The Doctrine Subrogation

15/03/25 19:48

Definition and Principles

Subrogation means ‘to stand in the shoes of the assured’. It is the right of one person to
stand, at law, in the place of another, and to avail him of all the rights and remedies of that
other person.

The purpose of subrogation is to prevent unjust enrichment by ensuring that the insured
does not receive both an insurance payout and recover damages from the wrongdoer.

A more conceptually sound basis for subrogation, in insurance, is that it is a consequence of the
application of indemnity. Castellain v Preston [1883] 11 QBD 330 CA

Where the loss suffered by the insured is caused by a third party, if the insured recovers from
the insurer and the third party, the insured would be doubly indemnified; profiting from
insurance which would create a moral hazard problem. Subrogation prevents the insured from
profiting from his loss or as is often said from achieving double indemnity. Subrogation
ensures the principle of indemnity is not violated.

Basic Elements of Subrogation in Insurance Law

1. Subrogation is a procedural device available to an insurer to recover in the name of the

insured whatever is due by the wrongdoer to the insured. It does not affect the
substantive rights and obligations of the parties involved in the insurance contract
or the third-party wrongdoer.
2. It operates in service of the indemnity principle. This principle ensures that the
insured is compensated for their loss but does not profit from it. Subrogation helps
prevent double recovery by allowing the insurer to recoup the indemnity paid from the
wrongdoer.
3. No Subrogation in Non-Indemnity Insurance: such as life insurance, since life
insurance policies do not seek to indemnify but rather provide a contractual benefit.
4. Insurer's Right of Recourse: Subrogation provides a mechanism for the
reimbursement of an insurer which has indemnified its insured under a contract of
indemnity. The insurer has a personal right against its insured to reimburse itself out of
any claims the insured may have against third parties responsible for the loss.
5. The Insured must be capable of exercising the right:
An insurer can be subrogated only to actions which the insured could have brought
himself and subrogation cannot be evoked where the other party had no rights. Ward J
quoting from an author, Addison on the law of Torts the court said (at 37):
"But the right of the insurer is merely to make such claim for damages as an insured
could have made; and, when the latter cannot assert a claim for damages against
the wrongdoer, neither can the insurer do so."
6. There must be some connection to the subject matter insured.
7. Subrogation does not imply a cession (transfer) of the cause of action from the
insured to the insurer.

In Mason v Sainsburyy 1782 3 Doug KB 61, after paying the insured for damage caused by
rioters, the insurers were held entitled to recover in the name of the insured against the local
administrative district authority under the Riot Act of 1714. This demonstrates the insurer
stepping into the insured's shoes to pursue a claim the insured had.

The ability to recover any amounts diminishing loss|GIFTS

In Stearns v Village Main Reef Gold Mining Co (1905) 10 Com Cas 89;[1905] 10 CC 89,
the facts were that the Government of the South African Republic had, immediately before the
outbreak of the Second Boer War, seized a quantity of gold belonging to the defendants, who
recovered for the loss from their underwriters. The Government had then, at the request of the
defendants, and as a matter of grace, returned a large portion of the gold to the defendants.
The Court of Appeal held that the underwriters were entitled to recover the value of the
restored gold. In the course of his judgment, Romer LJ said, at 95-96:
'The question of whether the Transvaal Government, in returning this money, were
thinking of the insurers appears to me to be immaterial, if they imposed no condition or
trust or obligation upon the money as between themselves and the defendants when it
was returned. Probably the Transvaal Government were not thinking of the insurers at
all. But on the facts I have stated, it appears to me that the money having come back as
part of the commandeered gold, so as to diminish the loss, in the absence of circumstances
negativing that view, the insurers would be able to say: "We are entitled to avail
ourselves of that diminution of the loss which we insured against."

Castellain v Preston (1883) 11 QBD 380

▫ A vendor contracted to sell a house to a purchaser for a fixed price.
▫ The vendor had insured the house against fire, but the contract made no mention of the
insurance.
▫ Before the sale was completed, the house was damaged by fire, and the insurer paid out
the insurance money to the vendor.
▫ However, the sale proceeded without any reduction in the purchase price, meaning the
vendor effectively received both the full purchase price and the insurance proceeds.
▫ The insurer sought to recover the insurance money from the vendor on the basis of
subrogation.
Legal question
Was the insurer entitled to recover the insurance proceeds from the vendor, given that the
vendor had been fully indemnified by the purchase price?
Holding
The court held the insurer was entitled to recover the insurance proceeds from the vendor.
Reasoning:
▫ The doctrine of subrogation is fundamental to insurance law and ensures that an insured
party does not receive more than full indemnity for their loss.
▫ Brett LJ emphasized that subrogation entitles the insurer to every right of the assured
that reduces the loss for which the insurer has indemnified them, including rights under
a contract or a legal remedy.
▫ Cotton LJ explained that fire insurance is a contract of indemnity, meaning the insured
can only recover the actual loss sustained. Since the vendor was fully compensated by the
purchase price, any insurance payment exceeding the actual loss was recoverable by the
insurer.
Rule:
The principle of indemnity in insurance law dictates that an insured party cannot recover more
than the actual loss suffered. The doctrine of subrogation allows an insurer to step into the
insured’s shoes and recover any amounts that diminish the insured’s loss.

This case established the principle that subrogation applies broadly to prevent unjust
enrichment and ensure that insurance remains a contract of indemnity. It reinforced that
insurers can recover from an insured party when they have been compensated from another
source for the same loss.

Burnand v Rodocanachi (1882) 7 App Cas 333.

▫ That case was concerned with a valued cargo insurance policy.
▫ The cargo was destroyed by a Confederate cruiser.
▫ The United States government set up a compensation fund under an Act of Congress, out
of which the insured was paid the difference between the true total loss and the sum
received from the insurers.
▫ The Act of Congress specifically provided (as can be seen from the report of the decision in
the Court of Appeal at (1881) 6 QBD 633, 634):
"that no compensation is to be given by the commissioners on account of loss which has
been insured against or covered by insurance, and secondly that underwriters are not to
receive any benefit from the funds distributed under the Act, and that the compensation
given to any claimant must be given to compensate him for any loss either from want of
insurance or from being under-insured.'

The decision of the House of Lords was that underwriters were not entitled to recover the
amount paid out of the fund. Lord Selborne LC said, at 336:

'Here it is admitted that there is in the Act of Congress everything said and done which a
supreme legislature could possibly say or do for the purpose of excluding the present claim and
attributing that fund which has been appropriated in this case to the sufferers by the capture,
not to the valued but to the unvalued part of the loss. That distinction, which in my opinion
does exclude for this purpose the part covered by the valuation of the policy of insurance, is
made by the Act of Congress. It was a true and bona fide valuation but it did not cover the
actual loss. The fund awarded by the Act of Congress of the United States is only for that part
of the actual loss which the valuation did not cover and which the insurers have not paid.'

In Merrett v Capitol Indemnity Corporation [1991] 1 Lloyd's Rep 169, a broker made an
ex gratia payment to a reinsured to cover part of the reinsured loss. As found by the
arbitrators,
i. the broker made the payment to retain the goodwill of the reinsured and
ii. it expected to be reimbursed by the reinsurer (171 RHC).
As Steyn J said:
'It follows inexorably that the payment was made solely for the benefit of the assured and not
for the benefit of the reinsurer.'

These authorities were reviewed in Colonia Versicherung AG v Amoco Oil Co. [1997] 1
Lloyd's Rep 261. At 270 Hirst LJ said:
'In Burnand v Rodocanachi, as the judgments show, the critical factor was the clearly
expressed intention of the US Congress to compensate the beneficiaries for their uninsured
losses, together with the express exclusion of any claim by the insurers in their own right or
that of the assured. In Merrett's case the findings of fact by the arbitrators led inexorably, as
Mr Justice Steyn held, to a conclusion in conformity with Burnand v Rodocanachi. In
Castellain v Preston, on the other hand, no such intention to exclude the insurers could be
derived from the purchaser's payment of the purchase price without abatement on account of
the fire damage.'

In Colonia itself, the 'crucial question' as Hirst LJ put it, "is whether ….. it was the
intention of Amoco [in effect, the third party] to benefit ICI [the insured] to the exclusion of the
Colonia [insurers]'. This was a question of construction of the settlement deeds by which
Amoco had paid ICI and, as a matter of construction of those deeds, it had not been Amoco's
intention to benefit ICI to the exclusion of insurers.

From these cases, I take the position to be as follows:

1. The gift must have the effect of diminishing or extinguishing the insured's loss. If
a third party has made a payment which has eliminated or reduced the loss to the
insured against which it had insurance, then, subject to the exception below, the insurers
are entitled to the benefit of that payment, either in reducing any payment that they
might have to make under the policy or, if they have already paid, by claiming the
amount from the insured.

2. This will not be the case, however, if it can be established that the third party, in making
the payment, intended to benefit only the insured to the exclusion of the
insurers. That might be established if, for example, the third party acted from
benevolence towards the insured, as in the case of the brother in Bowen LJ's example in
Castellain v Preston; or if that had been expressly stipulated by the third party; or if
the third party had paid the money to retain the insured's goodwill and expected to be
paid an equivalent amount by the insured's insurer.

3. In assessing the intentions of the third party payor, it does not matter whether that payor
gave any thought to the position of insurers. A payment can still diminish the loss even if
no such thought is given.

Subrogation and salvage

Subrogation gives the insurer the right to salvage. If an insurer agrees to pay or reinstate as in
the case of a total loss, the insurer is entitled to such remnant as remains by way of salvage.

Subrogation in Other Contexts

While most common in insurance, subrogation is also recognized in:
• Suretyship: A surety who pays a creditor steps into the creditor’s shoes to recover from
the principal debtor.
• Restitution: A party who discharges another's debt may acquire a right of subrogation to
recover the payment.