SUBROGATION

INTRODUCTION

The principle of subrogation plays an important role in the operation of insurance contract. It has been said earlier in this book that essence of insurance is to put the insured back to the position he was before a loss. That implies that the insured is not expected to enjoy anything more than what he enjoined before the loss. The principle of subrogation ensures that the insured receives an exact financial compensation for a loss sustained which was caused by the action of another person.

The Principle of Subrogation tends to answer questions like what happens to the remnants of the subject matter after it has been indemnified by the insurer? Is the insurer entitled to recover the remnant of the subject matter when somebody else compensates the insured after receiving indemnity from the insurer? What right does the insurer have against the third party that is liable to the loss suffered by the insured?

Upon the happening of a loss, if the insured has an alternative right or remedy which may rise in contact, or status, he can recover from all sources, but he cannot retain more than his actual financial loss or indemnity within the limits of his policy of insurance. If he has been indemnified by his insurer, then the insurer becomes entitled to the alternative right and remedies. That is, the insurer stands in place of the insured and is entitled to avail himself of those rights and remedies but only up to the amount of the indemnity paid to the insured.

This principle is to ensure equity. It prevents a third party from running away from his responsibility because an insurer has compensated the insured. It also prevents the insured from making money from the insurer after he has been compensated by the third party that caused the loss.

 

MEANING OF SUBROGATION

This is an area of indemnity that allows one person to stand in the place of another and avail himself of all rights of that other person.

This doctrine was vividly elaborated by the fact of BURNAD VS RODACANACH (1882) when it was stated that “the general rule of law is when there is a contract of indemnity and a loss happens, anything which reduces or diminishes the amount the insurer is bound to pay, and if the insurer has already paid it, then if anything which diminishes the loss comes to the hand of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to the recouped by having the amount back”.

In the case of Castellian V Preston (1883) it was stated that: “A person who wishes to recover for, and is paid by the insurer as for a total loss cannot take with both hands. If he has a means of diminishing the loss, the result of the use of those means belong to the insurer”.

The essence of this principle is to let an insured be aware that he can recover from a source in addition to his recovery from his insurer. But whatever the recovery is, it will also be recovered and held in trust for his insurer who has already provided an indemnity.

For example, suppose Ngaka has a car and Nwachukwu also has a car and both cars were insured under a comprehensive policy with their respective insurers. Both cars were involved in an accident. Njaka was responsible for the accident. Nwachukwu insured with Union Life and Fire Insurance Plc while Ngaka insured with Nico Insurance Plc.

To get compensated for his damaged car, Nwachukwu has two options. He either claims from his insurance company or from Ngaka. If he decides to claim from his insurance company, his insurer has the right to recover from Ngaka. In this case, Nwachukwu is not paid twice for the same damage.

 

HOW SUBROGATION RIGHT ARISES

Subrogation case may arise through the following ways:

1) Through torts: A tort is a civil wrong, negligence, a nuisance, trespass. Example of this could be found in fire insurance where a painter failed to take adequate care when using a blow lamp and set fire to the premises of the insured. A motorist driving negligently may hit and damage a building. These two events are caused by third party and these losses are still insurable. Where an insured has received indemnity by third party, the insurer has the right to subrogate.

 

2) Through contract: The right to subrogate under this is possible in any of the following circumstances:

• Where there is a contractual right to compensate regardless of fault.
• Where it is the custom of the trade to which the contract applied and imposition of the responsibility on the bales.

Let us look at this example for better understanding of subrogation arising out of contract:

Goods damaged while in custody of carrier; the contract of carriage will automatically involve the carrier in some liability for damage to goods in his custody,irrespective of negligence.

 

3) Tenant agreement: Tenants do make a binding agreement with the landlord at the time of taking the apartment, that the tenant will repair any damaged property caused by him. Such was the situation in Darell V. Tobbit (1880), where the owner recovered cash from his insurer and had the same damage repaired by the tenant. It was held that the insurers were held to have their money back.

 

4) Through statues: These are rights made possible by certain statutes which provide financial compensation for whoever sustains damage through some action. For example, the local police activities are responsible for peace and order within their jurisdiction. Where riot damage has been caused, an insurer who made payment in respect of such damage has the right to recover against the police.

 

5) Through subject matter of insurance: The insurer has the right to take the salvage, having paid indemnity to the insured on total loss basis. If the salvage is left for the insured, it will enable him to receive more, in addition to his full indemnity from the insurer. For example the remains of insured vehicle, machineries or stock damaged by insured perils are left to the insurer after the indemnity has been given to the insured. The salvages are disposed off by the insurer which is assumed as exercising their subrogation rights.

 

WHEN SUBROGATION RIGHT ARISES

In common law, the right to subrogate does not arise until the insurer has compensated the insured for the loss. In practice of insurance, where it was discovered that there is delay in reporting claim and the settlement procedure might be an advantage to a negligent third party, since the insurer would not have got complete control from the date of the loss and their eventual position could be prejudiced by the delay. In order to avoid being prejudiced, the insurer introduces policy condition, so as to assure the position of the insured before the claim is settled. Although the insurer cannot make any recovery from third party before the claim is settled but he can hold the third party into ransom, pending the time when the claims is settled, due to an express condition. Whether an express subrogation condition appears on a policy or not, any action must be taken in insurer’s name.

 

MODIFICATION IN THE OPERATION OF SUBROGATION

The principle of subrogation is subject to the following modification. At common law, the right to subrogate is vested on the insurer after he has indemnified the insured. Sometimes it happens that the exercise of subrogation involves a payment by another insurer, the insurer involved may agree to waive all subrogation right against each other. This saves considerable time and expenses in arguing over liabilities of respective insured and the “swings and roundabout” theory ensures that an insurer with a substantial portfolio will not be unduly prejudiced by this arrangement, in that, the right he forsakes are likely to be balanced by claims not pursued against him.

1) Knock to knock agreement: The basic principle here is that no insurer will exercise subrogation rights against another insurer with whom he has such an agreement. It is strictly an inter-company agreement and it should not in any way be benefit or prejudice the position of respective insured. They still possess their full common law rights and they may proceed with claims against the other motorist or any other party they consider at fault in an accident.

 

2) Third party sharing agreement: This is a situation where two motorists are involved in an accident and third parties are insured, the insurer will ignore the question of blame for the accident and settle the third party claim on an equally shared basis.