Upon indemnifying a policyholder for a loss, an insurer generally has the right to recoup its loss by pursuing recovery from other entities or individuals who may be responsible for the policyholder's damages in the first place. Subrogation rights vary across jurisdictions and can have serious consequences both for the policyholder and the insurer. Disputes often arise, such as the circumstances under which the insurer may subrogate and for how much, particularly where the policyholder has not been fully compensated for its losses.
Generally, an insurer's subrogation rights are limited to recovering no more than what it paid to its policyholder. However, there is a disagreement among jurisdictions as to whether the insurer can recover in subrogation before the policyholder is "made whole."
For example, if the insurer disputes part of the insured's claim and only partially compensates the policyholder, some jurisdictions subordinate the insurer's subrogation rights and require that the policyholder be made whole before the insurer can recover. This issue can become complicated depending on the circumstances, such as whether the applicable policy covers all or part of a claim, and in situations where the policyholder purchased inadequate limits to cover the loss or claim.
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