Your (Sometime) Friend, Insurance Subrogation

Neighbour #1, “It says here you’re suing me!”

Neighbour #2, “I’m what?!?”

A lawsuit was commenced in 2015 over an explosion in Regina Beach, Saskatchewan. You may recall a news story where a homeowner was surprised to learn he was one of a number of people suing neighbours over damage caused by the explosion. After all, he had not consulted a lawyer or given anyone permission to sue on his behalf. Sounds like a case of identity theft, but it’s not. This sort of thing goes on all the time and is perfectly legitimate.

The homeowners involved in that lawsuit all carried insurance. When the explosion damaged their property they all made a claim on their policies and when the insurance company paid their claims it acquired certain rights. One was the right to “step into the shoes” of the homeowner and sue anyone they believe caused the damage. In legal parlance this is known as the right of subrogation. It means that upon paying or even agreeing to pay the homeowner’s insurance claim the insurance company is “subrogated” to all rights of recovery that the homeowner may have against the responsible parties.

But the insurance company cannot enforce the homeowner’s rights in its own name. It must instead bring the lawsuit in the name of the homeowner. Thus, a homeowner who receives a payment under her insurance policy may become a plaintiff in a lawsuit without granting express permission and frequently without even knowing it happened, at least initially.

Eventually, though, the homeowner will learn of her involvement because her obligations under the contract of insurance do not end with her lending her name to the lawsuit. The homeowner is also bound by the terms of the insurance contract to co-operate with her insurance company during the lawsuit. That means she must, at her own cost, assist the insurance company in searching for and offering up relevant documents, She must also attend personally at each of the milestones in the litigation: mediation, questioning, pre-trial conference and trial. Failure to co-operate with the insurance company is a breach of the insurance contract and may entitle the insurance company to repayment of the insurance proceeds paid to the homeowner to cover her loss.

There is no way around it. If someone other than the homeowner caused the loss then the insurance company will likely start a lawsuit to recover the money they paid to the homeowner under the insurance policy.

It is not all bad news, though. The homeowner has  some leverage. Many insurance companies recognize that being involved in a lawsuit is a hardship to the homeowner and may offer a small sum to help defray the homeowner’s expenses. As well, while the homeowner may be a party in the lawsuit she is not paying her insurance company’s lawyer. That obligation lies squarely with the insurance company, unless the homeowner received compensation for her losses under the insurance policy but also sustained other losses which were not covered by the insurance for which she wants to sue the responsible parties. In that case the homeowner has the right to control the litigation. What does that mean in practical terms? Let’s consider an example.

A business owner suffers a fire loss which destroys her business premises and interrupts her business. She has a fire insurance policy that pays to rebuild her premises to the tune of $900,000 but she doesn’t have any coverage for the interruption to her business. She loses $100,000 in profits while the building is reconstructed. The insurance company starts a lawsuit to recover the money it paid under the policy but must also be mindful that the business owner has an additional loss of $100,000. One lawsuit must be initiated for both losses.

Since the business owner has not been fully compensated by the insurance company for her loss she is entitled to control the lawsuit, but that also means that she has to pay the lawyer. Not such a good deal it would seem. But looks are deceiving. Typically the insured will give control of the lawsuit to the insurance company on the understanding that both losses will be pursued and the proceeds of the lawsuit, after deduction of the lawyer’s fees and disbursements, will be split between the business owner and the insurance company based on the relative sizes of their claims. Thus, if the claim is settled for $800,000 and $50,000 in legal fees were incurred to achieve the settlement then the insurance company and the business owner split $750,000. 1/10 goes to the business owner and 9/10’s to the insurer. Whoever paid for the lawyer gets the extra $50,000. Thus the insured can frequently recover a portion of its uninsured loss without actually having to pay a lawyer to do it. Thank you subrogation!