How does filing a Chapter 7 Bankruptcy petition affect an existing subrogated claim against the debtor?

In this post I will discuss how a subrogated claim is treated in a Chapter 7 Bankruptcy. First, we’ll discuss what a subrogated claim is. Later on we’ll discuss how it matters to the cost of a bankruptcy in Spokane or elsewhere in Eastern Washington. Remember, this post does not contain legal advice. For advice, contact us, Attorney Spalding is a Spokane Chapter 7 Bankruptcy Attorney.

What is a subrogated claim?

A subrogated claim enables a party, usually an insurer, to seek reimbursement for claim payments made to another party, typically its policyholder, as a result of damages or losses caused by a third party.

What is Subrogation?

Subrogation is a legal principle that allows one party, such as an insurance company or individual, to step into the shoes of another party to pursue their rights, recoveries, or remedies. In the context of insurance, when an insurer pays out a claim to its policyholder for damages or losses caused by a third party, the insurer may seek to recover the amount it paid from the party at fault. This process, known as subrogation, enables the insurer to pursue reimbursement for the claim payment made to the policyholder.

How Does Subrogation Work?

Let's consider an example to illustrate how subrogation works. Suppose an individual's car is damaged in an accident caused by another driver. The individual's auto insurance company covers the cost of repairs through the policyholder's collision coverage. After settling the claim with the policyholder, the insurance company then pursues subrogation against the at-fault driver to recover the amount it paid out for the damages.
Subrogation can also occur in other scenarios, such as property damage claims, where a homeowners' insurance company pays for damages caused by a negligent third party and seeks to recover the costs from the responsible party.

Types of Subrogated Claims

Subrogated claims can arise in various situations, including:
1. Property Damage Claims: When an insurance company compensates a property owner for damage caused by a third party, the insurer may initiate a subrogation claim against the negligent party or their insurer to recover the amount paid to the policyholder.
2. Personal Injury Claims: In cases where an individual sustains injuries due to someone else's actions or negligence, their healthcare insurer may cover the medical expenses and subsequently pursue subrogation against the at-fault party to recoup the costs.
3. Insurance Claims: Subrogation is common in the insurance industry, where insurers often seek to recover claim payments from third parties responsible for the losses or damages.

The Legal Basis for Subrogation

Subrogation is typically based on the principle of "equity," which seeks to prevent unjust enrichment and ensure that the party responsible for the loss or damage bears the financial responsibility. When an insurer indemnifies its policyholder for a loss caused by a third party, the insurer is essentially stepping into the shoes of the insured and acquiring the right to pursue recovery from the responsible party.

Can a subrogated claim be discharged in Chapter 7 Bankruptcy?

Yes, usually. In this context, a subrogated claim is a debt that Party A (the debtor) owes to Party C, who has already made Party B (the party that Party A originally owed) whole by paying them the money that Party A owed them. Because subrogated claims are usually, though not always (see next paragraph) an unsecured claim, they are therefore subject to being discharged in a Chapter 7 Bankruptcy.

But there’s an exception to this that turns a non-priority unsecured claim into a priority unsecured claim. This exception will make the subrogated claim non-dischargable when the claim is “for death or personal injury caused by the debtor’s operation of a motor vehicle, vessel, or aircraft if such operation was unlawful because the debtor was intoxicated from using alcohol, a drug, or another substance.” Section 523(a)(9) of the U.S. Bankruptcy Code.

Note that the above situation does not include property damage unless the claim is “for willful and malicious injury by the debtor to another entity or the property of another entity.” Section 523(a)(6) of the Bankruptcy Code. Here, if the facts support the argument, your Bankruptcy Attorney could at least argue that even if the debtor were intoxicated at the time of the accident, they did not act willfully or maliciously. That said, no lawyer can put forward a bad-faith legal argument. Additionally, the legal conclusion could turn on how the bankruptcy court interprets local laws. Therefore, it’s a good idea to seek legal advice (which this blog post is not) from an attorney if you think this scenario applies to you. But be prepared to cover the costs of legal services involving adversary complaints, which may occur if a creditor objects to your discharge on the theory the one of the exceptions to discharge applies to their claim.