Upon indemnifying a policy- holder for a loss, an insurer generally has the right to re- coup its loss by pursuing recovery from other entities or individuals
who may be responsible for the policyholder’s damages in the first place. Subrogation rights vary across jurisdictions
and can have serious consequences both
for the policyholder and the insurer.
Disputes often arise, such as the circumstances under which the insurer may
subrogate and for how much, particularly
where the policyholder has not been fully
compensated for its losses.
Generally, an insurer’s subrogation
rights are limited to recovering no more
than what it paid to its policyholder.
However, there is a disagreement among
jurisdictions as to whether the insurer
can recover in subrogation before the
policyholder is “made whole.”
For example, if the insurer disputes part
of the insured’s claim and only partially
compensates the policyholder, some juris-
dictions subordinate the insurer’s subro-
gation rights and require that the policy-
holder be made whole before the insurer
can recover. This issue can become com-
plicated depending on the circumstances,
such as whether the applicable policy cov-
ers all or part of a claim, and in situations
where the policyholder purchased inad-
equate limits to cover the loss or claim.
A majority of courts have agreed that
an insurer may not recover in subrogation unless the policyholder is fully compensated for its losses. The courts reason
that the insurer should bear the risk of
loss, because the policyholder paid the
insurer to assume that risk.
Conversely, a minority of jurisdictions
adhere to the “insurer-whole” rule, where-
by the insurer is made whole first out of a
recovery from a responsible third-party
up to the amount paid by the insurer to
the policyholder. These courts reason that
the policyholder chose the policy limits,
and if the insurer compensates the policy-
holder in accordance with its obligations
under the policy, the insurer should be
permitted to subrogate for that amount.
This situation is sometimes referred to as
“partial subrogation,” which occurs when
both the insurer and the policyholder
possess an interest in the subrogation
claim. [See, e.g., Winkelmann v. Excelsior
Ins. Co., 650 N.E.2d 841, 844 (N. Y. 1995).]
Some courts have devised variations of
these methods, such as a pro rata allocation in accordance with the percentage of
the original loss paid to the policyholder.
[See, e.g., Culver v. Insurance Co. of North
Subrogation and the Right
to be “Made Whole”
By Matthew D. Stockwell, Esq.