Navigating State-by-State Subrogation Laws

All about Subrogation

Subrogation is a legal term that refers to the right of an insurance company to pursue a third party that caused an insurance loss to the insured, usually with the intention of recovering the amount of the claim paid to the insured for that loss. In other words, if your house is damaged by a falling tree and you file a claim with your homeowner insurer, your insurer has a right to recover from the party responsible for the tree falling. The insurer reimburses you and then pursues the negligent party directly.
An important subrogation right is the right of an insurer to be subrogated to the insured’s cause of action against a tortfeasor to the extent that the insurer has indemnified its insured. In general, an insurer, which has become subrogated to its insured, stands in the shoes of its insured to the limit of the indemnity paid by the insurer. The insurer acquires no greater rights, nor is it subject to greater liabilities, than those possessed by the insured at the time the right of the insurer arises. If the insured had no right against the party sued, neither does the insurer. The insured retains his subrogated claim and can sue the responsible party himself . An insurer binds no one but himself by the contract of insurance it writes and a claimant’s cause of action against the tortfeasor is not increased or diminished by the purchase of the policy.
A homeowner policy has a subrogation clause stating, "If you and we do not agree on the amount of loss, we may make an appraisal." And that, we think, can be used to avoid a subrogation situation where the subrogation right is placed in jeopardy. Under most homeowner policies, appraisal applies only to the amount of the loss-meaning damage to the structure of the home, damage to an object (such as a car) not part of the home, and loss of use, but not the person’s personal property as a general rule. Nobody should lose sight of the fact that at the end of the day, insurance companies are not in the practice of giving out free money. They are here to make a profit like every other business. That is the reason why they write contracts with subrogation clauses, to limit their losses. It further means that if the insurer actually pays you any type of settlement, they will attempt to recoup that loss from others and will retain a portion of the money as expenses for doing so.

State by State Summary of Subrogation Laws

As a common principle, most states consider subrogation to be an equitable right, which means that it is governed mostly by judge-made law rather than strict statutory provisions. This means that the law of subrogation is not as uniform across all the states as one might expect. Beyond general principles of equity inherent in all states, the rights and remedies of subrogation vary from one state to another in terms of both breadth and depth. Even though the basic theory of subrogation is similar from state to state, some variants in underlying statutes and case law addressing subrogation exist. These differences will affect the scope of rights available to an insurer or self-insured who seeks to settle a claim with its own policyholder, and may also affect the ability to recover amounts from third parties responsible for injury or damage to that insurer’s insured.
Many jurisdictions have adopted the common-law principle of "equitable subrogation," i.e., the right of an insurer who has paid a claim on behalf of an insured (the insured’s right to compel someone who caused the loss to pay them instead) to "stand in the shoes" of the insured with respect to the insurance proceeds or recoveries inured. The insurer takes over the rights of the insured to pursue its claim against the responsible third party. In other words, a property insurer that has provided coverage for loss or damage to property belonging to its insured can sue under the insured’s name, obtain a judgment, and even execute against the assets of the responsible party if necessary. In many states this right of subrogation is codified, particularly with regard to uninsured motorist coverage. A key benefit to insurers with regard to subrogation is that the insurer is entitled to a full legal recovery or financial benefit, free from any legal obligation to pay a mandatory "share" to the insured.
One important aspect of equitable subrogation is that the insurer who seeks to obtain a subrogation recovery without actual assignment of rights must be able to prove that it is inequitable or unjust for the responsible third party to keep the benefit of the insurance recovery. Thus, a central goal of the carrier is to establish that the insured has not also obtained "double" compensation for the same loss or harm. Similar to other restitutionary principles, equitable subrogation also contains a requirement of proportionality, i.e., the recovery sought must be no more or less than proportionate to the insurer’s payment. The idea is to restore the insurer to the same position it would have enjoyed had the insured not experienced a loss covered by the policy.
The equitable subrogation rules of some states have developed into statutory provisions that define exactly how much recovery the subrogating insurer is entitled to, and govern the extent to which the insured can retain some benefit or proceeds from its recovery from a third party. The "deductible approach," for instance, permits the insured to obtain some of the recovery equal to the sum of the deductible amount(s). Other jurisdictions define subrogation rights via legislation that limits the subrogating insurer’s recovery to the amount of the insurance claim paid, or that place a cap on the recovery for the insurer. In many jurisdictions, state statute expressly denies to a carrier the right of subrogation against the insured when the carrier is the workers’ compensation carrier. There are various state statutes governing these varied approaches; the general rule is that statutes will be given effect unless they violate a fundamental public policy for the state in question.

Majority States in Subrogation

Subrogation laws in major states can vary greatly and are often a result of years of litigation on this hot topic. This section is intended to highlight some of the notable subrogation laws in key jurisdictions. California is one of the more well-known exceptions to the "make-whole" rule, but its entire tort legislative scheme is engineered to encourage settlements and yet places obstacles in the way of subrogation recovery. The subrogation statute provides for 100% credit against any recovery by the insurer to the insured and defines a "claim" as one where the insured may be made whole. The legislative scheme effectively transfers the rights of insurers to insureds in California. Along these lines, the substantial case law on the recovery of market value of personal property is set forth in Jensen v. Fujiwara (1997) 52 Cal.App.4th 267 and sets adrift the subrogation right in favor of insurers who have paid for damages to personal property. Over the years, California is moving further away from its traditional "make-whole" rule and insurers with subrogation claims against insureds should consult an attorney to determine the viability of pursuing such claims.
Texas has enacted legislation providing for equitable subrogation. The Texas statute provides for a right of equitable contribution or subrogation based solely on principles of equity and fairness, independently of the contract documents, from and against all parties. It applies to all contracts, including subcontractor and supplier agreements. The statute provides that an insurer that pays an insured is entitled to demand reimbursement from a subcontractor or other party whose negligence caused the insured loss and, alternatively, an insurer may pay for damage sustained to his own property and pursue the matter at law. Florida allows for equitable subrogation by statute and imposes a 5-year statute of limitations on subrogation claims.
New York is a world unto itself, there is no actual "make-whole" rule nor is there a "subrogation statute" as applied to workers’ compensation insurance. New York courts have been moving toward a vibrant and evolving equitable subrogation theory. In most, New York simply sees subrogation as another way to seek damages.

Permissive and Restrictive Subrogation States

The spectrum of subrogation laws across the country can be grouped into two distinct classifications: restrictive and permissive subrogation states. While every state places its own spin on subrogation as an equitable remedy, their classification as restrictive or permissive is determined by a few specific rules. The classification determines whether a cause of action in subrogation belongs to the insurance company or the insured. As previously stated, in most every state the courts find subrogation to be an equitable remedy, which means subrogation is not an absolute or an inherent right, but a right created by the courts. So, absent a statute specifically addressing the right of subrogation, the transferee (subrogee) stands in the shoes of the transferor (subrogor), and can pursue recovery, in its own name, only to the extent the transferor could have recovered.
However, if the insured is fully reimbursed on the front end through a settlement, then they have no incentive to pursue the recovery on the back end. The insured must be put in a position where they actually desire to pursue, themselves or through the subrogee, the recovery. All of these desires are factored into the classification of the state’s subrogation rules and whether they are restrictive or permissive.
Permissive subrogation states are those in which the insured has full right to pursue any and all recovery. In those states, the courts have found that subrogation does not need to flow from the insured to the insurance company in order to exist. For example, Georgia courts have held that since subrogation is an equitable right of the insurer, then the insurance company has an absolute right to a subrogation lien to the same extent of an uninsured subrogor, regardless of a policy provision transferring the right of subrogation to the insurance company. In Georgia, the insurer can bring the subrogation action in the name of the insured. Regardless of the state, it makes sound legal strategy for even permissive states to have the insured execute a subrogation assignment to the carrier. That way, the carrier has no uncertainties about its right of recovery.
Restrictive states, on the other hand, are often states in which the subrogation right has been intruded upon by statute. Utah is a restrictive state in that insurance companies cannot pursue a cause of action in subrogation against a negligent tortfeasor that is an "innocent third party" at the time of the negligence. Oregon courts are in line with this statute as being generally prohibitive of subrogation against an "innocent third party." However, in Utah, a court has found the insurance company has standing to sue an "innocent third party" if it can demonstrate that the insured actually suffered an ascertainable loss that was partially or wholly uninsured. It is important to keep in mind that this case was decided on determinative facts not common in most cases. If the facts are similar, then a successful case of subrogation may be possible. Many restrictive states have such statutes, and it is important to keep in mind what they say, especially since they can be easily overlooked in the general pursuit on establishing a right of action in subrogation in the absence of a statute.
Thus, regardless of classification of a state regarding the enforcement of the right of subrogation, the sound legal strategy is to identify the desires of the insured and draft a policy or other assignment in order to fully protect the insurance company’s right of subrogation. For example, even in restrictive states, the insurance company would be well advised to have a policy provision expecting the insured to execute an assignment in order to fully give to the insurance company all the rights it believes it has regarding subrogation.

Insurer’s Rights under Various State Subrogation Laws

The procedure for pursuing subrogation claims, while somewhat uniform in theory, varies significantly from state to state. The first consideration in bringing subrogation claims is the applicable statute of limitations. Generally, the statute of limitations for first party property claims (e.g., subrogation claims under homeowner’s and commercial policies) are between one year and three years, while the predominant limitations period for third party liability claims is between two and three years. In many jurisdictions, however, the applicable statute of limitations can be as short as 10 days if the claim involves a subrogated property damaged by fire. Also, some states have rather unique and unexpected procedural rules and requirements. For example, in Wisconsin, a subrogated carrier cannot file a fire subrogation claim against a municipality or other governmental entity unless that carrier notifies the defendant in writing of its intention to bring claims within 30 days after the damage occurs. Further, in Wisconsin , the applicable statute of limitations is tolled against a subrogated carrier for 120 days after it sends that 30-day notice letter in order to give the governmental entity time to take action and settle the claim itself before litigation is initiated against it.
Some states have administrative requirements for a subrogated carrier to fulfill prior to bringing suit. For example, Georgia and North Carolina require a carrier bring its subrogation claim to decision with their respective state insurance departments via an administrative action, as opposed to either submitting a claim to an alternative forum or bringing it on behalf of the insured directly in a court. In Oklahoma, a carrier exclusively subrogated for workers compensation claims must likewise submit their disputes to the Oklahoma Workers Compensation Court before they can bring the claim in any other court, but they are not allowed to bring their subrogation claim on behalf of the injured employee, as subrogation recoveries cannot reduce the amount of benefits owed to the injured employee under the state’s workers compensation scheme.

The Effect of State Laws on Subrogation Rights

The impact of state laws on subrogation rights may be more significant than most adjusters realize. An injured party’s subrogation rights are often limited or expanded by the law of their domicile. The broadest rules of subrogation are found in the common law of the individual states. And the narrowest are typically in the statutes of some states. For example, Ohio’s "collateral source rule" statute limits insurers’ subrogation rights in that insureds are permitted to double dip, receiving both insurance benefits and a recovery from the party at fault. Colorado’s "omit and foreclose" statute prevents an insurer from obtaining a "subrogated claim" against its own insured.
Listed below are several examples of the impact of various state statutes and case law on an insurer’s subrogation rights. Please do not rely on these examples without seeking counsel: In New Jersey, the standard automobile form policy issued by insurance companies includes a provision allowing the company to pursue the right of subrogation under certain circumstances. If collected, the recovery is first offset against expenses, and the remainder is divided among the following classes: First, the cost of repair; second, loss of earnings; third, the uninsured portion of the loss, up to $200; fourth, the amount of any deductible; and fifth, the insured’s interest in the loss.
When a tortfeasor is liable to an insured for the negligent destruction of a vehicle, which is towed to a repair shop and then damaged while in the repair shop’s custody, and the insurer pays the insured’s claim, the insurer has subrogation rights against the negligent tortfeasor and the repair shop. When the negligence occurs during the repair process, the repair shop is liable for the damages caused by its negligence. When the negligence occurs after leaving the repair shop, the repair shop will not be liable for damages.
When an insured injuries a third party, the third party pays his medical expenses through his "no-fault" insurance company. The injured party then sues the insured, seeking compensation in excess of the "no-fault" benefit limits. When the injured party eventually recovers a sum greater that the limits of his "no-fault" policy, he is entitled to keep the entire recovery. He is not required to reimburse his "no-fault" insurer as a prerequisite to recovery from the defendant. This practice is prohibited in most states. However, because Michigan has a "coordinated NO-Fault system," if the plaintiff was actually reimbursed, he cannot recover additional damages from a tortfeasor, since he does not sustain additional loss as a result of the defendant’s actions.
If a tortfeasor is injured by the negligent driving of a Minnesota resident, that driver’s insurer must insure the insured for the tortfeasor’s damages under the Minnesota "Minnesota assigns precedence of payment" act. The priority for payment requires that an insurer pay first the medical expenses of those injured by its insured, up to the limits of the insured’s coverage. Only after the insurer pays up to the limits of the coverage is the injured party allowed to collect from the insured. The injured plaintiff must exhaust all remedies against his tortfeasor’s insurer before enforcing a claim against his own.
In Indiana, the subrogation rights of any "insurer" – including health plans which provide medical benefits – arising out of or incurred because of an injury or an illness are subrogated and will have the full right of subrogation, but the insurer shall only be entitled to exercise the right of subrogation in the following circumstances:

(1) Subrogation to the extent of any amount received under a settlement; or
(2) The insurer’s right of subrogation is subordinate to the injured party’s or ill person’s right to full compensation for all past, present, and future medical expenses.

Any lawsuit filed by an insurer must be delayed until a patient has received his full damages. An injured patient must receive full compensation for all past, present and future medical expenses before his health care provider may enforce a lien against a recovery he receives from a third-party settlement, verdict or financial award.

Practice Pointers when Utilising State-By-State Subrogation

Given the patchwork nature of state-based subrogation rules, the practical advice for struggling with subrogation is less a list of applicable rules, and more a list of tips for managing the various issues that arise from differing rules. First, there are many different tools to use for each type of subrogation, so choose the appropriate tool. Second, choose the best subrogation tool for the job. You don’t have to always bring the hammer to play if a scalpel will suffice. Third, know when to bring a subrogation suit and when not to. Fourth, know where to bring an action, and when to bring it. Fifth, never ignore the duty to defend that can be created by an insurer’s reservation of rights regarding coverage. Sixth , know your legal fee allocation rules in dealing with underinsured/at-fault drivers, as well as what needs to be obtained to protect your ability to sue directly from the at-fault insurance carrier. Seventh, if seeking to enforce a judgment through garnishment or otherwise, know which courts are available and the rules governing the enforcement of a judgment. Eighth, bringing an adjudication of liability can be a very effective tool in pursuing subrogation. And finally, the most effective way to deal with subrogation issues is to build relationships at the outset to help avoid the need for litigation altogether.