There are many terms, related both to insurance and business, which seem too intimidating for most people even to want to try to understand. Subrogation is one such term. It sounds like an impressively dense legal concept that only can be understood through the use of skilled professionals pouring over thick stacks of documents trying to decipher obtuse language to discern some hidden meaning or obtain some pearl of wisdom. Well, so much for fantasy. It really is a straightforward legal concept that every New York business and insurance adjuster should become familiar with, because it can affect the business’ recovery after a property or casualty loss.
Subrogation is an equitable doctrine that allows an insurer, which has paid its insured for a covered loss, to stand in the shoes of its insured to try to recover the money it paid, from the party that caused the loss in the first place. See Kaf-Kaf, Inc. v. Rodless Decorations, Inc., 90 N.Y.2d 654, 660, 687 N.E.2d 1330, 1332-33 (1997).
The easiest way to think of subrogation is in terms of an insurance policy that provides coverage for property damage. Just about every New York business has one. For the most part, every insurance policy protects the insured, to one degree or another, from responsibility, or liability, for its own negligence. Homeowners’ policies, and many business owners’ policies, also known as “BOP” policies, often also provide property coverage. That is, the policies require that the insurer pay the insured for the loss or damage to the insured’s real or personal property when the loss or damage results from a cause of loss covered under the policy. When the insured makes a claim to recover under its own policy for damage caused to its own property, called a first-party property claim, the insurer will evaluate, or adjust, the claim. If the damage was caused by a covered cause of loss, the insurer will pay the insured either the value of the property at the time of the loss, including depreciation, or the cost to repair or replace the property if the repair or replacement is done within a certain amount of time after the loss.
Once the insurer pays the insured’s first-party property claim, the insurer can try to recover the money it paid to its insured, from the person or entity that caused the damage in the first place. This is subrogation. By paying the insured’s claim, the insurer becomes subrogated to the insured’s right to recover from the party that caused the damage, to the full amount it paid the insured under the policy. The insurer can sue in the insured’s name, even when trying to recover the insured’s uninsured loss, when the insured assigns all its rights to recovery to the insurer, which it often does in a subrogation receipt. See CPLR 1004, and CNA Ins. Co. v. Carl R. Cacioppo Elec. Contractors, Inc., 206 A.D.2d 399, 400, 616 N.Y.S.2d 187 (2nd Dept. 1994).
As a result, if the insured’s actual loss is $150,000.00, but it has a $10,000.00 deductible, the insurer will pay it $140,000.00 for the loss. The insurer then can sue the party that caused the loss to recover the $140,000.00. The insured can sue the same party, to recover its uninsured loss, which is the $10,000.00 it did not collect under the policy.
Subrogation claims can be big or small, involve businesses or homeowners, and seek to recover for damages caused by fire, water, or just about anything in between. The key is that the insured must have a right to recover from the same party from which the insurer seeks to recover. That is, if the insured could sue someone for negligence for causing its damages, the insurer would have the same right to sue the same person for the same negligence, at least to recover the amount the insurer paid the insured under the policy for the covered loss caused by that negligence.
There are other issues involved in subrogation, which affect an insurer’s right to recover. These include, for example, waivers of subrogation, where parties to an agreement, such as a lease, agree to give up their insurer’s right to sue the other to recover for an insured loss; and the anti-subrogation rule. These will have to wait to be discussed in subsequent entries. Even with them, however, subrogation basically is a doctrine based in fairness; that is why it is called an equitable doctrine. If an insured’s business is damaged in a fire caused by someone else’s negligence, and the insurer pays the insured the cost to repair the damaged property, it is only fair to allow the insurer to try to get its money back from the person or business that caused the fire. As we said, it doesn’t take a professional degree to understand subrogation.