10 - Subrogation and Contribution

Question 1

Define subrogation

Answer 1

The right of one person, having indemnified another under legal obligation to do so, to stand in the place of that other and avail himself of all the rights and remedies of that other whether already enforced or not

Question 2

What is the main purpose of subrogation?

(hint: comes from Castellain v Preston)

Answer 2

A doctrine in favour of the underwriters or insurers in order to prevent the insured from recovering more than a full indemnity

In other words it prevents the Insured from making a claim against their Insurer and then suing the person who caused the loss, giving them a profit as they will have recovered the loss twice

Question 3

How does subrogation apply to non-indemnity policies?

Answer 3

It doesn’t, there is no right of recovery in non-indemnity policies

Question 4

What are the two ways subrogation may operate?

Answer 4

1. Where the Insured has not made a recovery the Insurer may bring an action against the responsible third party in their name
2. Where the Insured has made a recovery they may be called upon to pay that recovery to the Insurer. If they refuse the Insurer may seek an injunction requiring them to hand it over

Question 5

Where the Insured has recovered for when the same loss twice what must be true for the Insurers to have subrogation rights?

Answer 5

The Insured must have been indemnified.

As shown in Scottish Union and National Insurance v Davies

Question 6

Where the Insurer is subrogating against a third party what must be true?

Answer 6

The action is in the name of the Insured

There is one action for the whole loss, the Insurer cannot seek to recover just their own part. If they recover the whole loss they may have to pay the Insured their excess/deductible

The Insurer under common law must indemnify the Insured prior to exercising their subrogation rights. In practice there is usually a clause in the policy allowing them to take action prior to this

Question 7

If more money is recovered from a third party than the size of the loss who is entitled to this? What case established this?

Answer 7

The Insurer - the Insured may not recover more than they have paid out

Established in Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd (1962)

Question 8

If the Insurer does not wholly indemnify the Insured, for example due to an excess, and then makes a partial recovery from the third party, how is this recovery split? What case established this?

Answer 8

The Insurer keeps the whole recovery as the wording of the excess is usually “the first” amount of the claim. Only if the recovery was more than the Insurer’s outlay would money pass to the Insured as recovery for their excess

Napier v Hunter (1993)

Question 9

What is an ex gratia payment?

Answer 9

When an Insurer makes a payment which it is not bound to do so by the terms of the policy (in other words the claim is not strictly covered and so the Insurer has no legal obligation to pay the claim but they do so anyway)

Question 10

How are subrogation rights affected by ex gratia payments?

Answer 10

There is no right of subrogation following an ex gratia payment as it is outside the terms of the policy

Question 11

What are the three sources of subrogation rights?

Answer 11

1. Statute
2. Tort
3. Contract

Question 12

Can an Insurer make a profit on:

A) Subrogation?

B) Salvage or abandonment?

Answer 12

A) No

B) Yes

Question 13

What are some ways in which subrogation rights may be modified or denied?

Answer 13

1. General market agreements (eg motor, EL)
2. Contractual waivers
3. Co-Insurance
4. Public policy

Question 14

Define contribution

Answer 14

The rights of an Insurer to call upon other Insurers similarly not necessarily equally liable to share the cost of indemnity

Question 15

Is there contribution in life insurance policies?

Answer 15

No, contribution only applies to policies of indemnity. Someone can take out as many life insurance policies as they want and upon death each Insurer must pay out in full (subject to terms and conditions of the policy)

Question 16

What is double insurance?

Answer 16

When two policies of indemnity cover the same loss

Question 17

When does contribution arise?

Answer 17

When two or more policies of indemnity covering the subject matter in question and the same interest in the subject matter are liable for the same loss, which is caused by an Insured peril that each covers

Question 18

What is the importance of the case North British and Mercantile Insurance Co v London, Liverpool and Globe Insurance Co (1877), better known as the King and Queen Granaries case?

Answer 18

It is the leading case law on common interest and contribution

In this case it was held that the owners of the grain and the bailees (granary owners) had different insurable interests so there was no contribution

Question 19

What is the purpose of a contribution condition?

Answer 19

To set out how the policy will respond to a loss if there is another policy that also covers it

Question 20

What is an escape clause and what was their original purpose?

Answer 20

A contribution condition that states the policy will be avoided if the Insured takes out any other policy covering the same risk without the consent of the Insurer. Originally this was to guard against insurance fraud arising from multiple insurances.

Question 21

What happens when two policies covering the same loss both contain clauses avoiding the loss if another policy also covers it?

(As shown in Gale v Motor Union Insurance Co 1928)

Answer 21

Both policies should share the loss equally

Question 22

What is the purpose of a rateable proportion clause?

Answer 22

In the event of multiple policies covering the same loss it limits the Insurer’s liability to their share of the loss only.

This makes the Insured claim from each Insurer separately rather than claim it all from one Insurer who then has to rely on subrogation to attempt a recovery from the other Insurer(s)

Question 23

What are the two main methods of calculating the ratio of contribution?

Answer 23

Independent liability

Maximum liability

Question 24

How is contribution calculated using the maximum liability method?

Answer 24

The loss is shared in proportion to the maximum amount of cover available under each policy.

eg if policy A had a limit of £20,000 and policy B had a limit of £30,000 then policy A would pay 2/5 of any loss and policy B would pay 3/5 of any loss

Question 25

A policyholder has two policies in force covering the same property. Policy A provides £15,000 and policy B provides £35,000 of cover. In the event of a loss of £10,000 how much would each policy pay using the maximum liability method of calculating contribution?

Assume the terms and conditions of both policies are the same and there is no average or excess

Answer 25

Policy A would pay £3,000 and Policy B would pay £7,000

Question 26

How is contribution calculated using the maximum liability method?

Answer 26

The maximum payout of each policy is calculated as if it were the only policy in force and then the loss is shared in proportion to the maximum liability of each policy

Question 27

A policyholder has two policies in force covering the same property. Policy A has a sum insured of £20,000 and Policy B has a sum insured of £40,000. In the event of a loss of £30,000 how much would each policy pay using the independent liability method of calculating contribution?

Assume both policies have the same terms and conditions and no average or excess applies

Answer 27

Policy A would pay £12,000
Policy B would pay £18,000

Question 28

What method of calculating contribution is generally used for property insurance?

Answer 28

When not subject to average and the subject matters are identical normally the maximum liability method is used

When subject to average the independent liability method is normally used

(When not subject to average but the subject matters are not identical the “mean method” applies but that is outside this course due its complexity)

Question 29

What method of calculating contribution is used for liability insurance?

Answer 29

Independent liability method

Question 30

How can market agreements modify the principle of contribution?

Answer 30

Insurers may waive rights of contribution or agree to share losses where strictly speaking contribution would not arise in law in order to prevent disputes and reduce operating costs

Question 31

What is a more specific insurance clause?

Answer 31

States that the policy will pay only when the cover provided by another policy more tailored to the subject matter is exhausted. In this scenario it effectively operates similar to an excess of loss