All businesses require some form of liability insurance to operate. Even if your landlord or the state does not require business insurance, you should make sure your business is covered by some form of insurance to limit your risk. You cannot control every scenario, and you probably want to avoid getting sued if an accident happens and harms a customer, or having to pay out of pocket for damages caused by someone else.
When you have business insurance, and an accident happens, you may experience something called subrogation and loss transfer. You can find this clause in your insurance policy, typically in the section for policy conditions with the heading “Transfer of Rights of Recovery Against Others to Us”.
What Is Subrogation and Loss Transfer?
Subrogation is a standard clause in any business insurance policy, where your insurer retains the right to recover their losses from a responsible party after paying a claim. These claims are typically paid under commercial property, commercial liability, and commercial auto policies but can also apply to worker’s compensation policies. After compensating your business (or a party that has sued you) for the claim, the insurer can then step into your shoes to sue the person or company responsible for the incident to recover the money they paid to you for the claim.
How Does Subrogation Help Your Business?
When your business sustains property damage because of someone else’s negligence, you shouldn’t have to absorb the financial cost for repairs. Once your insurer compensates you for the loss and repairs, you can go back to work, and you don’t have to worry about going after the person or company responsible. Subrogation allows your insurer to take that effort on themselves, minimizing the extra legwork and potential legal costs for you.
Can Subrogation Harm or Limit Your Business?
Since your business insurance provider is essentially stepping into your shoes to recover the losses from the responsible party, your recovery rights may be somewhat limited. You cannot ‘double-dip’ and accept funds from your insurer for the claim while also receiving payment for damages from the person or business responsible for the incident. If you do, you will most likely have to reimburse your insurer for the benefits they paid you.
Can I Waive My Rights to Sue?
In some cases, a business owner may want to waive their rights to sue a responsible party. For example, if a store owner hires his brother to construct something that collapses and injures a customer, or if a flower shop owner’s friend accidentally side-swipes her delivery van. However, if either of these business owners file a claim with their insurer for these incidents and receive compensation, they would most likely be violating the subrogation clause in their policy. This is because nearly all subrogation clauses specifically include language that forbids waiving your (or your insurer’s) right to sue, and require you to protect the insurer’s loss transfer rights after they have compensated you. If you don’t file a claim for the incident with your insurer, however, you can prevent the responsible party from a lawsuit, and you could work out a private method of making things right.