What is subrogation in insurance?
The right of an insurer who has indemnified an insured in respect of a particular loss to recover all or part of the claim payment by taking over any alternative right to indemnity which the insured possesses
Subrogation will only arise where the insured has suffered a loss & has another means of recovering it
Subrogation supports indemnity policies only, & it doesn’t apply to non-indemnity contracts (e.g. life insurance or personal accident insurance)
E.g. Castellain v. Preston (1883)
What is the nature of subrogation?
It prevents the guilty party who caused the damage from being
‘let off the hook’, & ensures that they don’t escape their financial responsibilities
Main purpose: prevent ‘double indemnity’ of the insured - to prevent the insured from recovering twice for the same loss, & so preserve the principle of indemnity
What are the 2 ways the principle of subrogation can operate?
- Where the insured has ‘recovered for the same loss twice’
•So, they’ve collected a claim payment from the insurers & also recovered compensation for the same loss from another source
•E.g. Castellian v. Preston (1883)
•The insured must be indemnified - the insurer can claim the right of subrogation only after the insurer has paid
•E.g. Scottish Union & National Insurance v. Davies (1970)
•Gifts - the insured may reduce a gift (a voluntary payment), after having suffered a loss, usually from someone other than the wrongdoer - where the giver intends the money to be for the sole benefit of the insured, it can’t be claimed by way of subrogation - Where the insurers bring an action against the third party
•Where insurers have indemnified the insured & the insured hasn’t enforced their alternative rights to compensation, the insured can pursue any right of action available to the insured to reduce the loss insured against
•The action will normally lie against a 3rd party whose negligence (or other tort) has caused the loss
•The action must be brought in the name of the insured & legally it’s regarded as the insured’s own action - if the assured doesn’t allow this, the insurer can sue the assured & 3rd party, then the court would allow them to use the name
•Although, actions brought by insurers under the Riot Compensation Act (2016), insurers can sue in their own name
•When an action is taken by insurers in the name of the insured, it must be for the whole loss, as the law only allows a person to sue once for a wrongful act that has bee committed against them
The time when subrogation arises
•At common law, the insurers must indemnify the insured before they can exercise subrogation rights
•Insurers include a ‘duty of assured’ clause, where they require the insured to take steps to preserve the insurer’s subrogation rights - the insured may be obliged to start legal proceedings against the 3rd party even though they haven’t been paid yet by the insurer - this legal action would protect the insurer’s right
•The insured will be in breach of their duty to the insurers if they prejudice their rights (e.g. by waiving their rights against the 3rd party or entering into a compromise with them) - so, the clause reinforces & supplements the common law duty of the insured to act in good faith when proceeding against the 3rd party
What is the operation of the principle of subrogation, & the way in which any recovery from a 3rd party is shared between the insured & insurers?
It depends on 2 factors:
1. The amount of the recovery in relation to the loss
2. Whether the insurance covers the loss in full
Recovery equal to the loss:
•Often, the amount of recovery from the 3rd party will be the same as the loss suffered by the insured
•So, the whole of the loss will be bourne by the 3rd party
•The insurer is entitled to keep the amount they paid for the loss & if the insured paid an excess, they can receive this back
Recovery greater than the loss:
•If there’s any surplus after the insurers have recovered their money, the insured is entitled t keep it, & the insurers only can recover the amount they paid for the loss
•E.g. Yorkshire Insurance Co. Ltd v. Nisbet Shipping Co. Ltd (1962)
Recovery less than the loss:
•The recovery from the 3rd party may be less than the loss that was suffered by the insured
•This may happen if the 3rd party is insolvent or unable to pay
•Under Napier v. Hunter (1993), the insurers will recover the amount they paid, & the insured isn’t entitled to get their excess payment back
•The insured can deduct from any amount to which the insurer is entitled by way of subrogation, any legal costs or other expenses reasonably incurred in attempting to recover the loss that was insured
What are ex gratia payments in the way the principle of subrogation can operate?
If the insurers make a payment outside the terms of the policy, making it clear that no legal obligation to pay is accepted, & that payment is made merely as a favour (known as an ‘ex gratia’ payment), they’re not entitled to subrogate against a 3rd party
The insured is entitled to retain any amounts secured in this way
What are the 3 sources of subrogation rights?
- Tort
•Subrogation rights most frequently arise in tort, a branch of law
•In most cases, the 3rd party would’ve negligently damaged property belonging to the insured which is covered under the insured’s property insurance - Contract
•Subrogation rights may exist in contract
•If the insured has an alternative contractual right of recovery, in addition to that provided by their own insurance, the insurers will be able to enforce this right for their own benefit
•E.g. property insurers who pay a claim for damage to buildings may have right of recovery against a tenant of the insured, who’s legally responsible for the damage under the terms of the lease
•Subrogation rights in contract can also arise from indemnity (or ‘hold harmless’) clauses, where 1 party agrees to pay back another, if the latter should suffer a particular loss - this are common in contracts associated with complex construction or engineering projects, where many firms & groups of workers are involved
•E.g. Lister v. Romford Ice & Cold Storage Ltd (1957) - Statute
•A recovery by way of subrogation may be founded on a statutory right belonging to the insured
•E.g. the statutory right of property owners to recover damages from the police authority if their property is damaged in the course of a riot - this right arises under the Riot Compensation Act (RCA) (2016)
-The right passes to insurers who pay a claim for riot damage & is enforceable by them against the policing body in the district in which the riot occurred
-The Act allows insurers to sue the relevant authority in their own name
What is the link between subrogation, salvage, & abandonment?
The doctrine of salvage & abandonment allows insurers who have paid a total loss, to claim for their own benefit anything which remains of subject matter
Abandonment is linked with subrogation & has the same general purpose of preventing the insured from recovering more than an indemnity
Differences:
•Subrogation gives the insurer the right to pursue a claim against a 3rd party for the loss of the subject matter, whereas abandonment & salvage confer rights only over the subject matter itself
•An action by way of subrogation cannot be brought in the insurer’s own name (with 1 exception), whereas an insurer who accepts abandonment becomes the owner of the goods
•Subrogation allows the insurer to recover no more than their own payment, whereas the insurer can make a profit on the abandoned property
•Subrogation operates automatically as a result of the principle of indemnity, whereas abandoned property need not be accepted by the insurer
What are modification or denial of subrogation rights in relation to market agreements?
Subrogation rights can be affected by voluntary market-wide agreements between insurance companies
Insurers may agree among themselves to waive their rights of subrogation against 3rd parties
•This is common where the 3rd party is insured - if they’re covered by their own insurance, the consequence is that 1 insurer will end up claiming from another - this would be costly & wasteful
•E.g. in motor insurance, a network of ‘knock-for-knock’ agreements developed - when an accident occurs involving vehicles covered by different insurers, each insurer pays for the damage to its own insured’s vehicle & gives up any subrogation rights that may exist against the other motorist - but recent dissatisfaction has led to withdrawal of these type of agreements by many insurers
•E.g. ‘immobile property agreements’ between motor & property insurers that cover impact damage by motor vehicles - losses are stated in a predetermined proportion
•E.g. in employers’ liability insurance, insurers usually don’t pursue rights of recovery against persons who negligently injure fellow employees - Lister v. Romford Ice & Cold Storage Ltd (1957)
What are modification or denial of subrogation rights in relation to contractual waiver of subrogation?
Often, insurers agree with an insured that they won’t exercise subrogation rights against certain other parties or persons who are associated with the insured
•They do this by including a ‘subrogation waiver clause’ in the policy
•Purpose: to prevent a subsidiary from having to pay back sums which have been paid to the parent company under an insurance claim
Even if there isn’t this clause in the policy, a non-consumer (business) contract between the insured & another person may be constructed in this way, as to bar the insurers’ rights of subrogation
The way in which 2 or more parties have arranged their insurance may persuade a court that there should be no subrogation rights
What are modification or denial of subrogation rights in relation to co-insurance cases?
2 or more persons can be insured under the same policy, & the policy can be joint or composite
A question arises as to whether an insurer can exercise subrogation rights against the other co-insured who is legally responsible for the loss after they’ve indemnified one co-insured
•In some cases there may be an express ‘waiver of subrogation’ clause in the insurance contract, to the effect that no subrogation rights will be exercised against the co-insured
In the cases in which subrogation action in co-insurance is discussed, there are normally 2 contracts involved:
1. The underlying contract between 2 parties
2. An insurance contract
E.g. Tyco Fire & Integrated Solutions (UK) Ltd v. Rolls Royce Motor Cars Ltd (2008) - it was held that (in the absence of the waiver clause) whether the insurer has subrogation rights, depends on the underlying contract between the contractor & subcontractor - if the contract exempts the subcontractor’s liability, there will be no subrogation rights, but otherwise, the insurer subrogates into the contraxtor’s rights despite co-insurance
•Although, the Supreme Court rejected this view in Gard Marine & Energy Ltd v. China National Chartering Co. Ltd (The Ocean Victory) (2017) - the insurer’s subrogation claim was rejected
If 1 co-insured ceases to be covered by insurance, subrogation may then be allowed
If the underlying insurance requires a co-insured to purchase a seperate insurance to the co-insured contract, so far as covered by that seperate insurance, a subrogation action may be allowed towards that co-assured
•It means that regarding the areas that the seperate insurance covers, the parties weren’t meant to be co-insured under the co-insurance policy
What are modification or denial of subrogation rights in relation to public policy?
Following Lister v. Romford Ice & Cold Storage Ltd (1957), insurers generally agree to give up their subrogation rights against negligent workers who injure their fellow employees in the course of employment
The Court of Appeal has refused to allow subrogation in Morris v. Ford Motor Co. (1973) - the court rejected the cleaning firm’s claim, which was directly against the negligent Ford employee, on the grounds of public policy, & highlighted that industrial relations would be harmed if there was a right to sue employees in such cases
What is double insurance & contribution?
Contribution is concerned the sharing of losses between insurers when double insurance exists
•The principles are: the insured can’t recover for the same loss twice & the insurers should share the loss in a fair way
•Contribution only applies to insurance policies that are contracts of indemnity
•Contribution is governed by common law rules - but, these rules are frequently modified by clauses in the policy known as contribution conditions
•Contribution is often further modified by internal market agreements between insurers
Double insurance
•It’s usually unintentional, but it can also be deliberate (where a 2nd insurance is arranged incase the 1st insurer was insolvent or unable to pay)
•In some cases, a person may effect insurance without having cancelled a policy which the new contract was intended to replace
•More frequently, there may be some overlap in cover between 2 different types of policy which the insured has a transfer
What are the 5 conditions that need to be satisfied for contribution to arise?
- Each policy is liable for the loss
•Contribution will arise only where both insurers can be called upon to pay under their policies
•Insurers can’t always rely on a breach of condition to deny a claim for contribution - e.g. Legal & General Insurance Society v. Sphere Drake Insurance Co. Ltd (1992) - Each insures the same interest in the subject matter
•The subject matter that’s affected by the loss must be common to both policies, but they don’t need to cover exactly the same subject matter, there just needs to be overlap in what they cover - Two or more policies of indemnity exist
•The contracts must be both in place at the time of the insured incident
•Contribution doesn’t apply in life or other non-indemnity insurances
•E.g. Body Corporate 74246 v. QBE Insurance & Allianz Australia Insurance Ltd - there was actually no overlapping cover, so only 1 insurer paid the claim - Each insures the subject matter of the loss
•There must be a common interest
•Different interests in the same property can exist - there is no double insurance or contribution here
•E.g. North British & Mercantile Insurance Co. v. London, Liverpool & Globe Insurance Co. (1877) - the insurer tried to bring a claim against the merchants’ insurer under contribution, but the claim failed because the interests of the bailee & the owner of the grain were different - Each insures the peril which brings about the loss is
•The range of perils covered doesn’t need to be identical, provided there’s an overlap between the two
What is the operation of contribution at common law?
An insured whose loss is covered by 2 or more policies cannot recover more than an indemnity, but, at common law, they can claim against the insurers in any order & for such proportion of the loss as they think fit
•They may even choose to claim from 1 insurer only & recover in full from that insurer
•Having satisfied the loss, the insurers who pays could then claim a contribution from the other insurer
•Insurers have regarded this as an unsatisfactory state of affairs, as 1 insurer has more of a burden of handling the loss & paying, etc
•So, insurers may include contribution conditions in their policies
What are contribution conditions in insurance policies, in relation to the operation of contribution at common law?
Contribution conditions are a clause that sets out how the loss is to be met if the insured has another policy which covers it
•The effect of the condition will to be to change or override the common law rules
What are 4 types of contribution conditions in insurance policies, in relation to the operation of contribution at common law?
- ‘Escape’ clauses
•This condition forbids the insured from taking out another policy without the consent of the insurers
•The insurance will be avoided if the insured takes out any further insurance on the same risk without notifying the insurers & obtaining their consent
•The clause may state that the insurance will be invalid if the insured already has cover on the same risk with another insurer
•If 2 policies are taken out & both prohibit other insurances, the 2nd policy never operates because of the existing policy in force
•An accidental overlap won’t bring conditions such as this into operation - Other non-contribution clauses
•The clause may state that there will be no liability for any loss which is insured by another policy
•These clauses are valid in law & their effect is to push the whole of any loss onto the other insurer
•The courts have rejected the possibility of the 2 policies cancelling each other out so there’s no cover - E.g. Gale v. Motor Union Insurance Co. (1928): although both policies excluded liability for losses that were insured elsewhere, the judge ruled that the loss should be shared equally by the 2 insurers
•The courts should evoke the equitable principle of contribution between co-insurers to avoid them leaving the insured with no cover as the both excluded liability if they have another insurer
•In some cases, insurers have stated they’ll pay once the cover provided by the other policy has been exhausted - if both policies have a similar wording, the clauses will cancel each other out - ‘More specific insurance’ clauses
•A policy may provide that where a loss is covered by another more specific insurance, the policy will respond only when the cover provided by the more specific insurance has been exhausted - so, it operates like an excess of loss policy
•If a loss is covered by 2 policies, but the range of property covered by 1 is narrower than the other, the former may be regarded as more specific - ‘Rateable proportion’ clauses
•Rateable proportion can be calculated in 2 ways, in the simplest way: (the amount of insurance provided by the policy / the total amount of insurance in force on the property damaged at the time of the loss) x the actual loss incurred
•This type of clause is included in most indemnity insurances, & can be found in conjunction with other contribution conditions
•The clause states that the insurers will be liable for a ‘rateable proportion’ only of any loss that is also insured by another policy
•Purpose: to prevent the insured from recovering in full under a policy that includes the condition
•Both policies would usually carry a clause of this type, so the insured will be obliged to separately claim an appropriate proportion from each insurer
What are the 2 main methods of calculating the ratio of contribution?
Which method is used will depend on the circumstances & the class of business concerned
- The maximum liability method
•Loss is shared by the insurers in proportion to the maximum amount of cover that’s available under each policy - in the case of property insurance, it’s usually equivalent to the sum insured
•But, this method doesn’t lasts operate fairly & it won’t work in some circumstances
-E.g. if the terms & conditions of the policies aren’t the same, this method won’t operate fairly, for example because one policy may have a policy excess
-E.g. if the range of the 2 policies is different, it’ll be difficult to compare the sums insured
-E.g. if 1 policy provides unlimited cover (as in the case of some liability insurances), the method won’t work - The independent liability method
•The liability of each insurer for the particular loss which has occurred is assessed as though its policy were the only one in force
•The figure that results in each case represents the independent liability of the insurer for the loss
•The loss is then shared in proportion to the independent liabilities of the 2 insurers
•E.g. if the loss is 15k
-1st: calculate independent liability of policy A, which is 10k as this is the sum insured
-2nd: calculate independent liability of policy B, which is 15k as the sum insured was 20k
-3rd: the loss is shared in proportion to the 2 independent liabilities - A pays (10k / 25k) x 15k =6k, & B pays (15k / 25k) x 15k =9k
What is the basis of contribution in property insurance?
There is little legal authority on the basis of contribution in property insurance & the choice of method will usually depend on market practice
In property policies that aren’t subject to average & where the subject matter of insurance (the property) is identical, the maximum liability method will normally be used
Where non-average policies are in contribution but they aren’t concurrent (identical), the ratio of contribution is often based on a ‘mean method’
In policies that are subject to average, or where a lower loss limit applies within a greater sum insured, the independent liability method is used to calculate the proportions
•The majority of non-consumer (business) property policies are now subject to average & limits within a greater sum insured
•So, the independent liability method is becoming the most used method
What is the basis of contribution in liability insurance?
It’s established in law that the independent liability method is the proper basis for the calculation of contribution
What are market agreements in relation to contribution?
In some cases, market agreements between insurers will modify the application of contribution itself, this can happen in 2 ways:
1. Insurers may agree to share losses in cases where contribution doesn’t arise in law
•E.g. in fire insurance, where insurers agree to share certain losses where the policies cover the same subject matter against he same period, but not the same interest
2. They may sometimes agree to waive rights of contribution in cases where such a right clearly exists, so that the whole of the loss is borne by 1 insurer
•E.g. in motor market - Gale v. Motor Union Insurance Co. (1928)
The purpose of these agreements is to prevent disputes between insurers & reduce operating costs
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Chapter 1 - Law & Legal Systems52
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Chapter 2 - Law Of Torts23
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Chapter 3 - Law Of Contract22
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Chapter 4 - Law Of Agency19
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Chapter 5 - Insurance Contract Formation & Insurable Interest24
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Chapter 6 - Pre-contractual Information Duty14
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Chapter 7 - Insurance Contracts & Key Terms21
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Chapter 8 - Making The Claim20
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Chapter 9 - Measuring The Loss: The Principle Of Indemnity19
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Chapter 10 - Subrogation & Contribution20
