By Ninsiima Irene

Advocate and legal consultant with M/s Angualia Busiku & Co. Advocates  August 2011


In the case of  Castellain V Preston and others[1] Brett J said that …every rule of insurance law is adopted in order to carry out this fundamental rule”  He said this in reference to the rules on indemnity and subrogation in an insurance contract,  the former to the effect that;  “every contract of marine or fire insurance is a contract of indemnity and of indemnity only, the meaning of which is that the assured in case of a loss is to receive a full indemnity, but is never to receive more;” and the later to the effect that; “subrogation is the placing the of the insurer in the position of the assured, such that as between the underwriter and the assured, the underwriter is entitled to every right, whether of contract fulfilled or unfulfilled, or in tort, enforced or capable of being enforced, or to any other right, legal or equitable which has accrued to the assured, where by the loss can be or has been diminished.”

Subrogation according to Oxford English dictionary[2], literally means the substitution of one person for another. It was first known in Roman Law where it enabled a third party who discharged a debt for which another was liable to succeed to the rights of the creditor against the debtor. Such a third party was said to be subrogated to the rights of the creditor. By the close of the 18th century, the English Courts of Law & Equity started recognizing the rights of subrogation in separate legal relationships, one of which was a contract of indemnity. That is how rights of subrogation attached to insurance contracts. In Insurance Law, subrogation is the name given to the right of the insurer who has paid a loss to be put in the place of the assured so that he can take advantage of any means available to the assured to extinguish or diminish the loss for which the insurer has indemnified the assured.

The nature of the doctrine of subrogation.

The doctrine vests two distinct rights on the insurer after payment of a loss.

2.1 The right to receive the benefit of all rights & remedies of the assured against third parties. Once he receives this benefit, it will extinguish or diminish the ultimate loss that the insurer sustained. The insurer is thus entitled to exercise, in the name of the assured; whatever rights the assured possesses to seek compensation for the loss from third parties. The insured’s right to sue third parties has been recognized in a non-marine insurance case of Mason V Sainsbury.[3] The Plaintiff’s house had been demolished in the riots of 1780. He had insured his house and collected money from his insurer who proceeded to exercise the plaintiff‘s remedy against the third party. The action was brought in the name of the plaintiff & it was contended on behalf of the third party that there could be no recovery because the insurer had received their premium and had not also suffered by any act of the third party (the defendants). The court of Kings Bench unanimously rejected this arguments, Lord Mansfield[4] held that it did not matter that the insurer had already been paid premium, they were entitled to exercise their right.

In a subsequent& leading case of Castellain V Preston and others[5] the owners of houses which were insured against fire contracted to sell the property and reserved power under the contract to name the time for completion. The property was burned, and the insurance company in ignorance of the contract paid the vendors for the damage done. The vendors neither reinstated the premises nor handed the insurance money to the purchasers, but they subsequently named a time for completion and the purchase was eventually completed. The insurance company brought an action against the defendant vendors to recover sums paid under the insurance and interest or in the alternative for a declaration that the defendants held the money on trust for the company.

Chitty J gave judgment for the defendants and the plaintiff appealed.

Brett J, in disagreeing with the Judgment of Chitty J, who had tried the case in the court of 1st instance and concluded that the insurance co could not recover, noted that Chitty did not consider well the application of the doctrine of subrogation. He said that the foundation of every rule with regard to insurance law had to be considered, which is that: every contract of marine or fire insurance is a contract of indemnity and of indemnity only, the meaning of which is that the assured in case of a loss is to receive a full indemnity, but is never to receive more. He went on to say that every rule of insurance law is adopted in order to carry out this fundamental rule, and if any proposition is brought forward, the effect of which is opposed to this fundamental rule, it will be found to be wrong.

Brett J went on to say that  the doctrine of subrogation is another proposition which has been introduced in order to carry out the fundamental rule, it was introduced in favour of the underwriters  in order to prevent their having to pay  more than full indemnity, and to prevent the assured from receiving more than full indemnity.

He faulted the judgment of Chitty J in so far as it limited the doctrine of subrogation to putting the underwriters in the place of the assured in order to enable them enforce a contract or a right of action. He said that this would be limiting the doctrine and the effect of doing so would be to entitle the insured to get more than full indemnity.

That in order to apply the doctrine properly, the full meaning of subrogation had to be considered, which is the placing the of the insurer in the position of the assured, such that as between the underwriter and the assured, the underwriter is entitled to every right, whether of contract fulfilled or unfulfilled, or in tort, enforced or capable of being enforced, or to any other right , legal or equitable which has accrued to the assured , where by the loss can be or has been diminished.

2.2. The second right vested in the insurer by the doctrine of subrogation is; the right to claim from the assured any benefit conferred on the assured by the third parties with the aim of compensating the assured for the loss in respect of which the insurer has indemnified the assured. The only exception where an insurer cannot claim money’s paid to the assured is where the 3rd party intended the payment to the insured as a benefit to such assured to the exclusion of the insurer.

  1. Conditions precedent to the exercise of rights of subrogation.

The insurer is entitled to exercise his rights of subrogation if:-

  1. The insurance is indemnity insurance. For example Marine Insurance, fire insurance, Motor insurance, burglary, insolvency etc. Insurance contracts other than life insurance are always said to be indemnity contracts. There must be a loss suffered and based on a contingency which is compensated.
  2. He has made payment under it i.e. if he has indemnified the assured. The insurers right of subrogation cannot be exercised until he has made payment under the policy.[6] However, though this right cannot be exercised until payment under the policy has been made; it is a contingent right which arises/vests at the time the contract is entered into & cannot be extinguished by the assured entering another policy with  another insurer. If an insurer is liable under the policy for different types of loss, he must pay for all types of damages before he can be subrogated to any particular right of the assured.  For Example: A motorist may take out a policy covering third party liability, Personal liability to himself & injury to his car. The insurer may be liable in all three respects but will not be subrogated to the rights of the assured in respect of damages to the car, unless he has made payments in full in respect of  each head of liability under the policy.

3.1 Voluntary payment by insurers:

Where an insurer pays for a loss under the policy for which he was not strictly under any liability to pay, it was held by the Privy Council in King v Victoria Insurance Co[7] that where a payment has been made honestly, purporting to be satisfaction of a potential liability under a policy, a defendant third party cannot be allowed to allege that the payment was not  strictly within the terms of the policy. This does not happen where the contract of insurance is void or illegal; the law will not allow an insurer to be subrogated to the rights of the assured whom he purportedly indemnified.

Exclusion of rights of subrogation

It is possible to exclude all or some of the insurer’s rights of subrogation by means of a term in the policy. Or an assured may have mad a prior agreement with a third party where by the assured cannot sue that third party; in that case the insurer right of subrogation will be excluded by that prior agreement between the assured and the third party. Or it may arise by trade usage incorporated into a contract between the assured and the third party. The existence of such a usage is a material fact and should be disclosed to the insurer at the time of proposal for the cover.

Exercise of rights of subrogation

There are 2 rights which vest in an insurer from the doctrine of subrogation i.e. the right to obliged the assured the pursue remedies against third parties for insurer’s ultimate benefit and the right to recover from the assured any benefits received by the assured in extinction or culmination of the loss for which has been indemnified. The question is how are they exercised?

Claims against third parties (1st right)

The insurer is subrogated to any claims of any character which the assured is entitled to bring in proceedings against a third party to diminish the loss. It does not matter whether the right of suit is legal, equitable or statutory. The right is also exercisable by re-insurers. In the case of Assicurazioni Generalidi Trieste v Empress Assurance Corporation Ltd[8] the defendants had insured certain vessels and then re-insured them with the Plaintiff. The defendants paid a loss for which they supposed they were liable only as a result of fraudulent misrepresentation, on the part of the Insured’s. After they had recovered from the plaintiff reinsurers, they discovered the truth and obtained damages for fraud against the insured. The plaintiffs claimed that they were subrogated to the rights of the defendants against the insured and that they were therefore entitled to be reimbursed the sums they had paid out. The defendants argued that the damages recovered by them were received as personal damages for a personal wrong and was not connected to the subject matter of insurance. It was held that the damages were received by the defendants in diminution of their loss and that the reinsurers were entitled to succeed in their claim.

The insurer is not subrogated only to the rights of the accused but also to the benefits which a court may in its discretion award the insured such as a wards of interest to a successful plaintiff pursuant to a statute are not a matter of right but depend on courts discretion or even costs. An insurer is only subrogated to rights which diminish the loss which he has paid and nothing more.

An insurer is subrogated only to the assureds’ rights.

An insurer is not entitled to make any claim which the assured himself could not have made for example, where the assured has allowed his claim to be time barred. The case of Simpson  v Thompson [9]is a case that illustrates this principal. In this case two ships were owned by the same person & collided due to the fault of one of the ships. It was held that the insurers of the ships not at fault could not recover from the owner for the negligence of the other ship because the owner could not bring an action against himself. Another example is where the owner of goods excludes liability on a third party e.g, to provide that a carrier of goods will not be liable for any loss or destruction or that the carrier will have the benefit of the insurance on the goods. In such a case, the assured has no right to which the underwriters can be subrogated or if he is liable, he will also have the benefit of the insurance. Another example is where there is a “knock for knock” contract commonly used in Motor Insurance.

Commencement & Conduct of proceedings

  • Institution of proceedings: The insured is entitled to take proceedings against third parties to recover his loss and cannot be restrained from doing so by the insurer before or after payment of what is due under the policy. The insurer is safeguarded by the possibility that if the assured conducts the proceedings without regard to the insurer’s interest, before or after indemnification, he will be liable to the insurer in damages.
  • Control of the proceedings: Until he is paid by the insurer, the assured is entitled to control any proceedings brought in his name, even if he has been paid out under the policy, he can continue proceedings to gain compensation for his uninsured loss; the insurers cannot interfere, if he is willing to prosecute the claim for the whole loss. The insured must conduct the litigation with regard to the insurer’s interest otherwise he may be liable in damages for misconducting the litigation in particular, abandoning rights to

the prejudice of the insurers. In the Newzealand case of Bunett A Ltd v National Insurance Co of Newzealand[10], it was held that the assured has the discretion as to what quantum of loss is claimed in the action and he may be liable to justify his failure to sue for all or some of his insured loss.

  • Insurer has no right to sue in own name: The cause of action for damages remains in the assured, and the insurer is subrogated to the rights-thus it remains the assured’s actions. However if the insurer has assigned his right to sue to the insurers, the cause of action then vests in the insurer who can exercise it in his own name as was expressed in King v Victoria Ins. Co.11 Thus if an order for security for costs is made, it will be against the assured; also the assured must comply with the rules of procedures.
  • Insures right to control proceeding: When the insurer has fully indemnified the assured, he can take over control of the proceedings, but must indemnify the assured against his cost.
  • Duty to commence proceedings: Insurance policies frequently contain a clause expressly requiring the assured to take all the necessary steps to protect the insurer’s rights. In the absence of an express clause, the remedy of the insurer is to pay the loss & commence proceedings in the assured’s name. For example if the action is likely to be time barred, or there are threats of bankruptcy on the third party or loss of evidence etc.
  1. Release or settlement of claims. So far as third parties are concerned, the assured & the insurer are one singles entity & an unconditional settlement or abandonment by an assured will prima facie bind the insurer. Also where the assured’s debt is disclaimed for example by a liquidator, the insurer cannot claim rights of subrogation because the debt in which he has an interest is declaimed.

Release before payment:

After the loss has occurred but before the insurer has made payment any release or settlement made by the assured with third parties to the prejudice of the insurer will entitle the insurer, the set up, in answer to the assured’s claim, a counter claim for damages in the amount of the loss thereby suffered by the insurer. This does not however preclude an assured from settling a doubtful claim in good faith & such a settlement will not form a basis of defence to the assureds claim on the policy.

Release after payment:

If the assured makes a release or settlement with the third party after he has been paid by the insurers, and to their prejudice, he will be liable to compensate them for the amount by which he has diminished the value of their right of subrogation. In Horse, Carriage & General Insce. Co v Petch[11], the assured had a claim against a third party for personal injury & for damages to his car. The insurer was subrogated only to the action for damages to the car, but the assured compromised both claims for a sum of £1,250. The insurer has paid £8,115 to the assured in respect of the damaged car. It was held that the insurer was entitled to recover the full amount which he had paid in respect of the damaged car either as damages for being deprived of the right to conduct the claim or because of the assured must be assumed to have settled the action for the full amount in favour of the insurer.

Settlement by the insurers:

Any settlement by the insurer with a third party will bind the assured; only if it is to the assured’s prejudice can he claim damages from the insurer for example if in some way the settlement makes the assured loose the prospect of recovering his full indemnity.

  1. Cost of proceedings:

Where proceedings are brought in the names of the assured & both assured & insured have an interest in the claim, If the assured has been fully indemnified, the insurer has the right to start proceedings in the names of the assured, but must bear the costs of such proceedings, & if a greater sum is recovered, the insurer cannot claim more than he is entitled to just because he paid costs. If the assured insists on starting proceedings himself in spite of being fully indemnified, he cannot claim costs from the insurer, the insurer must first be paid the proceeds of the claim & the balance can be used by the assured to cover costs.

If the assured is not fully indemnified, he is entitled to start proceedings himself & remains dominus litis, provided that he protects the insurer’s interest as well as his own. If the suit came out to a successful conclusion, then the assured can first deduct costs before accounting to the insurer. If the assured looses the proceedings, in such a case, the liability for costs may be so large and the insurer is only expected to bear the costs if he authorized the proceedings, if he did not authorize the proceedings, the assured will be assured to have taken on the burden of litigation and will therefore bear the costs. If the assured decides against taking proceedings & the insurers decide to do so, they will bear the costs.

Claims against assured (2nd right vested by the doctrine of subrogation)

This is 2nd species of the right vested in the insurer by the doctrine of subrogation, namely to recover from the assured any benefit received by the assured in extinction or diminution of the loss for which he has been indemnified.

If the assured recovers any sums from a third party by way of diminution of his loss before the insurer has made any payment, all such sums should be deducted from the sums payable by the insurer.[12] If the insurer makes a payment to the assured not knowing that the assured has already made a recovery from the third party, he is entitled to any sum in the hands of the assured up to the value of his own payment as was held in Castellain v Preston.[13].

If the insured makes a recovery from a third party, after the insurer has made a payment under the policy; the insured can retain what he has recovered until he is fully indemnified. He is entitled to first deduct the cost of recovery from the third party before he can account to the insurer.

The insurer cannot be entitled to more than he paid as indemnity-thus if the assured recovers more than the total loss of the subject matter insured he can only reimburse the insurer for his payment & may retain the excess as was held in Yorkshire Insurance Co. v Nisbet shipping Co.[14]

Where the assured recovers the money before the insurer pays or makes full payment; he holds what the insurer will be entitled to after payment as an equitable lien in favour of the insurer.

However for this lien to arise, the fund should exist.

8.1 Gifts to the insured (Ex gratia payment)

Can an insurer be entitled to any exgratia payments made to the assured by the third party? If the payment was made with a purpose of extinguishing or diminishing the loss against which the insurer was obliged to indemnify the assured, then the insurer is entitled to recover what has been paid as was held in  Randal v Cockran.[15]  However; if the purpose of the payment was that it was intended to benefit the assured, rather than diminishing or extinguishing the loss; then the insurer cannot recover such, the assured is entitled to retain the value of such benefit as was held in Burnand v Rodocananchi Sons & Co,[16]

No recovery pending full indemnity:

The general principal is that an assured, who is paid out on his policy and then proceed to recover from a third party, is entitled to retain the recovery until he is fully indemnified against his loss. This only applies to cases where the assured’s  interest  was fully covered, but does not apply to or take into account cases of partial insurance where problems can be created by the presumption that the parties intend that the assured is to be his own insurer for the amount which is uninsured. For example 1: In marine Insurance contracts the assured is always deemed to be his own insurer in respect of any uninsured part of the risk.

However, there is no such presumption in non-marine insurance contracts; the assured is not his own insurer for the uninsured property unless there is a clause to that effect in the contract. Thus; in such a contract the assured is entitled to claim the full amount insured and if this is insufficient to compensate him, he can no doubt retain whatever he recovers from third parties until he has received full indemnity & need only hand over any excess to the insurer.

  1. Subrogation under the Marine Insurance Act 11/2002

S, 79(1) provides for the right of subrogation as one of the rights that vest in an insured upon payment. It provides that where the insurer pays for the total loss of the subject matter of insurance, either for the whole or an apportionable part of the subject matter, he thereby becomes subrogated t all the rights and remedies of the assured in respect of that subject matter as from the time of the causality causing the loss. And becomes entitled to takeover the interest of the assured in whatever may remain of the subject matter so paid for.

S.79(2)  provides that where the insured pays for a partial loss that insurer acquires no little to the subject matter insured or such part of it as may remain, but, he is thereby subrogated to all the rights & remedies of the assured in & in respect of  the subject matter insured as from the time of the causality causing loss; in so far as the assured has been indemnified by that payment for the loss.

  1. Conclusion

There are two basic propositions as expressed in Castellain V Preston (supra) and the principles arising from them are in every indemnity contract of insurance intended to ensure that the assured recovers only his full indemnity and that the insurer is subrogated to all the rights of the assured.