Subrogation can be a daunting subject for both insureds, as well as agents and brokers. However, the more you know about subrogation, the better the benefits are to clients who suffer losses where another party or entity may be at fault, especially if the loss is only partially covered by insurance.
In the insurance industry, subrogation usually involves three parties: the insured, who suffered a loss; the insurer, who will pay the insured for all or part of a covered loss; and, the tortfeasor, who is allegedly responsible for the damages, generally due to a negligent act or omission.
When a loss is reported and it appears the damage may have been caused by another party (e.g. shoddy contractor repairs, construction defects, faulty manufacturing or appliances, etc…), it is critical to advise the insured to retain the malfunctioning or improperly installed parts, pieces, and/or equipment. Such evidence could include anything from small pieces of a pipe to large appliances such as refrigerators or dryers.
Too many times, recovery efforts are severely compromised by an insured who wants that faulty dishwasher, which caused a massive water loss, removed immediately! Helping insureds understand the benefits of retaining the evidence may increase the likelihood that the faulty parts will be preserved. With that in mind, it’s critical to advise policyholders that the carrier may be able to partially, or wholly, recover their deductible. However, if there is any chance of recovering the deductible, the carrier needs to have the damaged product or part so it can be tested to prove there was negligent construction, repairs or manufacturing. It is also important to know if there is any chance of recovering from an at-fault party, the faulty part or product must be saved to make sure the manufacturer’s right to examine the product is preserved.
For example, little Johnny has a pet snake named Slither. When Johnny’s family leaves home for a long holiday weekend, they turn on the strip light attached to Slither’s cage to keep him warm. Unfortunately, the strip light was improperly manufactured and it overheats, causing the light fixture to ignite. A fire quickly engulfs part of the home (R.I.P., Slither.), with the damages far exceeding the insurance policy’s $5,000 deductible. If it can be proven that the reptile cage strip light caused the fire, the carrier may be able to recover any claim payments made and return the $5,000 deductible to the insureds. Additionally, when a carrier recovers funds paid out on a loss, that recovery is accounted for in the agent’s loss data, ultimately lowering the total incurred for that particular loss. One large recovery, or multiple recoveries, could significantly lower an agency’s loss ratio.
Further, since the insurer pays for experts to review the faulty or incorrectly installed equipment, the insured will have a copy of the analysis for use in any further action against the responsible vendor/party. This is a critical point to understand since there can be instances where a loss is only partially covered by the insurance policy, leaving the insured with an out-of-pocket loss. If the insured wants to pursue the at-fault party in order to be made whole for the loss, they will benefit greatly from the costly expert reports obtained by the carrier. However, any opportunity to be made whole starts with preserving all evidence. So, please always remind insureds to retain all evidence when a loss may be caused by the negligence of a third party.
Finally, you can obtain more information about product recalls at the United States Consumer Protection Safety Commission (CPSC). The CPSC also provides free safety alerts, safety resources, posters, brochures and other materials which you can have on hand in your office to help spread consumer product safety information to insureds.
This article is for informational purposes only and does not form a part of, replace, change or amend any terms, conditions, provisions or language within your Olympus Insurance policy. We encourage you to read your entire policy.