- The Doctrine of Subrogation
When an insured person suffers a loss he will be entitled to money from the insurance claim and may also be entitled to sue anyone responsible for the loss and claim damages. Where an insurer has paid the claim, the law has long recognised the interests of the insurer in any right of action accruing to the insured person to enable the insurer to claim back the whole or part of the sum paid out under the policy. See, Castellain v Preston (1883). Therefore, the law allows the insurer to commence legal action in the name of the insured against the 3rd party wrongdoer. Subrogation is a corollary of the principle of indemnity and since an insured cannot recover more than full indemnity, the insurer cannot also recover more than the amount of the claim paid. Nevertheless, the insurer must bring the action for the whole loss and not only for the amount to which they are entitled. See, Yorkshire Insurance v Nisbet Shipping (1962).
In Midland Galvanising v Comet Shipping (2014), Iyizoba JCA referred to following passage from Templeman on Marine Insurance 6ed at page 451 on the meaning of subrogation,
“Subrogation is the right by which an underwriter, having settled a loss, is entitled to place himself in the position of the assured, to the extent of acquiring all rights and remedies in respect of the loss which the assured may have possessed, either in the nature of proceedings for compensation or recovery in THE NAME OF THE ASSURED against third parties, or in obtaining general average contribution.”
- Restriction on subrogation rights
Furthermore, the insurer’s subrogation rights are confined to the rights of the insured including any contractual or statutory exclusion or limitation of liability. This can also arise where the action is statute barred or time barred, or where the liable 3rd party is bankrupt or liquidated. The insurer who brings an action against a 3rd party is also bound by a finding of contributory negligence against the insured.
Restriction on the subrogation rights of an insurer can also arise from a procedural defect caused by the insured. In British India General Insurance v Kalla (1965), the Supreme Court held that an insurer could not prosecute an appeal which the insured had abandoned. In Chubb Custom Insurance v Space Systems/Loral (2014), the Federal Supreme Court of the United States affirmed the decision of the Court of Appeal which held that the insurer lacked standing to bring a subrogation suit under Comprehensive Environmental Response Compensation and Liability Act (CERCLA) because the insured had not made a written demand for a sum certain to the allegedly liable party as required by the CERCLA statute.
- Letter of Subrogation or Subrogation Condition
Recently, in Midland Galvanising v Comet Shipping (2014), the insurer brought the action in the name of the insured against the shipping agent for damage to cargo. One issue which arose for determination was whether the insurer could bring the action in the name of the insured in the exercise of its subrogation rights. The trial court was of the opinion that if there was subrogation of the plaintiff’s claim then the insurer should have instituted the action in its own name. None of the parties raised this issue but it was raised by the trial judge suo moto. The trial judge said that he had no precedent before him suggesting that this was either industry or indeed acceptable legal practice, yet he did not ask both counsel to address him on the point. The Court of Appeal, per Iyizoba JCA held as follows,
“From all indications, if the learned trial Judge had called on the parties to address him on the new issue he raised suo motu, he surely would have come to a different conclusion on the right of the appellant to institute the action. This is because the authorities suggest that when there is subrogation, a suit in court must be instituted in the name of the insured and not in the name of the insurance company as there is no privity of contract between the insurance company and the defendant.”
The subrogation condition in the insurance policy usually affirms the position at common law and equity and only permits the insurer to bring an action in the name of the insured. On the other hand, a letter of subrogation may assign the rights of action of the insured to the insurer. Upon payment of the claim the insurer receives from the insured a signed discharge voucher. In addition, some insurers also insist on a Letter of Subrogation signed by the insured which may assign the insured rights of action and authorise the insurer to proceed directly in the name of the insurance company against any 3rd party wrongdoer.
The question is whether such a letter of subrogation actually constitutes a valid and effective assignment to the insurer of the insured rights of action against 3rd parties. Judicial authorities are not unanimous on the point. In Chellarams v N.N.S.L (1974), the State High Court held that the letter of subrogation signed by the insured had assigned the right of action and the insurer could only bring the suit in its own name. On the other hand, in Prestige Assurance v Ostfriesland (1995), the Federal High Court held that the letter of subrogation signed by the insured was not a formal assignment of the right of action and the insurer could not bring the suit in its own name. See, Omo-Eboh, Law of Insurance Contracts in Nigeria, 1st ed. (2012) for more cases on this point.
- Sub-Contractors & Co-insured
The general principle is that an insurer cannot be subrogated against its own insured. Therefore, one defence to a subrogation claim is that because the 3rd party is a co-insured, the insurer cannot subrogate against a negligent co-insured. Where the wrongdoer is a sub- contractor and co-insured and the loss is covered by the policy, the courts have held that the insurer cannot exercise subrogation rights against them. In Petrofina v Magnaload (1984) the main contractor took out a policy which also covered the sub-contractors. After paying the claim the insurers brought an action against the negligent sub-contractor. The court held that the insurers could not exercise subrogation rights against the sub-contractor as they were co- insured. See also, Stone Vickers v Appledore Ferguson Shipbuilders (1991) and National Oilwell v Davy Offshore (1993) Cooperative Retail Services v Taylor Young Partnership (1990) HL.
In Commonwealth Construction v Imperial Oil (1977), the Supreme Court of Canada held that sub-contractors who are not specifically mentioned but described and covered under the policy are protected from subrogation proceedings. Such a sub-contractor had an insurable interest in the project and therefore the insurer had no right to subrogate against that sub-contractor notwithstanding any actionable negligence. In Gard Marine & Energy v China National Chartering (2015), the Court of Appeal in England stressed the importance of interpreting the underlying contract between the parties to establish if there was an intention that the insurance was for their joint benefit. If there was such an intention, then it meant that the parties had agreed to an insurance solution without rights of subrogation.
5. Tenancy & Fire Policies.
It is now settled that when a landlord takes out a fire policy and the tenant pays the premium, the tenant should benefit from the insurance. Therefore, where the tenant was responsible for the fire, the landlord cannot sue the tenant and the insurer cannot bring an action against the tenant. In Mark Rowlands v Berni Inns (1986), the premises were destroyed by fire due to the tenant’s negligence and the insurer brought an action against the tenant. The lease contained a provision stating that the landlord had an obligation to insure the premises and the tenant was obliged to pay money to the landlord for the premium. The landlord had taken out an insurance policy over the premises, which did not name the tenant. The Court of Appeal in England held that the policy taken by the landlord was intended to be for the benefit of the tenant and as such the landlord could have no further claim against the tenant. See also, Weide v Hashim Transport (1968) and Sule v Norwich Union (1971).
In The Eaton Company Limited v Albert Smith (1978), a landlord’s insurer sought to recover in respect of a fire caused by a negligent tenant. The lease provided that the landlord would keep the buildings insured against loss by fire but the obligation to repair rested upon the tenant. The Supreme Court of Canada held that the landlord and tenant had entered into a contract in which the landlord had agreed to provide fire insurance in lieu of its right to sue and the insurance money was the only source of compensation that the landlord could look to in the event of loss. Therefore, the landlord and its insurer could not shift the loss to the actual wrongdoer. See also, Agnew-Surpass Shoe Stores v Cummer-Yonge Investments (1976), Greenwood Shopping Plaza v Beattie (1980).