Subrogation

Subrogation is the right or rights of the insurer to as-sume the rights of the insured. Legal rights or to stepinto the shoes of.[1] Rights of subrogation can arise twodifferent ways: automatically as a matter of law, or byagreement as part of a contract.[2] Subrogation by con-tract commonly arises in contracts of insurance. Subro-gation as a matter of law is an equitable doctrine, andforms part of a wider body of law known as unjust en-richment. Two areas where subrogation is relevant areinsurance and sureties. In each case, the basic premiseis that where one person (i.e. typically an insurer or aguarantor) makes a payment on an obligation which isthe primary responsibility of another party, the personmaking the payment is subrogated to the claims of theperson to whom they made the payment with respect toany claims or remedies which are exercisable against theprimarily responsible party. For example, if a car ownerhas collision insurance coverage[3] on his car and the caris damaged by a negligent third party, and if the car ownerelects to claim under his or her insurance policy, then anyclaimswhich the car owner had against the negligent partywill pass to the insurance company in jurisdictions whichrecognise the doctrine. Similarly, if a father guaranteesthe debts of his son to the bank (i.e. a contract of surety-ship), and the bank elects to call upon the guarantee ratherthan claiming against the son directly, and the father paysout on the guarantee, the father will become subrogatedto the bank’s claims against the son.The doctrine of subrogation can also pass proprietaryrights such as a security interest or claim to ownership ofgoods. If a work of art is stolen, and the insurance com-pany pays out under a policy of insurance to the ownerand the art is later recovered, the art will belong to the in-surance company under rights of subrogation. Similarly,if an insured ship sinks, the rights of salvage will pass tothe insurer if the claim is paid out as a total loss. If a guar-antee is paid out by a guarantor and the bank also held amortgage over the debtor’s home, the guarantor will besubrogated to the bank’s rights as a mortgagee with re-spect to the debtor’s home.In many areas where subrogation arises as a matter of law,subrogation may be limited under the terms of the rele-vant contract. For example, in a contract of guarantee,the guarantee will often provide that the guarantor waivesthe right of subrogation or agrees not to exercise it unlessthe bank has been paid in full. In an insurance contract,in addition to right of subrogation at law, there will oftenbe a right of subrogation bolstered by the insured party’sagreement that the party will provide all necessary assis-

tance to the insurance company in pursuing any subro-gated claims.Subrogation is sometimes misunderstood by lay peopleand criticized on the basis that payment under an insur-ance claim is simply a right based upon the payment ofinsurance premiums, and a belief that they should also re-tain a right to exercise any claims arising from the insuredevent. An insurance contract is a contract of indemnity,however, and to allow a party to receive insurance pro-ceeds and claim against third parties would mean that therecipient might recover more than the total loss. Becausesubrogation operates to prevent such over-recovery, it isconsidered to form part of the general law of unjust en-richment (i.e. preventing a party by being unjustly en-riched by pursuing a claim for a loss in respect of whichthey have already been indemnified).Subrogation is an equitable remedy and is subject to allthe usual limitations that apply to equitable remedies.Although the basic concept is relatively straightforward,subrogation is considered to be a highly technical area ofthe law.

1 Types of subrogation

Although the classes of subrogation rights are not fixed (orclosed), and vary between different legal jurisdictions,types of subrogation are commonly divided into the fol-lowing categories:

1. Indemnity insurer’s subrogation rights

2. Surety’s subrogation rights

3. Subrogation rights of business creditors

4. Lender’s subrogation rights

5. Banker’s subrogation rights

6. Trustee's subrogation rights

Although the various fields have the same conceptual un-derpinnings, there are subtle distinctions between them inrelation to the application of the law of subrogation.

1.1 Indemnity insurer’s subrogation rights

With insurance subrogation, there are three parties in-volved: the insured; the insurer; and the tortfeasor (the

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2 2 REMEDIES

party who is responsible for the damages). Under sub-rogation, the insurance company assumes the right tosue the tortfeasor for the amount of the damages reim-bursed to the insured.[4] An indemnity insurer has twodistinct types of subrogation rights. Firstly, they have theclassic type of subrogation used in the example above;viz. the insurer is entitled to take over the remedies ofthe insured against another party in order to recover thesums paid out by the insurer to the insured and by whichthe insured would otherwise be overcompensated.[5] Sec-ondly, the insurer is entitled to recover from the insuredup to the amount which the insurer has paid to the in-sured and by which the insured is overcompensated.[6]The latter situation might arise if, for example, an in-sured claimed in full under the policy, but then startedproceedings anyhow against the tortfeasor, and recoveredsubstantial damages.[7]

1.2 Surety’s subrogation rights

A surety who pays off the debts of another party is subro-gated to the creditor’s former claims and remedies againstthe debtor to recover the sum paid.[8] This would includethe endorser on a bill of exchange.[9]

In relation to a surety’s subrogation rights, the surety willalso have the benefit of any security interest in favour ofthe creditor for the original debt. Conceptually this is animportant point, as the subrogee will take the subrogor’ssecurity rights by operation of law, even if the subrogeehad been unaware of them.[10] Accordingly, in this areaof the law at least, it is conceptually improbable that theright of subrogation is based upon any implied term.

1.3 Subrogation rights against trustees

A trustee of a trust who enters into transactions for thebenefit of the beneficiaries of the trust is generally enti-tled to be indemnified by the beneficiaries for personalloss incurred, and has lien over the trust assets to securecompensation. If, for example, the trustee conducts busi-ness on behalf of the trust and fails to pay creditors, thenthe creditors are entitled to be subrogated to the personaland proprietary remedies of the trustee against the ben-eficiaries and the trust fund.[11] Where under the termsof the trust instrument the trustees are permitted to tradein derivatives as part of the trust’s investment strategy,[12]then the derivatives document will also normally containa subrogation clause to bolster the common law rights.

1.4 Lender’s subrogation rights

Where a lender lends money to a borrower to dischargethe borrower’s debt to a third party (or which the lenderpays directly to the third party to discharge the debt),the lender is subrogated to the third party’s former reme-

dies against the borrower to the extent of the debtdischarged.[13]

However, if the original loan was invalid (because, forexample, it was ultra vires the borrower) then the lendergenerally cannot enforce the third party’s claim againstthe borrower as this would indirectly validate an invalidloan.[14] Nonetheless the claim can subsist insofar as theunlawfully borrowed money was used to discharge lawfuldebts, by inferring the legality of the use of the funds tothe right of subrogation.[15] The law in this area has beensubject to conflicting decisions.[16]

1.5 Banker’s subrogation rights

Where a bank, acting on what it believes erroneously tobe the valid mandate of its client, pays money to a thirdparty which discharges the customer’s liability to the thirdparty, the bank is subrogated to the third party’s formerremedies against the customer.[17]

2 Remedies

In Lord Napier & Etterick v Hunter [1993] 2WLR 42, theHouse of Lords confirmed that an (indemnity) insurer’ssubrogation rights dictate that in a claim against the as-sured (for damages personally recovered by the assured)the insurer is not limited to a simple personal remedy; theinsurer also has the benefit of an equitable lien over thedamages received by the assured in respect of the insuredloss. That case also controversially held that in workingout the compensation to which the insurer is entitled theassured cannot be said to have first recovered the wholeof his uninsured loss, and must instead be considered tohave owed foremost the excess agreed.Subrogation can thus in rare instances deprive the con-sumer of the benefit of the Make Whole Doctrine, theright of an injured party to recover full damages. Thisabrogation of Make Whole doctrine puts the insurer inthe position of having first claim to an at-fault party’s as-sets, even if the assured is left with reduced damages fromthe insurer as a result (see Northern Buckeye vs Lawson -2004).[18] In other words, the law’s intent to prevent dualrecovery by the assured can lead to less-than-equitablerecovery (see Roger Baron).In the cited case, the Ohio Supreme Court ruled that thelanguage of the assured’s insurance contract overruledOhio’s statutory default Make-Whole Doctrine. For thisreason, an insured client needs a full awareness of subro-gation clauses in their insurance contracts, including in-surance provided by employers, fraternal organizations,etc.

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3 References

[1] “What is SUBROGATION?". Retrieved 2013-01-31.

[2] “Legal definition of subrogation”. thefreedictionary.com.Retrieved 2013-01-31.

[3] http://www.irmi.com/online/insurance-glossary/terms/c/collision-insurance.aspx

[4] “Subrogation and Insurance Claims”. Adjusting Today.

[5] Mason v Sainsbury (1782) 3 Dougl KB 61; Morris v FordMotor Co [1973] QB 792

[6] Castellain v Preston (1883) 11 QBD 380; Re Miller, Gibb& Co [1957] 1 WLR 703

[7] In practice there are many reasons why an insured may dothis; to recover a related uninsurable loss, to establish adefence to other claims against the insured. However, ineach case the law requires them to return the amount ofany compensation received in respect of which they havealso received insurance payments to the insurer.

[8] Forbes v Jackson (1882) 19 Ch D 615

[9] Duncan, Fox & Co v North and South Wales Bank (1880)6 App Cas 1

[10] Charles Mitchell, The Law of Subrogation, ISBN 0-19-825938-7

[11] Re Johnson (1880) 15 Ch D 548; Re Oxley [1914] 1 Ch604

[12] Inmost jurisdictions the trustees would be prohibited fromsuch risky investments by law unless expressly empoweredby the trust instrument.

[13] Butler v Rice [1910] 2 Ch 277; Ghana Commercial Bankv Chandiram [1960] AC 732

[14] Sinclair v Brougham [1914] AC 398; much criticised onthis point.

[15] Orakpo v Manson Investments Ltd [1978] 95, per LordGoff

[16] For example, in Nottingham Permanent Benefit BuildingSociety v Thurstan [1903] AC 6 the House of Lords heldthat a building society could be subrogated to an unpaidvendor’s lien in respect of an unlawful loan to an infant topurchase land.

[17] B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB48

[18] http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2004/2004-ohio-4886.pdf

4 External links• NASP (National Association of Subrogation Profes-sionals)

• Subrolitigators - America’s Subrogation CounselRegistry

• Northern Buckeye vs Lawson - 2004

• Waiver of Subrogation

4 5 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

5 Text and image sources, contributors, and licenses

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