Subrogation Clause

Definition of "Subrogation clause"

Written by

Staci Skinner

Coldwell Banker Terry & Associates

Subrogation clauses are used in both the real estate and insurance industries to follow lawful claims against a third party that damaged the property of the insured. If we encounter a dispute over indemnity or enforceability, subrogation clauses fall under the common law legal system. In this situation, the insurance company is the principal, while the surety (entity responsible) is the third party that caused the damage.

What is Subrogation?

In order to understand how subrogation clauses work, we first need to understand what subrogation stands for. The practice of subrogation refers to the substitution of one party in a legal situation for another. In other words, through subrogation, a third party is granted the legal right to collect damages or debt on behalf of the party that suffered the damage or incurred the debt.

The subrogation principle is mostly used by the insurance sector to cover the insurance claim covering the insured from the party that created the damage. In this case, the insurance company makes sure that the coverage they offered to their client is recovered from the entity responsible for the damage. In other words, it recovers its own damages.

You may encounter this subrogation right in contracts signed with insurance companies. The contract underlines the specific clauses that give insurance companies the right to sue the party responsible for the damage and recover their losses.

How Does Subrogation Work?

When the insured party incurs damage to their insured asset, the insurance company pays the client’s claim for the losses and/or damages they suffered. This usually happens directly once the value of the damage is determined. The next step is for the insurance company to determine if the damage was caused by a third party (Acts of God can not be blamed for the damage). Once they determine who the third party is, the insurance company seeks to be reimbursed for the damages they already covered for the policyholder.

Insurance companies are allowed to seek this reimbursement due to the subrogation clause, and they can either go against the party responsible for the damage or the insurance company that covers them. The insured does not have the right to go directly against the party responsible for the damage. The most common cases of subrogation can be seen in auto insurance policies. The policyholder’s car is hit by a third party, and the insurance company covers the damage, then goes after the party at fault to recover their losses.

What is a Subrogation Clause in Real Estate?

Subrogation clauses are applied in real estate through insurance providers. For instance, if you own a property and lease or rent it fully or in part to someone else, you should use liability insurance to protect yourself from possible damages that person could cause. The tenant could also have an insurance policy to cover themselves. If and when some damage or injury happens, the insurance company deals with the claim in a timely manner, and the relationship between landlord and tenant should not be damaged.

For example, in case of a fire that the tenant is responsible for, the insurance company covers the claim under the policy signed with the landlord, and the landlord receives the money to cover the cost of the repairs. So far, the example doesn’t include a subrogation clause. In this situation, the insurance policy limits the subrogation of the insurer. However, if these limitations aren’t specified within the insurance policy, they may further investigate and discover that the tenant is responsible for the fire and sue them to recover damages.

While insurance policies are meant to cover damages to the policyholder, shouldn’t the insurance company recover their damages if the party responsible is found? This is open to debate, but this is why understanding these legal issues is important for landlords, and they should also be addressed with tenants. Disclosure doesn’t only work in buyer-seller contracts.