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What is Subrogation and How Does It Work?

By Stuart Heller

Subrogation is the right of a person to assume a legal claim of another. In situations in which there is insurance it is the right of an insurer to be substituted in place of the insured in regard to a claim against a third party for indemnification of a loss paid by the insurer. Here’s an example: Mr. Jones’ place of business is damaged by water pouring through the ceiling. He has insurance that covers water damage to his premises. His insurance carrier is obligated to pay for the necessary repairs, and does so. However the damage was caused by someone working for his landlord. Without some provision to the contrary in his policy, his insurance company inherits Mr. Jones’ right to sue his landlord to attempt to be reimbursed for the money it paid on the claim.

Many leases call for a mutual waiver of this right, that is, for a waiver of subrogation. Thus both the landlord and the tenant agree that each will get its insurance carrier to give up the right to sue the other party when it pays a claim to or for its insured. Often this requirement is conditioned on such an agreement not causing an increase in either party’s insurance premiums, something which I have not seen happen. The actual mechanism for this waiver is an endorsement to the respective policies.

While they can be confused because they sound somewhat the same, a subrogation provision has nothing to do with a subordination clause, something which I discussed in an earlier issue of Legal Tips. That clause is used to allow a landlord to control the priority of interests in its property. It assures the landlord that it can give its lender or a subsequent purchaser at a foreclosure sale an interest senior to (of higher priority than) that of the tenant, and thus be able to use the property as collateral for a loan.

COMING NEXT: Why do you want a broad right to assign your interest in an agreement to someone else?

Stu Heller helps his clients understand and improve their business and real estate transactions. His website is at www.theleasinglawyer.com. He can be reached at 206-623-0579 and hellerlaw@aol.com. Contact him for a free initial consultation. Be sure to consult your lawyer before applying any of the above to a particular situation.