Understanding the doctrine of subrogation is key to pursuing successful recovery actions. Especially when there are plenty of aspects you, as an insurer, must take into account:
- The basis of subrogation in different jurisdictions.
- The steps to take over the rights and remedies of the assured.
- The distribution of recovery in case of partial indemnity.
- Defences available to third parties.
In this post, we’ll delve into the concept of subrogation, how different jurisdictions approach it, and the duties and obligations it confers upon the insurer and insured. Let’s start by looking into…
What subrogation means
When an insured loss occurs, the assured may be indemnified if their claim:
- Falls within the scope of the insurance policy.
- Is caused by a third party’s wrongful act (i.e., either in contract or in tort).
This could result in an overcompensation, with the assured being unjustly enriched at your expense.
That’s where the doctrine of subrogation steps in. The purpose behind it is to diminish or extinguish the loss you’ve sustained.
So, after paying for your assured’s loss, you’ll be allowed to recoup the benefits of all their rights against the third party.
Now, how does subrogation work when there’s a liable wrongdoer?
Contract
Imagine the goods insured are lost while in custody of a bailee (e.g., a carrier). Under the contract of bailment, you’ll be able to initiate recovery action against the bailee.
Tort
Take a collision between two vessels where the other vessel is to blame. After paying your assured’s loss, you may sue in tort against the vessel at fault.
How does the approach to subrogation change in different jurisdictions?
In Common Law jurisdictions, the right of subrogation entitles you to “step into the assured’s shoes”. That is, you’ll pursue recovery against the liable third party in the policyholder´s name.
However, in Roman Law jurisdiction, subrogated claims can be presented in your own name.
Another difference between both jurisdictions is that they set different limitation periods to take action against the wrongdoer.
The question of when insurers may commence recovery proceedings also varies from jurisdiction to jurisdiction. Certain legal systems require an insured to be fully indemnified, whereas others allow insurers to pursue partial recoveries once partial indemnities have been paid.
Regardless of the applicable jurisdiction, there are 3 points you should take into account to ensure a successful recovery:
1. Subrogation title
Ask the insured for a Letter of Subrogation before the claim is settled, where they authorise you to pursue recovery on their behalf.
2. Proof of damages
Provide documental or witness proof to sustain your recovery claim.
3. Proof of payment
The precondition of subrogation is you must have paid the indemnity to which the assured is entitled under the policy.
Which rights are available to you under the doctrine of subrogation?
Section 79 of Marine Insurance Act 1906 (MIA) confers upon the insurer 3 categories of rights:
1. Right to take over the subject-matter of the insurance, in the case of a total loss (section 79(1) MIA).
This is often referred to as the principle of “salvage”.
In the event of a total loss, the assured can’t claim both for a full indemnity and to retain the remains of the subject matter. Otherwise, they’d be in a better position than they were before the casualty.
As a result, the assured will hand over to the insurer the salvage after receiving payment.
Having said this, it’s arguable whether salvage rights fall within the scope of subrogation. Salvage deals with physical items remaining once the assured has been paid, while the doctrine of subrogation focuses on legal rights of the assured against third party.
2. Rights of action against third parties (section 79(2) MIA).
You can only exercise the rights that would be available to the assured. Meaning an insurer can’t benefit from subrogation by filing a suit against a third party if the assured had no rights of action.
3. Right to use any benefit received by the assured in respect of their loss to diminish the indemnified loss (section 79(2) MIA).
If the assured receives any benefit that reduces their loss prior to getting the insurance indemnity, they’ll only be entitled to recover from you the net loss (i.e., after deducting the benefit received).
The assured’s duty: protecting recovery rights
The Duty of Assured Clause in the Institute Cargo Clauses states that:
It is the duty of the Assured and their employees and agents in respect of loss recoverable hereunder to take such measures as may be reasonable for the purpose of averting or minimizing such loss, and to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised and the Insurers will, in addition to any loss recoverable hereunder, reimburse the Assured for any charges properly and reasonably incurred in pursuance of these duties.
Along the same lines, the International Hull Clauses state in Clause 49.1 that:
The Assured shall… take reasonable steps to… protect any claims against such third parties if necessary by the commencement of proceedings and the taking of appropriate steps to obtain security for the claim from third parties.
This imposes a duty on the insured to take all measures to protect your rights by:
Lodging monetary claim to the wrongdoer.
This is a formal notice where the insured demands payment for losses. If the quantum of loss hasn’t been determined, the estimated loss value should be indicated.
Filing suit
If the third party doesn’t pay for damages, the insured has to file a recovery suit within the limitation period (after having obtained your consent).
If the assured doesn’t fulfil their duty and prejudice your rights of subrogation, you may be entitled to damages for breach of implied terms.
Final thoughts on subrogation and recovery actions
There’s more to subrogation than meets the eye. For one thing, you may be dealing with jurisdictions with different legal systems, which may result in uncertain outcomes.
Besides, you can’t forget that your insured may have little interest in recovery litigation. Think about it…
You’ve already indemnified them under the insurance policy. And the third party at fault is a supplier with whom they have a business relationship they want to safeguard.
That’s where having a team of lawyers whose core expertise is subrogated recovery can give you the upper hand. We’ll find the legal leverage needed to encourage your insured to cooperate with the recovery proceedings.
