Subrogation is the process by which an insurance company seeks to recover, from a third party responsible for a loss, the money it paid to the policyholder as a result of the loss. In Latin America, subrogation claims are not sufficiently investigated and pursued. This area presents a recovery opportunity for (re)insurers writing risks in the region, and for their clients.
The insurance statutes of Latin American jurisdictions contemplate subrogation claims. These statutes generally provide that, upon payment of an indemnity under the policy, the insurer receives the rights that the insured had against third parties as a result of the loss, up to the amount paid by the insurer.
In addition, these laws often require that the insured cooperate with the insurer in the prosecution of a subrogation claim, and make the insured liable for any conduct that negatively impacts the claim. Some jurisdictions, like Colombia and Mexico, expressly provide that a policyholder that impairs the insurer’s subrogation rights may lose its right to an indemnity under the policy, in full or in part.
The Colombian Code of Commerce takes this issue one step further, by prohibiting the insured from waiving its rights against third parties responsible for the loss. A policyholder that waives those rights will lose its entitlement to a recovery under the insurance contract. This can be particularly important for construction or energy risks, where the policyholder’s EPC or other contracts often contain waivers of subrogation against key contractors or suppliers.
Participation of Original Insured
Ideally, the insured will not only co-operate with the insurer in the recovery effort, but also will actually participate in the action, joining the claim against the responsible third party.
This will allow the policyholder to seek recovery of amounts not covered by the insurance, such as the deductible and any uninsured losses. There are other benefits as well: the existence of a larger claim will probably put additional settlement pressure on the defendant, and the closer involvement of the insured (who now has become a stakeholder in the action) is likely to facilitate the insurer’s access to relevant evidence.
The insurance statutes of some Latin American countries, such as Chile and Mexico, contemplate the possibility of the insured joining the claim, and provide that the recovery will be shared between the policyholder and the insurer in proportion to their respective interests.
Large Latin American risks are frequently reinsured with international companies. As the parties ultimately bearing the costs of the claim, reinsurers will often seek to pursue a subrogation recovery.
However, the regulation of reinsurance in Latin America is very limited, and when it comes to the participation of reinsurers in the subrogation process, it is practically non-existent. An agreement with the cedant for the joint prosecution of the subrogation claim, or an assignment of the cedant’s rights, will protect the claim from challenges to the reinsurers’ ability to proceed. Further, in many Latin American countries, the subrogation claim must be brought in the name of the insurer, making the cedant’s co-operation necessary.
Where the reinsured retains some of the risk, the same rules that apply at the direct insurance level should govern the allocation of the recovery between the reinsured and the reinsurers.
In practice, subrogation recoveries are not pursued in Latin America as often as they should be, and significant amounts of money are being left on the table. (Re)insurers should consider the subrogation potential of every claim, as a matter of routine. It is most effective to investigate subrogation potential at the outset of a claim, in order to interview witnesses, secure relevant evidence, and make sure it is properly preserved for possible use in court. Subrogation presents an opportunity for (re)insurers doing business in the region, and also for their clients.
Posted by José Umbert