One of the real pleasures of working with The National Alliance for Insurance Education & Research is being around so many talented people. I observe skilled communicators, excellent insurance technicians, and brilliant minds. Our faculty is proficient in almost every niche and field: construction, healthcare, agriculture, manufacturing, and everything else. Our specialists understand the complexities of managing giant corporate risks and also include those who appreciate the evolving exposures of today’s families in a rapidly changing world. We bring the insight and wisdom of our faculty to members and participants through online classes and seek to deliver education in shorter formats to fit as many schedules and lifestyles as possible.
As I was reviewing content from one of our stalwart faculty members, I was reminded once again of what a privilege it is to be so close to these professionals. So, for your consideration, I’ve excerpted a bit of a course that will be coming up in 2021 called “Concepts That Affect Coverage/Liability,” authored by Allen Messer, CIC, CPCU. It discusses legal concepts and principles that directly impact the way insurance policies respond to losses and how insurance professionals can better understand these concepts to educate and serve customers. Please enjoy this deep dive into technical issues related to subrogation.
Concept #10 – Subrogation and the Sutton Doctrine, Made Whole Doctrine
Black’s Law Dictionary (Ninth Edition) defines subrogation as the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. Subrogation simply means the substitution of one person for another. In other words, one person can stand in the shoes of another and assert that person’s rights against the responsible party.
There are three types of subrogation.
- Equitable or Legal Subrogation – arises by operation of law – can take effect with or without a contract – can be modified or terminated by a contractual agreement
- Conventional subrogation – arises by contract or an express act – many insurance policies have specific provisions that transfer the insured’s rights to the insurer
- Statutory subrogation – arises by an act of the legislature – subject to the terms of the statute
There is also a legal concept titled the Antisubrogation Rule. Black’s Law Dictionary (Ninth Edition) defines this as the principle that an insurance carrier has no right of subrogation – that is, no right to assert a claim on behalf of the insured or for payments made under the policy – against its own insured for the risk covered by the policy. This might appear as a simple concept, but it’s not. Each jurisdiction has developed, either through case law or statute, rules and exceptions to these rules regarding the application of this concept.
For example, some jurisdictions have established what is known as an implied co-insured. This may occur when there is a landlord-tenant relationship and there is no specific contractual provision that gives the landlord the right to subrogate against the tenant. The tenant, as a matter of law, is considered co-insured under the landlord’s property insurance. The premise is that the tenant pays rent which the landlord uses, in part, to purchase insurance. Therefore the landlord’s insurer is prohibited from subrogating against the tenant. This is known as The Sutton Doctrine, having its origins in an Oklahoma court.
Another important concept related to subrogation is the Made Whole Doctrine. One legal treatise – The Made Whole Doctrine: Unraveling the Enigma Wrapped in the Mystery of Insurance Subrogation defines this as:
“The common law made whole doctrine is an equitable principle which generally limits the ability of an insurer to exercise its right of subrogation until the insured has been fully compensated or made whole. Under this conceptualization, in the event of a subrogation dispute between the insurer and its insured, the insured has priority of rights to collect from the responsible third party. Thus, where the insured’s recovery from both the insurer and tortfeasor is less than or equal to its loss, the insurer forfeits its right to subrogation.”
On its surface, it appears that this doctrine can be the nemesis of an insurer’s efforts to subrogate. But, again, each jurisdiction may approach the application of this doctrine differently. In fact, some jurisdictions permit an insurer to contract around the Made Whole Doctrine if that intent is clear from the policy provisions.
When the insurer has a valid subrogation claim, the insurer may have to decide whether to proceed against the responsible party in its own name or in the name of the insured. This may depend on whether the suit against the responsible party is in federal court or state court, and, if in state court, if there are any limitations on this decision.
In discussing subrogation, the concept of waiver of subrogation must be mentioned. Black’s Law Dictionary (Ninth Edition) defines waiver as the voluntary relinquishment or abandonment – express or implied – of a legal right or advantage. It is common, as part of a risk management program, for waivers of subrogation to be incorporated into contracts. Typically, insurance policies may address these waivers within their provisions.
The Commercial Property Conditions contains such a provision.
|This Coverage Part is subject to the following conditions, the Common Policy Conditions and applicable Loss Conditions and Additional Conditions in Commercial Property Coverage Forms.|
I. TRANSFER OF RIGHTS OF RECOVERY AGAINST OTHERS TO US
If any person or organization to or for whom we make payment under this Coverage Part has rights to
recover damages from another, those rights are transferred to us to the extent of our payment. That
person or organization must do everything necessary to secure our rights and must do nothing after loss
to impair them. But you may waive your rights against another party in writing:
1. Prior to a loss to your Covered Property or Covered Income.
2. After a loss to your Covered Property or Covered Income only if, at time of loss, that party is
one of the following:
a. Someone insured by this insurance;
b. A business firm:
(1) Owned or controlled by you; or
(2) That owns or controls you; or
c. Your tenant.
This will not restrict your insurance.
While this condition permits waiver of subrogation before a loss to any person or organization as well as after a loss to specific parties, not all property policies contain these same provisions. It behooves the insurance professional to determine if his/her insured has waived subrogation and if the particular policy permits such a waiver.
Keep in mind that many contract provisions addressing these waivers only apply “to the extent recoverable by insurance.” Many of these contract provisions do not properly address deductibles, self-insured retentions, exclusions, or limits of insurance.
See what I mean? Good stuff. And while I know there are some in our industry that might respond to this kind of wonky detail with an eye-roll, I know there are many out there who love the intricacies of insurance and feel more confident and equipped just knowing these details.
Check back for more Deep Dives.
About the Author: Paul Z. Martin, CPCU
Paul Z. Martin, CPCU, is the Director of AcademicContent and Academic Director Team Lead for the National Alliance for Insurance Education &Research. Paul works with Alliance faculty, agents, and other industry professionals to deliver high quality insurance content and education. During his career, Paul worked as an adjuster, underwriter, special agent, company manager, andindependent agent. Paul has been an insurance educator in Texas for over twenty years.