Subrogation in insurance: when the insurance company sues in your name

The insurance company has paid you, and now it wants to sue the person who caused the damage, in your name. At first sight, this is in your favor. But if you waived your claim against the person responsible before you reached an agreement with the insurance company, you could owe it money. This is how the subrogation mechanism works, and this is why it is important to understand it before you sign any arrangement.

What is the right of subrogation in insurance law?

The right of subrogation is set out in section 62 of the Insurance Contract Law, 5741-1981. Under this principle, after the insurance company has paid insurance benefits to the insured, it “steps into the shoes” of the insured and is entitled to sue the third party who caused the damage, for the amount it paid. For example: if a neighbor flooded your apartment and your insurance company paid you benefits, it is now entitled to sue the neighbor (or the neighbor’s insurance company) to repay it the amount paid.

The subrogation mechanism is meant to prevent double enrichment: the insured should not receive compensation both from the insurance company and from the person who caused the damage, and the insurance company should not bear damage caused by a third party. Section 62(d) sets a limit: the subrogation provisions do not apply if the insured event was caused unintentionally by a person whom a reasonable insured person would not sue, because of a family relationship or an employer-employee relationship.

Conditions for exercising the right of subrogation

Three cumulative conditions are needed to exercise the right of subrogation. First, the insurance company actually paid insurance benefits to the insured (or to a third party, in liability insurance). Second, the insured has a cause of action against a third party for the same damage. Third, the exception in section 62(d) of the Law does not apply: damage caused unintentionally by a relative or an employee or employer, whom a reasonable insured person would not have sued.

It is important to note: the right of subrogation is a right of the insurance company, not of the insured. The insured cannot “sell” the right. The insured must cooperate with the insurance company and must not harm its right. Section 62(c) of the Law provides that an insured who harmed the right of subrogation, for example by waiving their claim against the person who caused the damage, must compensate the insurance company for the damage caused to it.

The insured’s duty to cooperate

Section 62(c) of the Insurance Contract Law provides that an insured who received compensation from the third party that is due to the insurer must pass it on to the insurer. A person who made a settlement, a waiver or another act that harms the right that passed to the insurer must compensate the insurer. At the same time, section 62(b) protects the insured: the insurer may not use the right of subrogation in a way that harms the insured’s right to collect compensation from the person who caused the damage beyond the benefits they received. In practice, this means that the insured should not sign a settlement agreement with the person who caused the damage without the insurance company’s knowledge, should not waive their claim against that person, and should hand over every document the insurance company requires.

An insured who breached the duty to cooperate is exposed to a claim by the insurance company for the damage caused to it. For example: an insured signed a waiver in favor of the person who caused the damage in return for a small sum, and the insurance company can no longer exercise its right of subrogation. In that case, the insurance company is entitled to sue the insured for compensation for the harm to its right (section 62(c)), at most up to the amount of the benefits it has already paid them.

Waiving the right of subrogation in a contract: lease, construction and service contracts often include a clause in which each party undertakes that its policy will include a waiver by the insurer of the right of subrogation against the other party. The Insurance Contract Law does not regulate such a waiver explicitly. It provides that the right passes to the insurer once it has paid (section 62(a)), and that an insured who made “a settlement, a waiver or another act that harms the right that passed to the insurer” must compensate it (section 62(c)). So before you undertake in a contract to waive a claim against the other party, it is worth making sure that the insurer has agreed to this and that the waiver is included in the policy. Otherwise, depending on the circumstances, the insurer could argue that the waiver harmed its right.

Subrogation in car insurance: the special arrangement

In comprehensive car insurance, the right of subrogation is used most often. When a car is damaged in an accident caused by another driver’s fault, the insurance company pays the insured the cost of the repair (minus the deductible) and then sues the driver at fault or that driver’s insurance company. Subrogation claims in car insurance are usually settled directly between the insurance companies, without legal proceedings.

In compulsory car insurance under the Compensation for Road Accident Victims Law, 5735-1975 (חוק פיצויים לנפגעי תאונות דרכים, התשל״ה-1975), the arrangement is different. Section 9 of the Law provides that a person who paid compensation under the Law has no right of recourse against another person who is liable to pay compensation under the Law. The exception is mainly against a person whose entitlement is denied by section 7, such as a person who caused the accident intentionally, drove without a license or without insurance, or used the vehicle to commit a crime.

Subrogation in home and property insurance

In home insurance, subrogation claims are common in cases of water damage (flooding from a neighbor’s apartment), fire damage (a fire that spread from a nearby property) and damage caused by a contractor’s negligence (construction defects). The insurance company that compensated the insured sues the owner of the neighboring apartment, the contractor, or their insurance company.

An important practical issue: when the insurance company exercises a right of subrogation, it claims only the amount it actually paid, that is, minus the deductible the insured paid out of pocket. The insured is entitled to join their own claim to the subrogation claim, to get back the deductible too, as well as any further damage that the policy did not cover.

The limitation period in subrogation claims

An important practical question: when does a subrogation claim become time-barred? Because the insurance company steps into the insured’s shoes, the limitation period of the subrogation claim is the one the insured would have had against the person who caused the damage: usually seven years under the Prescription Law, 5718-1958. The shortened limitation period in section 31 of the Insurance Contract Law applies to the insured’s claim for insurance benefits against their own insurer, not to the subrogation claim against the person who caused the damage. That period is three years from the occurrence of the insured event (and five years in life insurance, illness and hospitalization insurance, and long-term care insurance made or renewed from 25 November 2020).

Important: the limitation period starts to run from the date the damage occurred, not from the date the insurance company paid. So an insurance company that delays paying benefits can find that it has missed the limitation date. This is one more reason why insured persons should make sure that the insurance company acts quickly.

The effect of subrogation on the insured: what is important to know?

An insured who received insurance benefits should know: if the insurance company succeeds in the subrogation claim and collects from the person who caused the damage more than it paid, the surplus belongs to the insured, because the right passes to the insurer only up to the amount of the benefits it paid (section 62(a)), and the insurer may not harm the insured’s right to collect more than that from the person who caused the damage (section 62(b)). Also, if the insurance company decides not to exercise the right of subrogation, it is not entitled to demand that the insured repay benefits already paid.

Finally, before you sign any document toward a third party who caused the damage, check with the insurance company. Signing a waiver or a settlement with the person who caused the damage can harm the right of subrogation and expose you to a claim by the insurance company itself. If in doubt, seek legal advice.

Frequently asked questions

When does a subrogation claim become time-barred?

The limitation period of a subrogation claim is the one the insured would have had against the person who caused the damage: usually seven years under the Prescription Law, 5718-1958. It starts to run from the date the damage occurred, not from the date the insurance company paid. The shortened limitation period in section 31 of the Insurance Contract Law applies to the insured’s claim for insurance benefits against their own insurer, not to the subrogation claim against the person who caused the damage.

The insurance company is suing the person who caused the damage. Can I also get back my deductible?

Yes. The insurance company claims only the amount it actually paid, minus the deductible. The insured is entitled to join their own claim to the subrogation claim, to get back the deductible too, as well as any further damage that the policy did not cover.

In a lease, I undertook to waive any claim against the other side. Does that affect the insurance?

Possibly. The Insurance Contract Law does not regulate such a waiver explicitly. It provides that an insured who made “a settlement, a waiver or another act that harms the right that passed to the insurer” must compensate it (section 62(c)). So before you undertake in a contract to waive a claim against the other party, it is worth making sure that the insurer has agreed to this and that the waiver is included in the policy.