Insurance Subrogation and Contribution

Let’s get technical with CCW Global

Insurance is a complicated subject.

There are many aspects of insurance which can be tough to understand if you are not an expert. As we have discussed elsewhere on this website, the strict definition of insurance is the equitable exchange of risk from one party to another for a predetermined fee. However, below this there are additional, and equally important, aspects of insurance to consider – aspects of insurance that have the potential to materially impact you.

With all the different types of insurance, and even the many mechanisms in play within a single class of policy, it can be a challenge to understand exactly how your insurance will protect you. Terms and Conditions riders outlining the scope of coverage are long, and commonly go unread by a vast number of policyholders. This is especially true for aspects of the policy that the customer does not interact with regularly.

A great example of policy mechanisms which are, by and large, misunderstood are Subrogation and Contribution.

What is Subrogation in Insurance?

Subrogation is the legal term which outlines the right of an insurer to recover money from a 3rd party responsible for a policyholder’s loss. Under the strict definition, Subrogation is the assumption of legal rights of a person to whom a legal obligation has been paid.

For example, when you have a car accident you will submit a claim to your insurer. If you weren’t at fault for the accident then the insurer will pay your claim under the terms of the existing car insurance policy. The insurer will then look to recover the claim from the party at-fault for the accident.

In our car accident example, the insurer has suffered a loss due to covering the financial exposure for the policyholder involved in the accident. As the policyholder has been paid their claim, the insurer now has the right to recover the loss from the party responsible for the claim. If the at-fault party holds insurance, then the insurer will seek recovery of damages from their insurance company. If the at-fault party is uninsured, then the insurer will subrogate damages directly from the party responsible.

What is Contribution in Insurance?

Contribution is arguably more complicated to understand than subrogation. Contribution is the concept that dictates how insurance handles losses where multiple parties are responsible, and one party pays more than their fair share of the loss.

Applicable in situations where the insured party is covered by more than 1 policy from more than 1 insurance company, Contribution ensures that there is clarity with regards to the financial responsibility of those providing insurance where there may have otherwise been nothing but confusion.

Keeping with car insurance as our example, for simplicity, let’s say that there is a car accident involving multiple vehicles hitting a single pedestrian; a Rolls Royce, Honda, and a Toyota. The pedestrian sues the owner of the Rolls Royce and receives a $75,000 settlement. As the other vehicles were also at-fault for the accident, the insurance of the Rolls Royce will sue the Honda and Toyota into contributing $25,000 each for their part of the damages.

This ensures that all parties contribute to the claim equitably, which is at the heart of insurance.

Why Do Subrogation and Contribution Matter?

Subrogation and Contribution are both extremely important because they deal with equity, and ensuring that there is parity across the policy – both for the individual receiving insurance protection, and for the underwriter offering the coverage. Remember, insurance is predicated on the equitable transfer of risk – without this equity we cannot really call insurance, “insurance.”

Additionally, it is not possible to leave insurance without clarity on these various situations. For most people holding any sort of insurance policy, it is probably going to be the case that in a claims situation they will simply contact their insurer and receive reimbursement – the topics of contribution and subrogation are likely never going to be raised.

However, policyholders could expose themselves to complicated contribution and subrogation headaches without even knowing it. In fact, getting into a claims situation (outside of car insurance) which involves contribution and subrogation is actually fairly easy and is often encountered when an individual has multiple policies with coverage overlap.

Overlapping Coverage, Contributions, and Subrogation

A really good example of a contribution/subrogation is an overseas car accident where the victim has both travel insurance and international health insurance.

Let’s imagine that in this situation you are traveling overseas and have rented a vehicle. You are involved in a traffic accident for which another party is at-fault. However, as a result of the accident you have suffered serious injuries and now require medical care. As you have both travel insurance and medical insurance, it would not be equitable for simply one policy to cover all your medical expenses (all other things being equal).

Obviously, we need to consider the role that deductibles, exclusions, and coverage areas play, but assuming that both policies are active and that all deductibles and exclusions are satisfied, we now come to a situation where the contribution for your healthcare expenses needs to be decided. There will also likely be some form of litigation for recovery of liability expenses on the part of the at-fault driver.

As Hong Kong travel insurance can include personal accident protection as well as myriad extended umbrella benefits, it is probable that the travel insurance policy will be recovering their costs from the responsible party. However, it is normally easier for international health insurance products to handle overseas medical claims.

In this situation the following course of events is probably going to be the most likely outcome:

• policyholder is involved in an accident for which they are not at fault.
• Health insurance covers immediate healthcare treatment
• Health insurance asks travel insurance for a 50 percent contribution to the claim
• Travel insurance recovers loss from at-fault driver

The policyholder receives their purchased coverage, while the insurers make arrangements behind the scene to ensure that neither underwriter is contributing more than their fair share of the protection being provided.

As a policyholder, that is to say someone who owns insurance, you won’t come across the issues of subrogation or contribution often. However, if you have more than one type of coverage, or policies that may overlap, it is important to know how your claims will be handled when you make them.

CCW Global is an expert in international and Hong Kong insurance solutions. Ranging from Home and Car insurance through to international event and health products, we have expert knowledge of how different types of insurance interact and work best to protect you. If you have any questions about insurance mechanisms you may have encountered, or if you would like to discuss the products that may be best suited to cover your risks, please contact us today.

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