Understanding Equitable Subrogation in Foreclosure: Your Rights and Options
Equitable subrogation is a common legal practice that’s carried out in the real estate and insurance sectors a lot. The legal doctrine allows one party to replace another party, asserting the remedies and rights of that other party in the process.
In real estate, equitable subrogation is often put into practice when a borrower refinances their mortgage. In this case, the new lender will extend credit to the borrower that acts as the new mortgage.
To assume the position of first priority lien holder on the property, the new lender will pay the original lender the amount of money that’s owed on that loan. Through the doctrine of equitable subrogation, this will relieve the original lender of its lien holder rights, giving them to the new lender.
Equitable subrogation also differs from traditional subrogation. That’s because instead of the remedy being contractual, it’s equitable — meaning one debt is replaced by another.
Below, we’ll discuss equitable subrogation in more depth, including how it pertains to foreclosure and how you can protect your assets in the process.
The Role of the Insurance Company in Equitable Subrogation
Insurance companies exercise subrogation rights quite often, specifically when they are settling claims. Insurance companies have the right to exercise subrogation rights so they can gain reimbursement for payments that are made to policyholders.
An example would be if a driver got into an accident that wasn’t their fault and was injured in the process. That driver’s insurance company might be contractually obligated to provide coverage for the driver, helping them to pay medical bills associated with their injury — in addition to the amount they have to pay for any damage done to the car.
The money that the insurance company has to pay is considered their loss. Through equitable subrogation, the insurance company might have the right to reclaim that loss from the other driver’s insurance company — since that person was at fault for the accident.
Of course, this example doesn’t apply to all cases across the board. Some states are considered no-fault states for auto accidents, which essentially wipes out the ability of insurance companies to exercise equitable subrogation in this way.
Policyholders may also be affected by the insurance company exercising subrogation rights, as it could impact their own interests in a property.
Equitable Subrogation in Foreclosure Cases
Equitable subrogation can also come into play in real estate in some foreclosure cases where there are multiple lien holders on a single property, and it can have large ramifications on distribution once a foreclosure sale has been completed.
Sometimes, a senior lender will pay off a junior mortgage on the property, and then seek to be subrogated to the position of the junior mortgage. This would allow them to pursue a claim on the outstanding balance owed by the borrower and, ultimately, try to foreclose on the property to obtain its money.
By pursuing equitable subrogation, lenders can seek to obtain reimbursement for payments they made on the outstanding debt.
At the same time, borrowers typically have options and rights to negotiate with lenders to avoid the foreclosure process altogether. However, this can be a complicated process.
That’s why if you’re facing the possibility of foreclosure, it’s important to have an experienced attorney on your side.
Proving Negligence of a Third Party
Equitable subrogation is meant to be a fair process, hence the name “equitable.” It’s possible, though, that one party may try to prove negligence by a third party.
The rules of how this must be done vary by state. Generally speaking, though, one has to show that a third party was responsible for the loss, which could include demonstrating clearly that they were primarily liable for whatever the loss was.
The party claiming negligence will have to back up their claims with proof by providing documentation such as insurance policies, contracts or other records that show the third party holds liability.
Understanding Subrogation Clauses in Insurance Contracts
Many insurance contracts will have subrogation clauses written right into them. These provisions will give the insurance company the right to pursue claims against third parties.
In essence, these clauses enable the insurer to get a reimbursement for any payments they must make to policyholders, if a third party was responsible for that loss — as mentioned in the example above.
These clauses can impact equitable subrogation, in that they can ultimately limit the insurance company’s right to pursue a claim against a third party. They could also affect the rights of both the third parties and policyholders alike.
Defenses and Waivers of Subrogation
It’s also common that defendants argue that equitable subrogation clauses cannot, or should not, be enforced in their case. There are many different angles they may take to defend their position.
One is that there was a lack of consideration given to their own claims, or that there isn’t a clear or direct relationship between the parties in the case. They also might argue that the subrogation clause is either unenforceable or ambiguous.
Again, depending on the state and how the subrogation clauses are written, it’s possible that defendants could be successful in this vein, if the insurer didn’t meet certain standards or requirements.
Waivers of subrogation could also affect the rights of equitable subrogation by limiting the ability of an insurance company to pursue a claim. In other words, there could be a limit to how much money, or a percentage, of the loss they are allowed to pursue using equitable subrogation.
Legal Framework for Equitable Subrogation
Case law in Florida has established the requirements for equitable subrogation. It has been established through the state court system as a fair remedy that ensures no lender is injured when they lend money to either businesses or individuals.
Equitable distribution has been used in Florida for disputes over real estate, in Land Bank of Columbia v. Godwin; over insurance; and over construction, in See Tank Tech, Inc. v. valley Tank Testing, LLC.
Florida’s legal framework for cases involving equitable subrogation could also impact other cases’ outcomes that involve both insurance and foreclosure claims. They could also affect the options and rights that insurance companies, lenders and homeowners have.
Seeking Professional Help
Equitable subrogation is certainly not a simple concept. Not only is it complex, but it can be up to interpretation.
That’s why if you’re facing foreclosure and/or an equitable subrogation case, it’s important that you consult with an attorney who has years of experience in these fields. This attorney can help you navigate the complex legal issues that are involved in cases with equitable subrogation.
Lenders, homeowners and policyholders all have options and rights in equitable subrogation cases, which an attorney can help guide you on. They’re also experienced in negotiating these claims with insurance companies or pursuing claims against third parties.
Common Misconceptions
There are many common misconceptions involving equitable subrogation.
One is that it’s the same as conventional subrogation. A main difference between the two is that equitable subrogation as a remedy for a particular debt can’t be legally enforced but should be recognized.
Another common misconception is that waivers of subrogation always are enforceable. Depending on how the waiver clause is written, and what state it applies to, it’s possible that it may not be enforceable, providing a loophole for defendants.
Frequently Asked Questions about the Process
What is the difference between equitable subrogation and conventional subrogation?
Equitable subrogation is referred to as legal subrogation, while conventional is referred to as contractual subrogation. The latter is based upon a contract between two parties, while the former doesn’t require such an agreement.
How does equitable subrogation affect policyholders and third parties?
Equitable subrogation could allow an insurance company to “step into the shoes of the policyholder,” assuming their rights in the process. Third parties may also have to pay compensation to cover losses an insurance company incurs.
What are the requirements for proving a case of equitable subrogation?
There are five conditions an equitable subrogation case must meet. The subrogee must be paid the full debt, the subrogee has to pay the original claimholder so their own interests are protected, the subrogee can’t act as a volunteer, the subrogation can’t harm any third parties’ rights, and the subrogee can’t be primarily liable for the debt in question.
Get Legal Help if You’re Facing Foreclosure
Equitable subrogation is a legal doctrine allowing a party to “step into the shoes” of another party so they can assert remedies and rights of that other party. Unlike conventional subrogation, it’s not based on a contract, and can arise at times in foreclosure cases.
Since equitable subrogation is such a nuanced and complex legal concept, careful consideration is required for the options and rights of all the parties involved. That’s why if you find yourself in such a case, it’s important to consult with an attorney who is experienced in foreclosure law and equitable subrogation.
Doing so will ensure that your rights and options are protected, and that you know how to navigate equitable subrogation in foreclosure cases.