What the cabbage pancake is Subrogation?

Subrogation is an insurance clause that could end up costing you real business relationships

You made a claim. Your insurer paid out. You moved on. Job done.

Steady on, tiger. Not quite.

What subrogation actually means

Subrogation is the legal right your insurer acquires, once they've paid your claim, to pursue whoever caused the loss in order to recover what they paid out. They step into your shoes. They use your name. And you don't get to decide whether or not it happens.

Pretty crazy, when you think about it.

This matters more than most policyholders realise. Because that third party could be a supplier, a contractor or a client. Even if the legal action could be a material risk to business continuity, your insurer has the right to sue in your name. Even if the person being sued is your dear old Granny, your insurer has the right to sue in your name.

Some boring historical precedent

One of the earliest and most important cases on subrogation is Castellain v Preston (1883), in which the court confirmed that insurance is designed to compensate for loss, not to create a profit. The logic is simple: if you could recover from your insurer and from the wrongdoer, you'd be better off than if the loss had never happened. Subrogation prevents that.

In the 1993 case of Napier and Ettrick v RF Kershaw Ltd, the courts established what became known as the "pay up and recover down" model: the insured must be fully indemnified before the insurer is entitled to recover anything. That framework still governs how subrogation recoveries are distributed today.

A practical example

A contractor damages your office during a fit-out (uh oh!) and the property insurer pays the claim (phew!). Your insurer then pursues the contractor to recover the cost. The claim is brought in your name. Your insurer controls the process. Your working relationship with that contractor is now caught in the middle. Awkward.

Can you avoid it?

Generally, no. The right to subrogate is a fundamental part of most insurance agreements. When you accept a claim payment, you essentially transfer your legal right to sue the at-fault party over to your insurer.

There is one potential pitfall worth knowing about. If the other party offers you a cash settlement directly and you accept it without telling your insurer, you could invalidate their right to pursue a recovery. Your policy almost certainly prohibits this, and it can be treated as a serious breach. Naughty, naughty.

So if someone hands you a cheque after an incident, call your broker before you cash it.

Some contracts do include a "waiver of subrogation" clause, where both sides agree upfront that nobody's insurer will chase the other after a loss. You'll find these fairly often in construction contracts and commercial leases.

Worth checking if you have them (or ask your REALLY HONEST broker).

Which policies typically include subrogation rights?

It’s always worth asking or checking yourself, but most indemnity-based commercial policies. That includes:

• Property and business interruption insurance
• Professional indemnity
• Public and employers' liability
• Cyber insurance
• Commercial motor

Life insurance and most personal accident policies do not involve subrogation, as they pay a fixed amount when something happens. There's no "loss" to recover, so there's nothing for an insurer to chase.

The REALLY HONEST takeaway

Subrogation exists for a fair reason. It's not a stitch-up. Insurers aren't doing it to be awkward; they're just making sure the right person picks up the bill. But if you're not aware it's happening, it can get messy fast.

Know it's in your policy. Know what not to do after a claim. And if a third party approaches you directly after an incident, call your broker first.