DOCTRINE OF SUBROGATION
Connecting the Dots in Financial and Legal Subrogation
Subrogation literally means ‘substitution’. In English law, the term subrogation denotes a process by which one party is deemed to have been substituted for another, so that he can acquire and enforce the other’s rights against a third party for his own benefit.
In as far as an insurer is concerned, with the right of subrogation, the insurer can legally bring a claim under the insured’s name against the third party who is responsible for causing the loss to which a claim was made under a policy/coverage. This is done as a means of recovering the amount of the claim paid by the insurer to the insured for the loss.
This is often referred to as the law of insurance indemnity. Under such law, when an indemnity insurer pays its insured in respect of an insured loss which has been caused by a 3rd party’s tort or contractual breach, the insurer’s payment does not discharge the 3rd party from liability.
Therefore, the law prevents the 3rd party from shifting the burden of paying for the insured’s loss on to the insurer. But this is subject to certain conditions.
The insurance policy is a contract between the insurer and the insured. Therefore, after the insurer has indemnified the insured’s loss caused by the 3rd party, there is a need for the insurer to be subrogated or to be put into the place of the insured to recover the loss against the wrong-doer as the insurer itself has no cause of action against the wrong-doer. (eg. under a contract situation, as there is no contractual relationship between the insurer and the 3rd party/wrong-doer, the insurer has no right in contract if to sue under its own name.)
There are two ways for the insurer to exercise its right of subrogation. First, the insurer can arrange for the insured to bring an action against a 3rd party responsible for causing the loss; and secondly, the insurer can take an assignment of the insured’s cause of action and bring an action against the 3rd party in the insurer’s own name.
WHAT RIGHTS CAN BE SUBROGATED TO?
Insured’s Contractual Rights
An insurer who indemnifies an insured for any loss suffered is entitled to the benefit of every contractual right the insured has against a 3rd party in respect of the insured loss. Further, the insurer who indemnifies an insured for an insured loss is entitled to every benefit recovered by the insured from a 3rd party.
However, an insurer cannot recover more than the indemnity he paid to the insured.
Case law example
This principle was enshrined in the English case of Darrell v Tibbitts. In this case, the Plaintiff was the owner of a house in Brighton. The house was let out under a lease to a tenant Mr. B. Under the lease, the tenant was obliged to repair the premises. The Plaintiff insured the house with the Union Society against fire and damage by explosion of gas. As it happened, the Insured’s premises was damaged by a gas explosion caused by the Corporation of Brighton. The Plaintiff later sold the premises to the Defendant and the benefits of the insurance policy were assigned to the Defendant. The insurers paid the Defendant a sum of 750 pounds to cover the damage of the insured premises. The tenant was compensated by the Corporation of Brighton and the money was used to reinstate the house in accordance with the term of the lease. The insurers later knowing that the house had been reinstated exercised their right of subrogation to recover the payment from the Defendant. The Court decided that the insurers were entitled to recover the payment from the Defendant under their right of subrogation since the loss had been made good by the tenant.
From the above case, once the insurance company has indemnified the landlord for the loss, the insurance company has a right to be subrogated into the place of the landlord. Therefore, the insurance company can sue in the landlord’s name against the tenant on contract either to compel the tenants to repair the house or to pay damages equivalent to the cost of the repair.
However, as the landlord has received from other sources compensation for his loss, where the tenant has repaired the house, then the insurance company is to have the benefit of those repairs. As such, the landlord would have to return the money received from the insurance company.
Insured’s Right Against Tortfeasors
A tort is a wrongful act, not including a breach of contract or trust, that results in injury to another person, his property, his reputation, or the like, and for which the injured party is entitled to compensation.
Negligence is one of the main tort that is often sued upon. It arises from a breach of duty of care owed by one person to another.
The insurer exercising his right of subrogation could either sue the tortfeasor in the name of the insured or by taking an assignment of the insured’s cause of action sue in the insurer’s own name.
MALAYSIAN CASE LAW
Tiong Nam Trading & Transport (M) Sdn Bhd v. Commercial Union Assurance (Malaysia) Sdn Bhd [2008] MLJU 494
The Court of Appeal explained the principle of subrogation in its judgment as follows:-
‘It must be borne in mind that the right of an insurer to be subrogated is not confined to claims which the insured may make in respect of the loss, but extends to all claims which, if satisfied, will diminish the loss. The Concise Oxford English Dictionary eleventh edition defined the word “subrogation” at p 1436 as:’
“the substitution of one person or group by another in respect of a debt or insurance claim, accompanied by the transfer of any associated rights and duties.”
‘While Goff & Jones, The Law of Restitution (Fifth Edition, 1998) Chapter 8; Halsbury’s Laws of England (Fourth Edition Reissue) volume 16 (Employment to Estoppel) at paras 888 to 893; Derham, Subrogation in Insurance Law [1985]; and Charles Mitchell, The Law of Subrogation (Oxford 1994) categorically defined the word “subrogation” to mean literally the substitution of one person for another.’
The Court of Appeal further confirmed that the doctrine of subrogation confers two distinct rights on the insurer after payment of loss. Firstly, the insurer is to receive the benefit of all rights and remedies of the insured against third parties which, if satisfied, will extinguish or diminish the ultimate loss sustained. Secondly, the insurer is thus entitled to exercise, in the name of the insured; whatever rights the insured possesses to seek compensation for the loss from third parties.
Article By
TAN KIT QIAN
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