Leasing and owning real estate is a complicated matter, one that may quickly prove disastrous if all parties involved do not carefully look over the relevant contracts before leasing or selling property. Should a contract fail to offer the proper protections to either party, difficult circumstances may grow into a financially devastating ordeal, one which both parties could easily avoid.
This is particularly true when it comes to subrogation. Subrogation is a legal principle under which one party retains the right to pursue another party's claim. In real estate transactions, there are many ways that a simple problem can grow to a costly quagmire without proper language establishing and limiting this right.
If you suspect that you may have an issue involving subrogation, then you need to address the matter quickly and decisively. If you allow it to sit unresolved, you may leave room for other parties such as insurers with motivation to resolve the matter to pursue a claim against you or on your behalf. Don't wait to build strong protections for your rights and priorities with careful research and a strong legal strategy.
How can subrogation cause problems in real estate?
One of the easiest ways to think about subrogation involves insurance providers. If you own a property and rent or lease that property or a portion of it to a tenant, you should carry an insurance policy to cover your own legal liability, and the party leasing the property should also carry an insurance policy to cover themselves. Ideally, if and when damage or injury occurs in relation to the property, the appropriate insurer handles the claim in a reasonable timeframe and neither you nor your tenant have any long-lasting conflicts with each other.
In this scenario, the insurance providers who cover both you and your tenant are subrogated to their respective clients, meaning that they may legally pursue your claim or a claim against you as if they have the same legal authority you do.
This is useful and necessary for insurance policies to work effectively, but subrogation must have defined limits to keep the insurers from pursuing the claim unfairly. If you do not limit the extent of the subrogation in your contracts with the leasing party, they may find themselves on the hook for damages that the insurer should cover.
If, for instance, a fire damages your property and your tenant is responsible, your insurer may cover the damages and compensate you as it should, then may turn around and sue the tenant for those damages. Unless your contracts have proper language limiting subrogation of the insurer, then this is not only possible, it is likely.
Protect yourself and your relationships
Successfully owning and using real estate requires ongoing attention to many details just like this. No matter how you plan to use or lease your property, be sure that you fully understand the legal issues you must address and deal with them promptly to protect your rights as well as your crucial business relationships.