Subrogation Essay, Research Paper
To understand subrogation it’s important to know how society and the law defined subrogation. Subrogation by Webster’s Ninth New Collegiate Dictionary is defined “the assumption by a third party of another’s legal right to collect a debt or damages.” Courts have defined subrogation as: “when one person has satisfied the obligations of another and equity compels that the person discharging the debt stand in the shoes of the persons whose claims has been discharged, thereby succeeding to the rights and priorities of the original creditor; FDIC v. Coone, 1992 U.S. Dist. LEXIS 15942 (M.D. Florida)(October 15, 1992); and “the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible from the loss.” Eastern states health & Welfare Fund v. Philip Morris, Inc., 1998 U.S. Dist. LEXIS 9716(S.D. New York) (July 1, 1998).
Now knowing what subrogation is, we can now explore the effects subrogation has on our everyday life. If you have any type of insurance, then subrogation is part of your life. You as the insured pay a premium so that the insurer will “stand in your shoes” and take financial responsibility for the claim. Subrogation is also the natural consequence of indemnification. In a perfect world, subrogation ensures that the party at partially responsible for the loss will eventually repay the party who has ultimately borne the loss, which is the insurer.
Subrogation is a very specialized form of collection. It is the only means by which an insurer can recover its payment under a policy or bond. Subrogation can keep rates low by requiring the person who is responsible for the loss to pay for it, and not the insurer. Recoveries are reflected in the increased premiums for those who are responsible for the loss. Or reflected in lower premiums for those policyholders who are not responsible for the loss. This is also known as experience rating. The process of experience rating ads a credit or debt to premiums predetermined by the National Counsel on compensation Insurance.
Subrogation recoveries serve as deduction to actual loss totals and actual primary losses, thereby directly affecting the experience modifier. As little as one subrogation recoveries can mean the difference between a debit modifier and a credit modifier. This is key in holding the insurer premiums to an absolute minimum under the experience rating process.
Health plan documents usually contain subrogation provision which grant the plan both the right to subrogate against third parties and the right to reimbursement where there has been a recovery against a third party. Plans are now recognizing the values of exercising their subrogation and reimbursements rights. Although many payments of medical benefits are made in situations where the plan beneficiary has no claim, the plans will usually benefit by asserting a right of subrogation or a right of reimbursement.
Business interrupted insurance policies covers businesses for profit lost during a strictly limited time frame and, in almost all cases, strictly defined policy limits. This confides and restricts the insured. The insured only recovers a fraction of the true economic loss. In most cases the economic loss extends into the future. Not covered in most policy, the interruption could affect profits for years. However, in subrogation action, policy restrictions are irrelevant, the measure of damages is the total economic loss stemming from the tort. Subrogation allows the insurance company to seek the full extent of the economic loss, unconstrained by the policy limits. Giving the insured a better chance in substantial recovery.
In some defective-product cases, the insurer’s right of subrogation may be limited by the “economic-loss doctrine.” The economic-loss doctrine was first expressed in the supreme court case East River Steamship Company v. Transamerica Delavel, Inc., 476 U.S. 853 (1986). The U.S. Supreme Court held that where a defective product causes economic loss, recovery under contract might be the only recovery available; there is no tort solution in negligence or strict product liability. Subsequent cases interpreting this doctrine vary from jurisdiction to jurisdiction. In many cases this means that an insurer seeking economic loss recovery in defective-product cases can overcome the limitations imposed by the doctrine. This was not so in Illinois Supreme Court ruling of the case Trans State Airlines v. Pratt & Whitney Canada, Inc. The courts ruled “purely economic damages resulting from an injury to a product itself are not recoverable in a product liability action.” The court also stated, “it seems reasonable to us that the economic loss doctrine should bar tort recovery when an defective product causes the type of damage one would reasonable expect as a direct consequence of the failure of the defective product. The U.S. District Court also ruled that the Trans States’ warranty rights expired before the incident occurred.
Without subrogation rights, two injustices will occur with each insured loss: first an insurer can never recover its payment for the loss which it did not cause, and second the party who has at least partially caused the loss will probably never be required to repay it. The insured, as the wronged party, will usually have no incentive to bring the negligent party to justice, if an insurer has indemnified the loss. This is where the deductible comes in. The insured has to pay the deductible stated on the policy, when the claim is processed. When the negligent party pays the insurer then the insurer gives back the deductible to the insured. This provides an incentive the insured needs to bring the party at fault to justice.
In a recent claim, a bank was one of the unfortunate banks in the southeastern United States which had been victimized by a very sophisticated ring of bank burglars. The burglars would target banks over holiday weekends, enter the bank when the bank was closed and wait for the night deposits. The burglars specialized in picking banks which received large cash night deposits from fast food vendors, WalMarts and grocery stores. The burglars took in excess of $500,000 in cash from the night depository but were kind enough to leave most of the customer checks. The bank reconstructed the loss based upon the depository slips. The bank then credited each of the customers’ accounts for the customers’ losses. After completing these actions, the bank made a claim under its financial institution bond. In investigating the claim, it was determined that all of the night depository agreements with the bank customers (with the exception of one) provide
that the bank had absolutely no liability to the customer for any losses until it opened the night depository bags and verified the amount of the deposit. This obviously raised numerous questions. One of which, did the bank really suffer a loss, if the bank did not have a legal obligation to reimburse its customers, then should the insurance company have to pay the claim? Should the bank be “placed in the shoe” of the customers? Or should the bank in fact be held legaly responsible for the well being of the deposit? These might in fact turn off customers from depositing their money this way.