What is Subrogation?
Subrogation is a right, defined by law, where insurance companies can pursue a third party who has caused a loss to the insured. The process occurs when the insurer pays out an amount of money to their insured for damages resulting from the actions, inactions, or negligence of a third party. The insurance company has the right to pursue the amounts paid out to their insured through the Small Claims Court.
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Who are the Parties involved in a subrogation matter?:
There are three types of parties that can be involved in a subrogation matter. They are the insurer (Insurance company), the insured (the policy holder), and a third party (an individual or company who caused all or part of the damage that resulted in the insurance claim).
When can you proceed with subrogation?
An insurer can only proceed with subrogation once they have paid out money to the insured for a claim related to a loss. The most common types of subrogation claims are related to property damage.
The right of an insurance company to proceed with subrogation is laid out contractually in both Common Law and in the Insurance Act, R.S.O 1990. Typically, insurance policies will contain language which further explains an insurer’s rights to proceed with subrogation. The language in the policy will also provide the insurer with the right to retain sole control of the action as well as the ability to settle claims without having to rely on the insured’s instructions.
Per the Insurance Act, R.S.O 1990 s.278(1) the insurance company is permitted to commence an action against the third party in the name of their insured.
What you Should Identify Before you proceed with subrogation:
Prior to commencing a legal action, an insurance company should identify the following:
- What is the cause of loss?
- What led to an insurance claim being filed?
- Who are the potential defendants?
- Who is responsible for the loss?
- Could there be multiple third parties who are responsible for the damage?
If they have determined a potential third party, the insurer must then decide if they were liable for the damage. They would do this by satisfying the following questions:
- Who was the last person/company to have access to the product or location of the loss?
- Was there a manufacturing defect associated with the product that caused the loss?
- Who was the supplier of the product that caused the loss?
- Who installed the product that caused the loss? A contractor? Sub-contractor?
- Who was responsible for maintaining the product or location of the loss?
- Was a contract signed between parties that helps to outline liability?
- Was there potential for the loss to have been prevented either partially or in its entirety?
Once the insurer has determined liability the next course of action is to determine if the third party was negligent in their actions. To prove negligence, the insurer must be able to prove the following:
- The third party owed a duty of care to the insured
- The third party breached a standard of care
- The third party caused the loss
- Damages were suffered by the insured
When proceeding with a subrogation claim the insurer must also be able to prove causation. The insurer needs to be able to prove that on a balance of probabilities, the loss suffered by their insured would not have occurred “but for” the negligent actions or inactions taken by the third party.
To be successful in a subrogation claim, the insurer must be able to prove the quantum of damages. One thing to remember in a subrogated action is that a large portion of the damages will be subject to depreciation.
Examples of documents to rely upon:
- Emergency work invoices
- Repair estimates and invoices
- Schedule of loss for any contents that may have been damaged during the loss including but not limited to their make, model, age, and original cost of purchase.
- If the insured required alternative living arrangements, receipts for hotels and meals will be required.
- Expert report from a third party that outlines the cause of loss
If the loss was caused by a defective product it is very important for the insurer to try and obtain the product. If the product is in the possession of a third party, it is important to contact them immediately to request that they do not destroy or get rid of the evidence. In many circumstances both the insurer and the third party will participate in destructive testing. That will help determine or at least narrow a cause of the failure.
Examples of subrogated actions related to property damage:
- Leaking appliances such as hot water tanks, dish washers and toilets
- Smoke or fire damage relating to a fire at the insured’s neighbor’s house
- A third party crashes their vehicle into the insured’s house
- Your insured’s neighbor is having renovations done and the contractor damages your insured’s property
- A paving company hits a waterline and your insured’s basement floods
The Canadian Inter-Company Arbitration Agreement:
Prior to an insurer contemplating commencing a subrogation action, they must first identify if they are subject to the Canadian Inter-Company Arbitration Agreement, then they must identify if the third party’s insurer is subject to the same agreement.
The Canadian Inter-Company Arbitration Agreement is an agreement created to help streamline and accelerate claims and disputes that arise between insurance companies. A list of signatories to the agreement can be found at the following: https://mccagueborlack.com/emails/pdfs/tab-a.pdf. One must keep in mind when referring to the list of signatories that they are referring to the most up-to-date version of the document. All insurance companies who are signatories to the agreement must comply with the obligations set out in the document.
Any signatories to the agreement will proceed with their claim through a mandatory and legally binding form of Alternative Dispute Resolution known as arbitration. If a Small Claims Court action is already commenced prior to the parties discovering that they are signatories, they will need to formally discontinue the action with the Small Claims Court and proceed through the arbitration process.
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