The doctrine of subrogation is a doctrine which is commonly used in the insurance industry. The following discussion defines what subrogation is, where it applies, how the recoveries can be shared between the insured and the insurer as well as limitations to successful recovery.
WHAT IS SUBROGATION?
Subrogation is defined as the right of an insurance company to get back the money that it pays as compensation to someone with an insurance policy (insured) from the person responsible for the loss, injury, or damage (third party).
For example, say A’s car has been damaged in an accident which was caused by negligence of another driver, B (third party) and A has a motor vehicle policy which covers accident damages. A has two options of recovering the loss – either through his/her own motor vehicle policy or suing B for the damages caused.
From the above example, once B receives indemnity from the insurer, his/her right to recover from B falls away. If B receives money from A after receiving compensation from the insurance company, he/she would have to pass on whatever the amount received to the insurance company.
The mischief intended to be cured by the doctrine of subrogation is to prevent the guilty party from being let off the hook and ensure that they do not escape their financial responsibilities simply because someone has been clever enough to arrange the insurance policy.
This position was also emphasised in the case of Castellain v Preston (1883) where Brett, LJ said that, subrogation is a doctrine in favour of the underwriters or insurers in order to prevent the insured from recovering more than a full indemnity.
In the Castellain case mentioned above, the insured contracted to sell immovable property. A fire occurred and the insured sustained a loss. The insurer was not aware of the contract of sale and paid the claim for the fire loss. The purchasers also paid the purchase price. The insured thus received an amount in excess of his loss, a move contrary to the principle of indemnity.
Subrogation only applies on indemnity contracts such as fire, motor vehicle insurance just a few to mention and does not apply on non-indemnity insurance such as life insurance and personal accidents.
HOW DOES IT OPERATE?
The corollary of the doctrine of subrogation is to prevent the insured from making a profit through double indemnity so the insurer may not in turn make a profit from exercising any rights. This doctrine can operate in two ways; firstly, the policyholder may have managed to recover twice for the same loss by collecting compensation from both the third party (tortfeasor) and the insurer.
Secondly, it can also operate in a situation whereby the policyholder has not received compensation from the third party. The insurer who has indemnified the policyholder for the insured loss may sue the third party who is legally responsible for the loss.
The insured must have been indemnified for an insurer to exercise subrogation rights. In Scottish Union and National Insurance v. Davies (1970),the insurers paid 409 pounds to motor vehicle repairers who had carried out repairs on the insured’s car. However, even though three attempts had been made to repair the car, the work was not satisfactory, so the insured sued the person who caused the damage and recovered 350, which he used to get the work properly done. the motor insurers attempted to claim this 350 by way of subrogation but failed because the repairs they had paid were useless and no satisfaction note had been duly signed by the insured. The court held that the insurers were not entitled to recover the 409 pounds which they had paid.
However, the fact that for the principle of subrogation to apply the insured must be indemnified first is not a hard and fast rule, because the insurers now tend to incorporate a condition which enables them to commence their recovery proceedings against a third party before they have paid out the insured’s claim.
HOW CAN IT BE ENFORCED?
As long as the insurers have compensated the insured for the loss suffered, and the insured has not yet enforced his available rights against the third party, the insurers may step into the shoes of the insured and enforce any right of action at the insured’s disposal to mitigate the loss insured against. It is also important at this juncture to note that, whatever action the insurer might pursue must be in the name of the insured. Legally it is regarded as the insured’s own action despite the fact that it is the insurers who will have the benefit of it.
For the insurer to effectively enforce this doctrine of subrogation, it needs the cooperation of the insured. The insurer’s right to recover from the third party can be seriously frustrated by the delay or some actions taken by the insured. So, to fill that gap, insurers normally include a subrogation clause in non-marine policies to allow them to institute proceedings against third parties before they settle the insured’s claim. Hence the insurers will become a dominant litigant.
HOW CAN THE RECOVERIES BE SHARED BETWEEN THE INSURED AND THE INSURER?
The sharing of whatever amount recovered from a third party depends on two factors:
- The amount recovered in relation to the loss and
- Whether the insurer covers the loss in full
Usually, the amount recovered from the third party will be exactly the same as the loss suffered by the insured. In this case, there would be no difficulties in sharing the money recovered because the whole of the loss suffered will be borne by the third party.
Secondly if there is surplus after the insurer has recovered their money, the insured is entitled to keep the surplus. Just like the insured who is not allowed to be paid more than loss suffered, the insurer as well is not entitled to recover more than it has paid out. This position was confirmed in the case of Yorkshire Insurance Co. Ltd v Nisbet Shipping Co. Ltd (1962). In this case, insurers had paid an agreed value of $ 72 000 for the loss of a ship in a collision in 1945. The insured sued the Canadian Government, who owned the other ship, and damages of $ 75 000 were awarded. This sum was converted into Canadian dollars at an exchange rate prevailing in 1945. However, when the dollars were converted into sterling, they produced $126 000, because the pound had been devalued in 1949. It was held that the insurers were entitled to $ 72 000, only the sum they had paid out. The insured thus benefited from $ 55 000 surplus. This case confirmed the position that, an insurer can never recover more by way of subrogation.
Like any other rule of law, there are exceptions. The insurer can recover more than they have paid under abandonment and salvage clauses. Abandonment is a clause in insurance contract which allows the property owner to abandon lost or damaged property and claim full indemnity. Salvage on the other hand means that once a claim for damaged property has been settled, the insurer usually offers the damaged property for commercial sale to mitigate its loss. Hence abandonment and salvage give the insurer the option to rightfully claim an insured property that has been destroyed and subsequently abandoned by its owner and the selling price can actually exceed the amount paid out as settlement.
Apart from that, the insurer can indicate in their contracts that the insured shall assign to them any of their right of recovery against a third party or persuade the insured to assign the right after a loss has occurred.
Recovery from the third party could also be less than that has been suffered by the insured. For instance, if the third party is insolvent or unable to pay. In the event that the insurers have paid the whole loss they will obviously be entitled to keep the whole of the sum that has been recovered
LIMITATIONS TO SUCCESSFUL RECOVERY
There are a number of factors which can actually prevent the insurer from a successful subrogation result. It is the duty of the subrogation team to have all necessary evidence at their disposal to make a convincing argument as to how claim facts warrant recovery from the negligent third party or tortfeasor.
The following are some of the factors which can prevent the insurer from a successful recovery:
1. Lack of cooperation by the insured.
The insured is expected to fully cooperate with the subrogation team of the Insurance company. It is the duty of the insured to disclose any useful information as well as provide material documents to enable successful subrogation. Sadly, some insureds tend to be uncooperative mostly because they are not well versed with claim processes. Hence there is need for the insurer to educate the insured about subrogation so that they can gain their trust whenever the need to exercise such right arise.
2. Lack of communication between insured, claims and subrogation teams.
There is need for open and frequent communication between the insured, claims adjuster and the subrogation team. This will usually help the subrogation team recover the loss timeously.
The claims adjuster should be diligent in his or her investigation so that the evidence forwarded to the subrogation team is useful. It is prudent for the claims adjuster to forward all the gathered information including that of witnesses as well as his or her opinion on the likelihood of potential recoveries.
3. Independent adjuster reports that do not address subrogation.
In most instances involving loss adjustments, an adjuster is at the scene of the loss and can be a tremendous help in addressing potential subrogation, obtaining witness statements or encouraging the insured to retain and protect the evidence until contacted by the carrier or recovery personnel.
4. Lack of supporting evidence.
It is trite at law that for any claim to succeed, the claimant must adduce evidence in support of the claim. Documentary evidence such as witness statements, expert reports, police report, etc., plays a pivotal role in making a claim. Lack of such evidence will greatly affect the recovery process.
5. Distorted evidence.
Sometimes policyholders or third parties temper with evidence out of ignorance. Some might think they are not doing damage whilst they are destroying the evidence. There is therefore need for the parties to protect the scene and allow professional adjusters to inspect for successful recovery.
6. Statute expiration after or just prior to subrogation referral.
It is important for the subrogation to be conversant with laws relating to civil litigation, especially the Prescription Act which provides timelines for the claimant to institute legal proceedings against the defendant (third party), for example 3 years from the date the cause of action arose. Failure to institute proceedings within the stipulated time will render the claimant statute barred. Timeframe for prescription varies from jurisdiction to another.
7. Subrogation waiver by contract.
Waiver of subrogation provisions found in contracts are generally upheld by the courts. However, it is always best to have the contract reviewed by subrogation counsel to confirm its legality. Incurring the additional legal expense to do so is highly commendable investment.
There are challenges to successful subrogation, but the rewards for the insurance carrier include improved financial stability, proper allocation of insurance premiums, better underwriting processes and increased custom satisfaction — all of which are worthy endeavours.
- Patrick Mashiri is a registered legal practitioner at Makiya and Partners
- Patrick can be contacted for feedback @ email@example.com and WhatsApp +263777462644