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10 - Subrogation and contribution (When contribution arises (Common peril,…
10 - Subrogation and contribution
Subrogation
Right of an insurer who has indemnified an insured to recover all or part of payment from TP
Insured can...
Claim against TP insurer
Claim against own insurer who will then subrogate against TP insurer
Can't receive compensation from own insurer and TP
If claim piad, any compensation from TP is owed to the insurer
Market agreements
Way in which ratio of contribution is calculated often based on market practice rather than legal rules
Market agreements between insurers can modify application of contribution itself
May agree to share loss where contribution doesn't strictly arise in law
Contribution rights may be waived so that whole of loss is borne by one insurer
Intended to prevent disputes between insurers and reduce operating costs
UK fire insurers have agreed to share certain losses where policies cover same subject matter against same peril, but not necessarily same interest
Operation of subrogation
Recovery for same loss twice
Insured must be indemnified
Insurer can only claim money back if their payment fully indemnified insured
Polic may be subject to deductible or there could be underinsurance
Gifts
Insured may receive voluntary payment from someone other than wrongdoer after loss
Insurer cannot claim for this if intended to be for sole benefit of insured
Insured could have received claim payment from insurer and compensation from TP
Insured must pay back to insurer any profit made from
double recovery
Insurer can secure injunction from court to order money to be paid back
Insurer action against TP
One action only
Action must be for whole loss of insured not just portion borne by insurer
Time when rights arise
Common law states insurer must indemnify insured before they can claim subrogation rights
Ability to recover could be seriously prejudiced by any delay by insured
Non-marine contracts contain express subrogation clause which allows insurer to begin proceedings against TP before indemnifying
Gives insurer right to control proceedings
Insured can't bring action against TP themselves
Insured cannot waive rights or make compromise
Action in name of insured
Legally regarded as insured's own action however will be for benefit of insurer
Sharing the recovery
Recovery greater than loss
Insured entitled to keep any surplus once insurer have received what they paid out
Insurer can't recover more than they paid out
(Nisbet principle)
Insurer can bypass this if express term assigns right of recovery exclusively to them
Recovery less than loss
Could happen if TP is insolvent and unable to pay
Insurer entitle to keep whole of recovery if they have paid whole of loss
Insured may have paid excess but insurer may still not have received the entirety of their payment back
Insurer can keep whole of recovery if amount is less than what they paid out
Could be case with excess or underinsurance
Insured allowed to deduct from, any amount to which insurer is entitled by subrogation, any expenses incurred attempting to recover loss
Recovery equal to the loss
Whole loss borne by TP and therefore no diificulty with making sure money goes to correct party
'Ex gratia' payments
Subrogation only arises from payments made under terms of policy
Payments made by insurer as a favour cannot be subrogated against a TP, as they are not legally obliged to pay
Insured allowed to keep any compensation from TP after 'ex gratia' payment
Nature of subrogation
Indemnity policies only
Subrogation is a corollary of indemnity and therefore doesn't apply to non-indemnity contracts, e.g. life and personal accident
Prevention of 'unjust enrichment'
Prinicpal of equity decided by
Castellain vs Preston (1883)
Contribution
Double insurance
Creates possibility of insured making a profit beyond indemnity
Could be fraudulent but more likely to be unintentional
May have forgot to cancel policy or have two policies which overlap
Camera could be covered as personal effect under motor policy, household contents policy or travel policy
Right of an insurer to call on others similarly, but not necessarily equally, to share in a loss
Only applies to contracts of indemnity
Person can buy as many life policies as they wish and each insurer must pay in full
Operation of contribution at common law
Contribution conditions
Other non-contribution clauses
May not prohibit another insurance policy but state insurer is not liable for loss insured on other policy
Both policies could have this
Gale vs Motor Insurance Co (1928)
Loss should be shared equally by the two insurers
Insurer may remove liability for amount insured elsewhere, but agree to pay excess beyond this
'More specific insurance' clauses
Cover may only respond when 'more specific insurance' has been exhausted
Acts like 'excess of loss' policy
Cover will be seen as more specific if it identifies and describes subject matter more precisely
'Escape' clauses
Effectively forbids insured from taking out another policy without consent
Policy avoided if done without consent
May also state cover is invalid if they already have cover with another insurer
'Rateable proportion' clauses
Now included in virtually indemnity insurance contracts
Insured will be obliged to separately claim an appropriate amount from each insurer
Used to set out how loss is to be met if there is more than one policy
Insured with two or more policies cannot recover more than indemnity
Can claim against any insurer in any order and for such proportion of loss they see fit
If one insurer pays in full, they can then asked for contribution from other insurers
Source of subrogation rights
Statute
Riot Compensation Act (RCA) (2016)
Right of property owners to recover damages from police authority
Right assumed by insurer who pay claim then sue police authority in their own name
Contract
If insured has alternative right of contractual recovery, insurer will be able enforce this for their own benefit
Marine insurers will have rights against carrier who has damaged shipper's cargo
'Hold harmless' clauses
Modification or denial of subrigation rights
Market agreements
As long as both parties are insured, insurers will often waive subrogation rights against each other
'Knock-for-knock' agreements'
Can often become pound swapping exercise
Avoid wasteful and expensive litigation
Immobile property agreements
Cover impact damage by motor vehicles on buildings
Loss shared in pre-determined proportion
Lister vs Romford Ice and Cold Storage Ltd (1957)
Insurers don't pursue recovery against persons who negligently injure their fellow employees
Contractual waiver
Subrogation waiver clause
Insurer can waive subrogation rights against certain parties associated with insured
Subsidiary company won't have to pay back claim paid to parent company
Co-insurance cases
May be an express 'waiver of subrogation' clause in contract
Used to be position that subrogation would be denied even without clause
Tyco Fire & Integrated Solutions (UK) Ltd vs Rolls Royce Motor Cars Ltd (2008)
Depends on underlying contract, whether there is a clause or not
No rights if contract exempts SC's liability
Other insurer subrogates into contractor's rights
Public policy
Morris vs Ford Motor Company (1973)
Claim rejected on grounds of public policy
Industrial relations would be harmed if there was a right to sue negligent employees
Tort
TP will usually have negligently damaged property of the insured
Can also be caused by tort of nuisance
Damaged caused by roots of neighbour's tree
Basis of contribution
Independent liability method
Property insurance
Maximum liability method usually used where policies are not subject to average and subject matter is identical
Independent liability method used when policies are subject to average or a lower loss limit applies
Almost all non-consumer property policies are now subject to average and limits so becoming almost universal in use
Maximum liability method
Loss is shared by insurers in proportion to maximum amount of cover under each policy, usually the sum insured
Liability insurance
Independent liability method is correct basis for calculation
When contribution arises
Common peril
Range of perils covered doesn't need to be exactly the same but there must be overlap
Common interest
Different interests exist in insurance, e.g. landlord and tenant
Will take out policy for own benefit and therefore there is no contribution
Common subject matter
Range of subject matter doesn't need to be exactly the same but there must be overlap
Each policy liable for the loss
Contribution can only arise if both insurers can be called upon to pay under their contract
May not arise if one insurer is able to avoid contract
May be able to avoid claim through exclusion
Two or more policies of indemnity
Both must be indemnity contracts and be in force at the time of loss