Legal Definitions - conventional subrogation

Conventional subrogation refers to a legal principle where one party, through a specific agreement or contract, acquires the right to pursue a claim or remedy against a third party that originally belonged to another. Unlike subrogation that arises automatically by law (known as equitable subrogation), conventional subrogation is explicitly created and defined by the terms of a written contract between the parties involved. This contractual right allows a party who has paid a debt or satisfied an obligation on behalf of another to step into the shoes of the original creditor and seek recovery from the party ultimately responsible.

• Example 1: Insurance Policy

  Imagine a business owner whose commercial property is damaged by a faulty product manufactured by a third-party supplier. The business owner's property insurance policy contains a clause stating that if the insurer pays for damages caused by another party, the insurer is subrogated to the business owner's rights to sue that third party. After the insurance company pays the business owner for the property repairs, the insurer can then, under the conventional subrogation clause in the policy, initiate a lawsuit against the product manufacturer to recover the money it paid out. The insurer is exercising the business owner's original claim against the manufacturer, as agreed upon in the insurance contract.

• Example 2: Mortgage Refinancing

  A homeowner has a primary mortgage with Bank A. They decide to refinance their home with Bank B, which agrees to pay off the existing mortgage with Bank A. The refinancing agreement between the homeowner and Bank B includes a conventional subrogation clause. This clause stipulates that upon paying off Bank A, Bank B will acquire Bank A's original priority lien position on the property. If it later turns out there was a junior lien (a second mortgage or judgment) that Bank B was unaware of, Bank B can use its conventional subrogation right to assert the priority of Bank A's original mortgage against that junior lien, protecting its investment as if it were the original lender.

• Example 3: Surety Bond in Construction

  A general contractor is hired by a city to build a new public library. The city requires the contractor to obtain a performance bond from a surety company, guaranteeing the project's completion. The agreement between the contractor (principal), the city (obligee), and the surety company includes a conventional subrogation clause. If the contractor defaults on the project and fails to complete the library, the surety company steps in and pays the city the agreed-upon amount to cover the costs of finding another contractor to finish the work. By virtue of the conventional subrogation clause in their bond agreement, the surety company then gains the right to pursue the defaulting general contractor to recover the funds it paid to the city. The surety company effectively steps into the city's shoes to seek reimbursement from the contractor who breached the original construction contract.