In real estate, subrogation is the substitution of one person or entity for another with respect to a legal claim or debt. Essentially, it consists of one party taking over another party’s rights and obligations in a contract.
In the context of a mortgage, subrogation could take place when a lender or creditor is repaid for its loss by another party who is not contractually obligated to do so.
What Is Subrogation and How Does It Work?
Subrogation refers to the legal process where one party (the subrogee) stands in the figurative shoes of another party (the subrogor) and asserts the rights of that other party.
In general, there are three main types of subrogation in real estate: statutory, equitable, and contractual, which is also sometimes called conventional.
Statutory subrogation occurs when legislation is in place that specifically allows for subrogation under certain circumstances. For example, many states have laws that let lenders seek reimbursement from borrowers through foreclosure sales.
Abiding by a legal doctrine, equitable subrogation can be changed or terminated if a formal contract is created.
Lastly, conventional or contractual subrogation usually takes place when there is a written contract between the parties involved. The terms of the contract will often dictate how subrogation can transpire.
Subrogation can be an effective way for lenders and insurers to recover losses caused by another party’s negligence. However, it is advisable to consult with an attorney before pursuing any claims since subrogation comprises a complex legal process.
What Are Examples of Subrogation in Real Estate?
Subrogation in real estate can refer to the legal right of a lender to step into the place of a borrower and collect any payments from a third party that the borrower is legally obligated to make. In other words, if a borrower defaults on one or more of their loans, the lender can take over the borrower’s rights to collect rent or other payments from a tenant or another third party.
Subrogation can arise when a homeowner defaults on their mortgage and the lender forecloses on the property. If the foreclosure sale fails to cover the outstanding balance owed to the lender, the lender may pursue a deficiency judgment against the borrower.
However, the lender could also demonstrate that the borrower’s default was caused by another party’s negligence, such as through faulty wiring in the home, in order to seek reimbursement from that third party through subrogation.
Another example of subrogation is when personal property is sold through a foreclosure sale. The lender would be subrogated to all of the borrower’s rights and title to the property in this situation. This means that the lender would be able to collect any rent or other payments due under the terms of the lease agreement from the new owner.
Often applied in cases involving property insurance coverage for incurred damages, subrogation could prove useful in a case where a homeowner has homeowners’ insurance, and their home sustains fire damage. In this situation, the insurer would pay for repairs up to the policy limit, then pursue subrogation against any negligent parties who caused the fire to recoup its losses.
Why Is Subrogation Important in Real Estate Transactions?
Subrogation allows for the transfer of risk from one party to another. By subrogating, the party who bears the risk (the lender) can shift that risk to another party (the borrower). As a result, lenders can offer more favorable loan terms to borrowers since they are not assumed to be at risk of losing their investment if the property is sold or foreclosed upon.
In addition, subrogation can help protect lenders from losses due to defaults or other unforeseen circumstances. When a borrower can no longer afford payments on their loan, the lender can use subrogation to recover some or the entire amount of the unpaid loan from a third party. This way, lenders will not lose all of their money if a borrower fails to repay their loan.
For example, if an individual had insurance that covered job loss or medical expenses, the insurer may be required to reimburse the lender for the defaulted loan payments of the insured party. Essentially, lenders have a vested interest in ensuring that their loans are repaid, and subrogation gives them another tool to pursue that objective.
What Are the Advantages and Downsides of Subrogation?
Subrogation in real estate carries a number of pros and cons. On the upside, subrogation can help ensure that all parties involved in a real estate transaction are held accountable for their actions. By law, the lender has the right to step in for the borrower and assert any rights that the borrower has against a third party.
Lenders can also recoup some losses if they have a successful subrogation claim. In addition, the subrogation process potentially discourages borrowers from defaulting on their payments because they may be held liable for the outstanding balance.
However, there are also downsides to subrogation. For instance, lenders may not be successful in their efforts to recover damages, which could leave the borrower responsible for repaying the entire loan amount plus interest and fees. Not to mention, the legal process for subrogation can be complicated, expensive, and time-consuming.
This can make it difficult to get subrogation started without the help of an experienced attorney or real estate professional. Ultimately, whether or not subrogation is right for a particular situation will depend on the specific details and circumstances involved.
What Is the Difference Between Subrogation and Insurance?
While both subrogation and insurance can provide financial assistance after a loss, key differences exist between the two terms. Subrogation allows an insurance company to recover money that it has paid out on a lawful claim from the party responsible for the damages.
This means that if a person files an insurance claim with their provider, which pays for the damages, the insurer may then pursue legal action against the person who caused the damage in order to recoup their losses. In contrast, insurance is a contract between an individual and an insurance company that provides financial protection in the event of an unexpected loss.
The insured must pay premiums to their insurance provider in exchange for coverage in case of an emergency event. The insurer would then pay for damages up to the limits of the insured party’s policy, regardless of who is at fault.
What Is an Example of Subrogation vs. Insurance?
For example, let’s say a fire breaks out at a property owner’s office building, and their insurance provider pays out on their claim. If the insurer later discovers that the fire was caused by someone else’s negligence, they may attempt to recover their losses through subrogation.
In this case, the insurer would be taking over the property owner’s legal rights to seek compensation from the negligent third party. However, if the owner simply had an accident and made a claim on their own insurance policy, their insurer would not be able to seek reimbursement through subrogation because there is no third party to blame.
Overall, subrogation allows insurers to recoup their losses when someone else is culpable, while insurance compensates policyholders against losses no matter who is at fault.
Key Takeaways in Regard to Subrogation in Real Estate
In the context of real estate, subrogation is when one party takes over the contractual rights and responsibilities of another party. The legal principle can be used to recover damages incurred by the original party or to transfer responsibility for the payment of a debt to the new party.
A common example is when a lender extends their rights of recovery due to a borrower defaulting on their loan. By filing a lawsuit against the borrower or foreclosing on the property, lenders exercise their right of subrogation.
Borrowers could protect themselves from subrogation by ensuring that they have adequate property and liability insurance coverage in place. In general, subrogation can be a complex, time-consuming process, but working with an experienced real estate attorney potentially makes the procedure much simpler.