Published on: 10 November 2021 by Michael Lamb
Subrogation is an important concept in relation to indemnity claims under insurance.
Under the principle of subrogation, policyholders pass their rights at law to insurers following an indemnification of a loss. Subrogation is a direct and natural consequence of the principle of indemnity, and upholds the core concept of indemnity; that a policyholder should not profit off a loss.
Let’s say a car covered by a comprehensive car insurance policy is damaged due to the negligence of a property owner. As comprehensive cover is in place, the insurer will compensate the insured for the loss/damage to their vehicle via a claim. Once the policyholder has been indemnified, the insurer is then entitled to take over their rights of recovery against the negligent property owner.
Having received a claim settlement, the policyholder subrogates their rights against the negligent property owner to the insurance company. The right to recover damages from the 3rd party which caused the loss has been transferred, via the mechanism of subrogation, from the policyholder to the insurer.
This ensures that a policyholder does not receive double compensation on a single loss, and thereby preserves both the intent and spirit of the principle of indemnity.
Subrogation, as with Contribution, only applies to claims which involve indemnification. As such, Subrogation does not impact benefit products like Life Insurance.
Subrogation normally occurs in one of four ways.
Subrogation in Tort happens when a loss to an indemnifiable policy is caused by a negligent third party. Subrogation in Tort is extremely common for products like Car Insurance where accidents will normally have an “at fault” party.
For example: a car insurance company, having paid a car insurance claim for a loss covered by the policy, determines that the other driver was at fault for the accident. Having paid the claim, the car insurer is able to sue the at-fault party for damages as recognized by the law of tort.
Insurance subrogation in Contract occurs when the insured party has a contractual right against another person or entity with respect to an insured loss.
For example: A landlord with a tenancy agreement has certain rights over a tenant occupying their property. The landlord has comprehensive home insuarnce coverage on their property. If the tenant caused an insured loss, following a claim paid to the policyholder the insurer may exercise its right to recover the loss against the tenant in the name of the policyholder.
Certain laws exist in Hong Kong governing specific types of coverage and rights therein. One of these statutes is in relation to Employee’s compensation insurance.
If a person is injured in the routine course of their employment, their employer is required to pay compensation under the provisions of the Hong Kong Employees’ Compensation Ordinance. The ordinance, or statute, governing Employees’ compensation will then grant the right of subrogation from the employee who was injured, to the employer providing indemnification. In turn, the employer subrogates their rights to the insurer which has paid the Employee’s compensation claim.
In a product like Employees’ Compensation insurance, where there could be two or more different subrogation occurring the exchange of rights can be fairly complicated.
When determining the financial loss of an indemnity, it is almost always an inevitability that property will have suffered damage. However, there will normally be something left of the property in question; the salvage. The insurer can either subtract the value of salvaged property from the claim payable to the insured, or can pay a claim in full and dispose (or keep) the salvage as it sees fit.
Under subrogation, the insurer has subrogation rights on any salvage arising in a claims situation.
As stated above, Subrogation only occurs in claims that involve indemnity.
However, there are a number of minute considerations that can influence the administration of your policy with respect to Subrogation issues. For example, Hong Kong common law normally determines that the rights of subrogation are received by an insurance company following the payment of a claim. In some instances, non-marine insurers will specify in their policy contracts that they are entitled to subrogation rights prior to indemnification of the policyholder.
While this does not impact you, to a great extent, these details are still important factors and considerations when it comes to the technical operation of your policy.
One such area of interest deals with the sharing of subrogation proceeds. It should be noted that this is only an extremely broad and generic example of this policy principle, and that any specific questions regarding sharing the proceeds of a subrogation should be discussed at length with an expert Hong Kong Insurance Broker.
Having said that, when an insurer has provided less than full indemnity following a claim (perhaps due to certain policy provisions, like Average, Deductibles, or Limits) the policyholder may be entitled to part (or possibly all) of the subrogated proceeds. A really simple and easy example for sharing of subrogation income can be seen with Deductibles and Excesses:
A policy includes a deductible of $5,000. Following a loss, the insurer pays $20,000 and recovers $10,000 from the responsible party. The insurer in this case, is entitled to keep the entire $10,000. However, if the insurer recovers $25,000 from the at fault party, then the policyholder is entitled to $5,000, with the insurer retaining $20,000.
When dealing with insurance there are a lot of details and technicalities that you don’t really need to be concerned about, as a policyholder. However, these things exist and occasionally you may encounter them during the life of your coverage, and it is always important to be prepared.
Subrogation, like Contribution, is a complicated and technical area of insurance. For the most part, you will never have to worry about subrogation, you will simply receive your claims when you experience a loss. If you do have questions about Subrogation rights and insurance in Hong Kong, or you simply want to learn what coverage solutions may be right for your needs, please Contact Us today.
Our expert Hong Kong Insurance brokers are ready to provide you free advice and offer no-risk, no-obligation quotations comparing the best insurance products for your specific requirements.