 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.
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.
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.
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.