Texas Subrogation – What If You Already Settled?

What if you just settled your insurance claim with the person who caused your financial loss. And lets say you live in Grand Prairie, Arlington, Dallas, Fort Worth, Weatherford, or anywhere else in Texas. What happens if your own insurance company sends you a letter asking for a return of money they paid on your behalf?
The case law in Texas is pretty simple sounding. When an insured settles with or releases a wrongdoer from liability for the loss before payment of the loss has been made by the insurance company, the insurer’s right to subrogation ends. This was stated in 1991, in the Houston Texas Court of Appeals case, Interstate Fire Insurance Co. v. First Tape, Inc.
In this case, Gary Pentecost (Pentecost) owned a commercial building which was insured by Interstate Fire Insurance Company (Interstate). Pentecost leased the building to First Tape, Inc. (First Tape). The lease between Pentecost and First Tape contained a clause on insurance and liability that read in relevant part that the two mutually agreed to release each other from liability for any acts of negligence that caused harm to the building and further agreed that there would be no rights of subrogation by their respective insurance companies. Further, the lease was transferable.
First Tape later sold its assets to Gundle Lining Systems, Inc., including the lease. A short time later, one of the machines used in the manufacturing process started a fire which consumed the building and contents. Interstate paid the claim and then tried to subrogate against Pentecost. The court ruled that, because Pentecost, in the lease, had released First Tape and therefore Gundle, that Pentecost had no claim against First Tape or Gundle. Since Pentecost had no claim, Interstate had no claim.
This rule derives from the basic principle of subrogation that an insurer acquires no subrogation rights until it pays the loss. The insurer then acquires only such rights against the wrongdoer as the insured had at that time. Thus, when the insured has settled its claim and released its cause of action against the wrongdoer, the insurer can acquire no subrogation right against the wrongdoer when it later pays the claim. This was restated in 1997, by the San Antonio Appeals Court in the case, In re Romero.
These laws and rules are more reasons for one of the residents above to seek the advice of an experienced Insurance Law Attorney when involved in an insurance claim. Otherwise they run the risk of owing money back to the insurance company.
It should be noted that because of this principle, the Texas Auto Policy contains a “settlement without consent” clause designed to prevent an insured from settling with a wrongdoer without first obtaining the consent of their own insurance company. This consent clause prevents the insured from extinguishing the insurance companies subrogation right without the companies knowledge. If they do, then the insured could become personally liable for the costs.