January 21, 2021

How to Understand the Fine Print

While it’s a good idea to read your insurance policy, hardly anybody does. The important thing is to understand what’s in it. Here are a couple of concepts to know about how your insurance works.

What is subrogation and how does it apply to insurance?

Subrogation in the context of insurance is the right of an insurance company to “step into the shoes” of the insured after the company has paid the loss. Subrogation entitles the insurance company to assert any rights on its own behalf that the insured may have had to recover payment from the parties that caused the loss.

The topic of subrogation is loaded with nuance and there are too many fine points to cover here. But these short explanations of how subrogation works in various types of insurance policies should be helpful.

  • In auto insurance, for example, if you have collision coverage, your insurer will pay to repair your car regardless of whether you were at fault. If you were not at fault, though, your insurer would subrogate against the party who hit your car for the damages it paid out.
  • In workers’ compensation, if a worker is injured operating a piece of machinery that malfunctions, the worker would be compensated for his injuries according to the workers compensation laws of the state. But the insurance company that paid out the workers compensation would be subrogated to the worker’s right to sue the manufacturer of the malfunctioning equipment and recover its payments.
  • One of the most common appearances of subrogation is in property leases, which typically include mutual waivers of subrogation. In these clauses the landlord and tenant each agree to waive any rights of subrogation they may have against each other in the event of a loss. Most insurance policies permit waivers of subrogation as long as the waiver has been agreed to before any loss occurs.

Proximate Cause vs. Immediate Cause

Many coverage disputes between insurer and insured arise from different interpretation of the word “cause.” Even when you have an “all-risk” property policy, it is not enough that the cause and its result (the loss) be covered. There must be a sufficiently close connection between the cause and the loss. This is known as the requirement of “proximate cause.”

Black’s Law Dictionary defines proximate cause as “that which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred.” This is not to be confused with the “immediate cause,” or cause closest to the injury’s occurrence.

How do you distinguish between “proximate” and “immediate” cause?

All basic property insurance policies cover fire damage, but only “special form” policies cover water damage. Nevertheless, if you had a basic policy and your house burned, the policy would cover water damage from fire hoses, because the fire is the “proximate cause” that led to the damage. That is, the water damage would not have occurred without the fire.

Many cases aren’t this clear-cut, however, and disputes often end up in court. Generally, though, whenever a dispute involves ambiguity in a policy’s wording, the court will rule in favor of the insured.

Article Courtesy of SmartsPublishing.com