What Is Subrogation? Should You Waive It?

Signing up for car insurance and not sure if it’s worth it to pay a premium to waive subrogation? Or maybe you’ve been in an accident and the other person has offered to settle with you if you sign a waiver of subrogation—should you do it? What is subrogation, really? Before you decide, you’ll need to understand what subrogation is and why you would (or wouldn’t) want to waive it. In this guide, we define subrogation and explain when and why it occurs to help you decision.

What Is Subrogation?

In layman’s terms, subrogation occurs when Person A owes something (usually money) to Person B, and Person C steps in and legally takes Person B’s place (including the rights to what Person A owed to Person B).

An example would be if you owed money to a loan company and someone else bought your debt. The person who bought your debt could then use subrogation to have you pay them back the debt (even though you didn’t borrow any money from this person originally). Here’s the more technical subrogation definition:

“The substitution of one person in the place of another with reference to a lawful claim, demand or right so that he who is substituted succeeds to the rights of the other in relationship to the debt or claim, and its rights, remedies, or securities.” (source: Black’s Law Dictionary)

You’re most likely to encounter subrogation when dealing with insurance claims, but it can also crop up in situations with guarantors (like co-signers of a lease or a loan).

How Does Subrogation Work?

Because the most common place people encounter subrogation is in dealing with car insurance, I’ll explain it through an example of a car insurance claim.

Let’s say you’re driving along the highway one day and you get into an accident with another driver. One of your brake lights is cracked, your rear bumper is hanging off one side, and you need a new paint job.

To pay for the repairs to your car, you file a claim to your insurance company with the other driver’s insurance information and cross your fingers. If your insurance company determines the other party was at fault, they’ll pay the claim to cover the damage (minus your deductible). You get your car repaired, and your life goes on as usual.

Behind the scenes, however, your insurance company will seek to recover their costs from the other party’s insurance company (or if that’s not possible, from the other party). It is the right of subrogation that allows your insurer to seek to recoup the money that they paid out to you in the claim from the at-fault party.

For the most part, the only involvement you’ll have in this whole process is if your insurance company chooses to pursue subrogation. If they do, they’re legally obligated to inform you and attempt to recover the cost of your deductible as part of the money they’re seeking from the at-fault party.

If your insurance company does pursue subrogation, they’ll require you to cooperate with their subrogation attempt. Among other things, this means that you likely won’t be permitted to sign a waiver of subrogation after an accident or claim.

What Is a Waiver of Subrogation?

A waiver of subrogation means that you give up your right to have another party (usually your insurance company) attempt to recover what a third party owes you.

Let’s return to the example of car insurance for a moment. Most insurance contracts forbid you from signing a waiver of subrogation after you’ve already filed a claim.

You may be able to sign one in advance of any accident if your insurance allows for adding waiver of subrogation endorsements to existing policies. If you do this, however, your insurance company might charge you an extra premium to try and minimize their losses that way.

By signing a waiver of subrogation, you waive your car insurer’s right to try to recover their costs (including the cost of your deductible).

You’re most likely to come across waiver of subrogation clause after an accident if the at-fault party in the accident or their insurance company attempts to settle with you directly (without going through your insurance company). They’ll want you to sign a waiver of subrogation so that they’re not at risk of being hit up twice for the same incident (once from you, once from your car insurance pursuing subrogation).

In most cases, your own car insurance will require you to notify them if you’ve decided to sign a waiver of subrogation (just as they have to notify you if they opt to pursue subrogation against the at-fault party or their insurance). That way, your insurance company won’t waste time and legal fees trying to get back money the at-fault party already paid out to you.

Should You Sign a Waiver of Subrogation?

While signing a waiver of subrogation can save you the hassle of lawsuits and dealing with insurance claims, it also means you’re far less likely to be able to recover any non-out-of-pocket costs (like all or part of your deductible).

If you let your insurance company pursue subrogation, they become responsible for all the legal fees and paperwork and hassle—all you have to do is wait and see if they’re successful in recovering any of your deductible.

Therefore, you should be very cautious about signing a waiver of subrogation clause, either in your car insurance contract or for a settlement after an accident. Not only might it be forbidden if you’ve already filed an insurance claim and didn’t have a waiver of subrogation signed with your insurance company before, but it could also mean that you end up with a smaller payment than you would otherwise.

The only reasons to consider signing a waiver of subrogation are if:

you have sizeable out-of-pocket costs that you’re hoping to recover (since your insurance company can only pursue subrogation for costs they’re responsible for), OR
you believe you’ll be able to get a more favorable settlement than your insurance company would

Even in these cases, however, be aware that if you sign a waiver of subrogation after the accident, your insurance might refuse to pay all or some of your claim (making it imperative that you win your suit against the at-fault party or their insurance).

Other Kinds of Subrogation

Aside from dealing with car insurance, you might encounter subrogation claims in a few other situations. Subrogation will most often be at issue when it comes to various types of insurance, including homeowners’ insurance- and health insurance-related subrogation claims, but it can occur with contracts of any sort.

In the next couple of sections, we’ll discuss the other two most common ways you’ll come across subrogation in your day-to-day life: health insurance and student loan repayment.

Health Insurance Subrogation

For health insurance, subrogation most often comes up in the context of personal injury lawsuits.

If you successfully sue another party for medical damages, your health insurance will often make a claim for part of your settlement through their right of subrogation. This might seem strange at first, but it turns out there’s a good (and in most cases, fair) reason for this.

As with car insurance, when you sign up for health insurance, part of what you agree to is that the health insurance company will pay your claims on the condition that it has the right to seek reimbursement for your claims from whoever is responsible. When you go to the doctor’s office, you’re the responsible party, which is why you pay your premiums and have a co-pay.

When it comes to a situation where you’ve been injured in an accident by a third party and have successfully won a suit against them, however, this changes—that third party is now responsible for your medical bills. If your health insurance company is to get reimbursed at all for your medical expenses, it must be from that third party’s payment to you. They can’t claim it from the third party themselves – otherwise, you’d be getting doubly reimbursed (your medical bills paid by the insurance company + the settlement from the third party), and the third party would be getting doubly charged, which is against the law.

So while it might seem unfair that your health insurance company gets part of the settlement, it makes sense.

The good news is that you won’t have to pay more than the insurer would pay for the same services. For instance, if a hospital charges $2,000 for a lab test connected to your treatment but your insurance company only has to pay $400, you would only owe the insurance company $400 out of your settlement.

Student Loan Subrogation

Currently, the federal government offers direct student loans, which means the loans are offered directly through and guaranteed against default by the Department of Education. If you took out a federal student loan before 2010, however, your loan would have been guaranteed by a separate student loan guarantor agency.

If your loan involves a guarantor of any kind, it could be subrogated if the agency that originally guaranteed your loan you sells off your loans to a third party.

The most common case where this occurs is when the Department of Education buys back a loan from one of these agencies. Unless it is otherwise prohibited by law or the loan contract you originally signed, the Department of Education can then step into the shoes of the original student loan guarantor agency to collect the loan back from you, even if you had defaulted on the loan.

Besides causing you the financial burden of having to pay back a defaulted student loan, student loan subrogation will also have a negative impact on your credit score. Because the subrogation means that you now technically owe money to someone new (even though you haven’t taken out a new loan), your defaulted loan will reappear on your credit history and cause your credit score to drop.

Subrogation Claims: The Bottom Line

You can define subrogation as what happens when you owe something (usually money) to one entity and a second entity steps into the shoes of the first entity to collect what’s owed.

Subrogation most often comes up in the context of car insurance claims, but it can be pursued under other circumstances as well, including health insurance claims and student loan repayment.

In the context of insurance, you might be able to sign a waiver of subrogation endorsement before any issues arise for an additional premium. If you try to sign a waiver of subrogation afterwards, however, you might end up having your insurance claim partially or totally rejected.