Insurance subrogation: when your insurer pursues the other side

Subrogation is how an insurer that paid your claim steps into your position to pursue the person who caused the loss. Cornell’s Wex encyclopedia, an educational secondary source, describes subrogation as one party taking over another’s legal rights, and gives an insurance example: when an insurer compensates a policyholder for an injury, the policyholder’s right to sue the person responsible may be transferred to the insurer (Wex: subrogation). The glossary of the National Association of Insurance Commissioners (NAIC) defines it in similar terms, as an insurer’s legal right to bring a liability suit against a third party who caused losses to the insured (NAIC glossary).

For most people, subrogation matters at three points: when your own insurer pays for damage someone else caused, when you want your deductible back, and when you settle with the other side after a health plan or insurer has already paid some of your bills.

How subrogation works

The sequence is simple. You suffer a loss. Your insurer pays under your policy. The insurer then tries to recover what it paid from the party responsible or from that party’s insurer. Washington State’s insurance regulator explains that when you file a claim, your insurer can try to recover costs from the person responsible for your injury or property damage, and that this is subrogation (Washington OIC: filing an auto insurance claim).

Subrogation does not create a fresh claim against the other side. As Wex describes it, your right to sue is transferred to the insurer. Because the insurer’s claim comes from yours, the things you do with your own claim, such as settling it, can matter to the insurer. That point comes up again below.

Auto collision claims and your deductible

The most familiar setting is a car crash. The Texas Department of Insurance (TDI) tells drivers that if they believe the other driver was at fault but that driver’s insurer won’t pay, they can file a claim with their own insurance company, and that doing so means paying their deductible (TDI auto insurance guide). TDI gives the same advice when the other driver’s policy limits are not high enough to pay for all your repairs.

A deductible is the part of a claim you pay yourself. TDI’s example: on a $1,500 collision claim with a $500 collision deductible, the company deducts $500 and pays you $1,000. The NAIC glossary likewise describes a deductible as the portion of an insured loss paid by the policyholder.

When your insurer then pursues the at-fault driver, your deductible can be part of what it seeks. In Washington, the state regulator says your company must include your deductible in its subrogation demand to the at-fault party. It adds that if the accident investigation shows you were partly at fault, you recover only a percentage of your deductible (Washington OIC). That is Washington’s rule as its regulator describes it. Other states handle deductible recovery under their own laws, and your share of fault can matter there too, as our comparative negligence guide explains.

Health plan reimbursement from an injury recovery: Texas’s statute

Subrogation also follows injuries. If a health plan paid your medical bills and you later recover money from the person who hurt you, the plan may claim part of that recovery. Texas regulates this by statute for many plans. Under chapter 140 of the Texas Civil Practice and Remedies Code, an issuer of a health benefit plan, a disability benefit plan or an employee welfare benefit plan that pays benefits because of an injury caused by a third party’s tortious conduct may contract to be subrogated to, and reimbursed from, the injured person’s recovery (Tex. Civ. Prac. & Rem. Code ch. 140).

Chapter 140 also limits what those payors can take in Texas:

• No lawyer. All payors together recover the lesser of one-half of the injured person’s gross recovery or the total cost of benefits paid as a direct result of the third party’s conduct.
• With a lawyer. The same two measures apply, each reduced by attorney’s fees and procurement costs under section 140.007.
• First-party coverage. A payor generally may not pursue the injured person’s first-party recovery. It may reach uninsured/underinsured motorist or medical payments coverage only if the injured person and their immediate family did not pay the premiums.

Chapter 140 does not reach every payor. It excludes workers’ compensation, Medicare, Texas Medicaid programs, the state child health plan, and self-funded plans subject to the federal Employee Retirement Income Security Act (ERISA). It also says nothing in it prevents a payor from waiving, negotiating or not pursuing its claim. For how uninsured motorist coverage works more generally, see our uninsured and underinsured motorist guide.

The made-whole doctrine, as Texas treats it

Texas’s chapter 140 refers to a common law doctrine that “requires an injured party to be made whole before a subrogee makes a recovery,” and says that doctrine does not apply to a payor’s recovery under the chapter (Tex. Civ. Prac. & Rem. Code § 140.005(d)). In other words, for plans covered by chapter 140, Texas uses the statutory caps above rather than a made-whole rule. That is a Texas rule. Whether a made-whole rule applies in another state, or to another kind of insurance, depends on that state’s law and the policy, and this guide does not survey it.

Self-funded employer plans under ERISA: a federal example

Because Texas’s statute excludes self-funded ERISA plans, federal law and the plan document carry more weight for those plans. In US Airways, Inc. v. McCutchen (2013), an employee’s health plan had paid his medical expenses after a car accident caused by another driver. He recovered from the other side, and after his lawyer’s fee his net recovery was smaller than what the plan had paid. The plan demanded full reimbursement (US Airways v. McCutchen).

The U.S. Supreme Court held that in this kind of ERISA reimbursement action, “the ERISA plan’s terms govern.” Equitable doctrines such as the double-recovery and common-fund rules cannot override a clear plan term. Where the plan says nothing specific about how to pay the costs of recovery, the Court said the common-fund doctrine supplies the default rule. The practical lesson under federal law is that the exact wording of the plan document matters.

Why a release or settlement you sign can matter

Settling a claim usually means signing a release. Wex explains that a release concedes a right, and that in a settlement the injured person accepts payment in satisfaction or compromise of the right of action and gives up that right in exchange (Wex: release). TDI notes that when an insurer settles a medical claim, it will ask you to sign a release promising not to file more claims for the accident, and suggests talking to your doctor about future treatment before you sign (TDI auto insurance guide).

Because your insurer’s rights come from your claim, giving up the claim can affect the insurer. Washington’s regulator tells policyholders to notify their insurer if they intend to settle with the at-fault person or that person’s insurer: “Notifying them in advance ensures you don’t risk your company’s right to subrogation.” It adds that these obligations should not interfere with receiving your benefits and full payment for your injury and damages (Washington OIC). Your own policy may also contain notice and cooperation terms. Our guide to settlement agreements and releases covers releases in more detail.

• List who has paid. Note every insurer or plan that paid any part of your loss or bills.
• Ask about your deductible. Ask your insurer whether its recovery demand includes your deductible.
• Identify the plan type. Ask a health plan whether it is self-funded under ERISA or insured, and get the plan document.
• Notify before you settle. Tell your insurer in writing before agreeing to any settlement with the other side.
• Read the release. Check exactly which claims and parties it covers before you sign.

This guide is general legal information, not legal advice. Subrogation, deductible recovery and plan reimbursement rules differ by state, by type of coverage and by the policy or plan terms, and they depend on the facts; consult a lawyer licensed in the relevant jurisdiction about a specific situation.