If a policyholder is injured or suffers property damage in an accident -- for example, in a collision with another car -- his insurance company will pay for the necessary medical care or repairs based on the terms of his policy. However, the company retains the right to seek reimbursement from the party who was at fault in the original accident. This is known as subrogation, and it may be used both to your benefit and to seek damages against you.
The point of subrogation is to recover claims that an insurer paid to a policyholder. This commonly occurs in auto accidents, for example, when a policy covers repairs to your car after it was hit by a motorist who was under-uninsured or had no insurance at all. Once it pays you, the insurance company may use a subrogation letter as a method of collecting from the other driver some or all of the funds it paid out. The letter will detail the incident, the amount being sought, the demand for payment and a deadline for doing so.
When You're the Victim
If you were injured or suffered property damage in a car accident that another driver caused, it's to your benefit to help your insurance company subrogate the amount spent on your behalf. For example, subrogation could force the other driver to repay your deductible and any other related costs you paid out-of-pocket. Even if you didn't incur any direct costs, cooperating with your insurance company on a subrogation letter can keep your own policy costs down. You generally won't be involved in the process apart from cooperating with your insurer as needed, though if the eventual result is a lawsuit, the company may have to file it in your name depending on state law.
You may be asked to waive subrogation as part of a settlement offer from the other party's insurance company after an accident. Check with your own insurance agent before doing so. If you sign the waiver without the knowledge of your insurance company, it may refuse to pay your claim because your waiver has barred it from seeking reimbursement from the other party.
When You're at Fault
If you've received a subrogation letter that references an accident or incident you caused or that you're accused of being responsible for, the letter will request that you pay for the damage. If you have adequate liability coverage under your own policy, and you're found to be at fault, your insurance company will pay the claim. But if you don't have liability coverage, or if the damage is so extensive that it exceeds your policy's maximum coverage amount, the other party's insurance company will try to collect the shortfall from you personally.
Failing to respond to a subrogation letter won't make the situation go away. The insurance company or its lawyers likely will intensify the collection process with letters and phone calls. If you fail to answer, they can, and likely will, sue you.
Health Insurance Claims
In some cases, you may receive a subrogation letter regarding pending health insurance claims or requesting proof of the validity of past claims. Some health insurance companies, for example, hire subrogation firms to investigate claims and determine if amounts paid can be recovered or reduced. A letter might ask about your sources of income, for example, to determine whether you're receiving funds from Social Security disability or from your employer for health costs associated with the incident. If you are, that can reduce the amount paid to you by the insurance company. Many insurance policies require you to respond to such requests, so check your documents or call your insurance provider for details and clarification.
How to Respond
While it's important to respond to the subrogation letter, don't do so lightly. Lawyers caution not to reveal too much information in response to a subrogation letter in case a lawsuit results later on. If the incident is serious enough that you've retained an attorney, forward the subrogation letter to her so she can respond on your behalf. If you don't have a lawyer, contact your insurance agent for advice. The company may have a preferred way for you to respond or may prefer to directly respond to the other party.