The devil is in the details when it comes to any insurance policy--and the more you know about those details, the better.
Take, for instance, the detail called subrogation.
A verb rooted in Latin, “to subrogate” means “to substitute one thing for another.” In insurance-speak, the principle of subrogation holds that one who suffers a loss on behalf of another gains the right to recover that loss from whomever caused it.
In plain English, this means that your insurer, in shouldering liability for the claim against you, holds the right to make itself whole by pursuing the wrongdoer.
Assume, for example, that an employee of yours suffers an injury in a freeway accident while driving a company vehicle on company business. Workers’ compensation law obligates you to pay the claim, of course. Because you insure the risk, however, your insurer pays the claim on your behalf.
Investigating the accident, the insurer discovers that another driver, not your employee, caused the accident. The insurer exercises its subrogation rights, suing the other driver to recover its loss. You, having already been made whole when the insurer paid the claim, have no right to any other remedy.
Why is this important for the business owner to understand?
Because many business owners don’t realize that subrogation plays no part in claims that they pay themselves--such as when the business self-insures the auto risk. Similarly, subrogation plays no part in claims about which the business owner chooses not to inform the insurer. That can happen if the business owner fears an increase in premium or perhaps even a loss of the coverage altogether.
Under such circumstances, you retain the right to make yourself whole by collecting from the wrongdoer. Similarly, if your insurer refuses to pay a claim, sticking you with the bill on the grounds that your coverage does not apply, you have the right to recover your loss from any third parties who are at fault.
Last but not least, you may also make yourself whole if your insurance doesn’t cover the entire obligation. If a claim comes to $10,000 and your deductible is $5,000, for example, you can pursue the wrongdoer for the difference.
What all this boils down to is simple: If you, not your insurer, make good on a loss that the law obliges you to pay, you have the right to pursue any third party who has caused the loss.
“Many business owners don’t understand how subrogation works,” says Sean M. Escobar, vice president and chief financial officer of Debt Recovery Consultants, a Simi Valley collection agency specializing in subrogation claims on behalf of insurers and self-insured companies.
“If you self-insure, or choose not to buy insurance at all for some risks, and you become legally obligated to pay a claim, you can pursue any third parties who have caused the damage,” he says. “If you have to pay the claim, you have the right to recover your loss just like an insurance company does.”
The business owner who doesn’t understand subrogation leaves untapped a source from which he or she may recover the loss, Escobar says.
How do you go about it, and what does it cost? Some attorneys specialize in pursuing subrogation rights, usually for contingency fees of around 30% of whatever they recover. In recent years a handful of debt-collection firms in Southern California have begun offering the service, including competitors of Escobar’s such as Quality Collection Service in Canoga Park and Equity Collection Service in Westlake Village.
These firms do much of their work on behalf of insurance companies, of course. But as business owners come to understand their own subrogation rights, they are making use of such services as well.
The debt-collection industry is a rough-and-tumble business. In order to protect consumers, state law in California and elsewhere limits what collection companies may do in pursuing third parties. That presents you with some T’s to cross and I’s to dot when pursuing a wrongdoer on your own.
As a consequence, most business owners leave the job to an expert--if they know about it in the first place.
“Even some insurance companies ignore their subrogation rights,” Escobar says, “sometimes because they dismiss them as not economically feasible.
“But that’s often not the case. In recent years the insurance industry has recognized subrogation as a means of generating significant revenue to recover losses, and there’s no reason why business owners shouldn’t know about it, too.”
Columnist Juan Hovey may be reached at (805) 492-7909 or at email@example.com.