Subrogation is defined as the substitution of one person in the place of another with reference to a lawful claim or right. Although subrogation is usually recognized in insurance settings (e.g. a health plan seeking recovery of claims it has paid where another party was liable), the right of subrogation can arise in many other contexts wherein one party pays a debt lawfully owed by another, including mortgage and real estate settings, surety ships, and other areas.
The party whose debt has been paid (usually an insured), is known as the “subrogor,” while the party who has paid the debt (usually the Plan or insurance company), is known as the “subrogee.” The subrogee steps into the shoes of the subrogor and acquires all legal rights the subrogor has with regard to the subject of the claim.
Subrogation arises in one of three ways. The first is known as contractual subrogation (also referred to as “conventional subrogation”) where a party maintains a legal right to subrogate. The second type is equitable subrogation, and the third is statutory subrogation.
This type of subrogation is based on the contract between the parties, such as the subrogation language contained in an insurance policy. The term “conventional” is defined as growing out of or established by convention; that is, an agreement or mutual engagement between two or more persons or entities.
Equitable subrogation is based upon principles of equity and objective fairness, and often employed to preserve the priority rights of a first lien holder. Equitable subrogation is the doing of justice between the parties by securing the ultimate discharge of a debt by the person whom in good conscience and equity should pay it.
The third type of subrogation is statutory subrogation. A right of subrogation and/or reimbursement can also be set forth in statutory law, giving an insurance carrier a right to recover certain benefits. It includes workers' compensation, hospital liens, Medicare, and many other areas.
Allowing insurers a right of subrogation does not increase the amount of lawsuits. In fact, it may have the opposite effect. If subrogation did not exist, plaintiffs would be free to bring lawsuits without concern for whether they must repay their subrogated carrier. When plaintiffs are obligated to repay their health insurers after a third-party recovery, many doubtful or borderline cases are not brought. Many lawyers advise their clients that because the insurance company or Plan has the right to recover all of the benefits paid to the individual, filing suit may not make economic sense.
Subrogation along all lines of insurance serves the vital function of actually returning funds to the respective insurance and health plans when the obligation lies elsewhere with a responsible party. If anything, subrogation helps keep premiums lower and should therefore be preserved at all costs.