A subrogation claim is an insurer’s attempt to recover from a responsible third party after the insurer has paid a covered loss. The insurer asserts the insured’s rights, so it generally cannot recover more than the insured could have recovered from that third party. For a business, subrogation can affect evidence preservation, settlements with the alleged wrongdoer and recovery of the policy deductible.
How insurance subrogation works
Suppose a delivery truck damages a storefront. The property insurer may pay the business under its own policy and then seek recovery from the trucking company or its liability insurer. Subrogation helps prevent double recovery by the insured and can move the ultimate cost of the loss to the legally responsible party.
The timing and scope of the insurer’s rights depend on the policy, applicable legislation and common law. The Supreme Court of Canada has explained that, absent contractual wording to the contrary, a common-law right of subrogation is generally not exercisable until the insured has been fully indemnified. A policy can alter that position. The controlling question is therefore what the actual contract and governing law say—not a universal rule that every insurer acquires every recovery right as soon as it makes any payment.
What happens after the insurer pays
The insurer or its adjuster will assess whether another person may be legally responsible. It may ask the business for contracts, photographs, damaged property, repair records, witness information or a statement about the event. It may negotiate directly with the third party’s insurer or start litigation in the insured’s name if the policy and law permit.
Subrogation does not improve the underlying claim. Defences that could have been raised against the business can usually still be raised against its insurer. Questions such as negligence, contractual risk allocation, limitation periods and the amount of recoverable damage still have to be established.
Protect the recovery claim while the facts are fresh
Commercial policies commonly require the insured to cooperate and not prejudice recovery rights. The wording varies, but sensible early controls include:
- keeping damaged equipment or components until the insurer authorizes disposal
- preserving photographs, inspection reports, contracts and communications
- notifying the insurer before signing a release or accepting a settlement from the third party
- forwarding demands or legal documents promptly
- avoiding admissions about liability before the facts and coverage have been assessed
A private settlement can affect the insurer’s recovery rights, but the consequence is not automatic in every case. It depends on the policy language, the right that existed at the time, whether the insurer was actually prejudiced and the governing law. The safest course is to involve the insurer before releasing a potentially responsible party.
For a closer look at the contract wording, see what a subrogation clause means. The separate duty to cooperate after subrogation article addresses ongoing assistance after a recovery file has begun.
Whether the deductible is recovered depends on the wording
There is no single Canadian distribution rule that can safely be assumed for every commercial policy. A recovery may include all, part or none of the insured’s deductible. The policy, a subrogation receipt or recovery agreement may address whether the insurer recovers its payment first, shares a partial recovery proportionately or includes the deductible in its demand.
Ask the insurer or broker in writing:
- whether the deductible is part of the recovery demand
- how a partial recovery will be allocated
- whether the business must take any separate step to preserve its deductible claim
- when any recovered amount will be remitted
If your business receives a subrogation demand
A demand from another party’s insurer is an allegation, not a judgment. Notify the liability insurer or broker promptly and preserve the relevant records. Do not assume the commercial general liability policy will necessarily respond: defence and indemnity depend on the allegations, the insuring agreement, exclusions, conditions and any reservation of rights.
The liability insurer may investigate, defend or negotiate the claim if it potentially falls within coverage. If coverage is uncertain or the amount is significant, obtain advice before responding substantively or signing an agreement.
Waivers of subrogation must match the contract and policy
Construction contracts, leases and service agreements sometimes require one or both parties to waive recovery rights for specified insured losses. A waiver is not automatically unlimited. Its effect depends on its wording, the loss, the parties protected and whether the insurance policy permits the waiver.
Before agreeing to one, confirm:
- which parties and losses the waiver covers
- whether it applies before and after a loss
- whether the policy authorizes the insured to grant it
- whether an endorsement or insurer consent is required
- how the waiver coordinates with indemnity and insurance clauses elsewhere in the contract
Subrogation is therefore best understood as a recovery mechanism governed by the insured’s actual rights. After paying a covered claim, the insurer may pursue those rights subject to the policy and law, while the business preserves evidence, avoids prejudicing the claim and verifies how any recovery—including the deductible—will be handled.