When the Insurance Company Owns Your Case

Buried in nearly every insurance policy is language similar to this: “The insurer, on making any payment or assuming liability therefor is subrogated to all rights of recovery of the insured against any person, and may bring action in the name of the insured to enforce those rights. “

What the hell does that mean? Here’s an example. Suppose you have a new electrical panel installed and a few days later your house burns down. Your insurance company pays the claim in full, but the investigation reveals the fire was the result of poor work by the electrician. Because your policy contains the language quoted above, the insurance company can bring a suit against the electrician, in your name, to recover the amount it paid you. In short, the insurance company owns your claim to the extent it paid you for the loss.

Subrogation clauses are found in all sorts of policies, including health, property and liability. They are not found in life insurance policies.

Sometimes these clauses make trouble. One reason folks buy insurance is to avoid the necessity of suing someone who through carelessness caused them a loss. In the example here, maybe you live in a small town and you and the electrician are friends. While you aren’t real happy about him burning down your house, you wouldn’t think of suing him when, because of your insurance, you suffered no out of pocket loss. That consideration won’t mean much to your insurance company. In fact, your policy contains a clause requiring you to cooperate with the insurer and not to do anything that would impair its rights under the policy.

Generally the insurance company initiates a “subro” action. You will know the company is considering a subro action when you get a letter from its lawyer. This letter, known in Maine as a “17C” letter after the rule that requires it, states that the insurance company is going to bring a claim in the insured’s name, and tells the insured that if he or she has an uninsured claim stemming from the same set of facts, the insured must tell the insurance company so those claims can be included in the subro lawsuit. So, if my house burns down and I lose jewelry which is not covered by my homeowner’s policy (as is typically the case, be advised – you need a special policy or endorsement for valuables), I can tell the insurance company’s lawyer to include my uninsured loss in the lawsuit.

A 17C letter is really important and you must read it closely and take action. A rule of lawsuits is that you can’t sue someone twice for the same thing. So if you get a 17C letter, but don’t tell the insurance company that you’ve got some uninsured losses you want claimed in the suit, and months or years later decide you want to recover for that loss, you may well be out of luck. (Remember, subro claims are brought in your name even when the action will benefit only your insurer.) There is a short 10 day deadline for responding to a 17C letter.

The other way a subro action gets going is when the insured initiates it. Often, particularly if the insured loss is not great or if “third party liability” is not obvious, the insurance company won’t bring a subro claim. However, if the insured brings a claim, the insurance company has the right to recover, from whatever the plaintiff-insured may get in the lawsuit, payments it made to the insured. In fact a health insurer gets a lien on any recovery. A lawyer handles this by contacting the insurance company ahead of time and making sure everyone understands their positions – we don’t like surprises when it comes time to divvy up the proceeds of a successful lawsuit.

Sometimes an insured wants its insurance company to waive the right of subrogation. My wife and I lately built a house. (GO Logic in Belfast did the job and they were wonderful.) My wife and I bought a “builder’s risk” policy covering our loss if the construction site burned or something awful like that. The contractor had its own policies, for worker’s compensation and comprehensive general liability (CGL) and so forth. We were content with our builder’s risk coverage and didn’t want the contractor to be on the hook , via subro, if we suffered an insured loss for which the contractor might be responsible. Essentially, we and the contractor identified the likely risks to the project, decided which party would purchase the insurance to protect against the various risks, and agreed that if there was a loss which was covered by insurance, we would not allow our insurance companies to bring a subro claim to recover from the negligent party. The contract clause looked like this: “The Owner and Contractor waive all rights against each other, separate contractors, and all other subcontractors for damages caused by fire or other perils to the extent covered by Builder’s Risk or any other property insurance, except such rights as they may have to the proceeds of such insurance.”

That did the job, and it’s something to think about when you are undertaking a similar project. Make sure you let your insurance company know what you are doing: A waiver of subrogation without the insurer’s consent could be a breach of your insurance policy, at least in some states.

This is a complicated area, and no one wants to screw up insurance coverage. Talk to a good insurance agent, or a lawyer, before acting on the matters discussed in this article.

Nicholas Walsh is an attorney practicing in Portland. He may be reached at (207) 772-2191, or at nwalsh@gwi.net.

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