Chapter 10 - Subrogation and contribution

Question 1

Why could an insured claim more than once?

Answer 1

• they have more than one insurance policy covering the loss; or
• they have a claim under one insurance policy only but can also make a claim for compensation against another person who allegedly caused the loss.

Question 2

Why does the law allow subrogation?

Answer 2

It is sometimes suggested that subrogation prevents the ‘guilty’ party who causes the damage from being ‘let off the hook’, and ensures that they do not escape their financial responsibilities simply because the party who suffers the loss or damage has been careful enough to arrange insurance.

Question 3

What is the main purpose of subrogation?

Answer 3

To prevent what is known as the ‘double indemnity’ of the insured – in other words to prevent the insured from unfairly profiting from their loss.

Question 4

What type of policy is supported by subrogation?

Answer 4

Since subrogation supports indemnity, the doctrine does not apply to non-indemnity contracts, such as life insurance or
personal accident insurance

Question 5

What are the rules of subrogation where the insured has recovered twice?

Answer 5

• the insured must be indemnified
• gifts, the insured may have received a gift

Question 6

What is the operation of subrogation when the insurers bring an action against the third party?

Answer 6

• Action must be in the name of the insured
• One action only - for the whole loss
• The time when subrogation rights arise

Question 7

What is a duty of assured clause?

Answer 7

by which they require the insured to take steps to preserve the insurer’s subrogation rights.

Question 8

What is the operation of subrogation when sharing the recovery?

Answer 8

• Recovery equal to the loss - position is straightforward and no problem about sharing the money recovered will arise because, in effect, the whole of the loss will be borne by the third party.
• Recovery greater than the loss - If there is any surplus after the insurers have recovered their money the insured is entitled to keep it.
• Recovery less than the loss

Question 9

Can an insurer seek subrogation for an ex gratia payment?

Answer 9

No

Question 10

What are the main sources of subrogation rights?

Answer 10

• Torts - 3rd party will have negligently damaged property belonging to the insured
• Contract - If the insured has an alternative contractual right of recovery, in addition to that provided by their own insurance, the insurers will be able to enforce this right for their own benefit.
• Statute - Finally, a recovery by way of subrogation may be founded on a statutory right belonging to the insured.
• Subrogation, salvage and abandonment - allows insurers who have paid a total loss to claim for their own benefit anything which remains of the subject matter.

Question 11

Why do insurers agree not to enforce their subrogation rights and on other occasions why are they legally prevented?

Answer 11

• Market agreements between insurers
• Contractual waiver of subrogation - can do this by applying a subrogation waiver clause
• Co-insurance cases
• Public Policy

Question 12

When does contribution arise?

Answer 12

• each policy is liable for the loss;
• each insures the same interest in the subject matter;
• two or more policies of indemnity exist;
• each insures the subject matter of the loss; and
• each insures the peril which brings about the loss.

Question 13

What is an escape clause?

Answer 13

An escape clause is a condition that effectively forbids the insured from taking out another policy without the consent of the insurers.

Question 14

What is the simplest way to calculate rateable proportion clauses?

Answer 14

If calculated in the simplest way then the amount of insurance provided by this policy is divided by the total amount of insurance in force on the property damaged at the time of loss, and this is multiplied by the actual loss
incurred.

Question 15

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

Answer 15

• Maximum liability method
• Independent liability method

Question 16

Maximum liability method?

Answer 16

Under the maximum liability method the loss is shared by the insurers in proportion to the maximum amount of cover that is available under each policy which, in the case of property insurance, is usually equivalent to the sum insured.

Example 10.29
So, to take a simple case, if property is insured for £10,000 with insurer A, and for £20,000 with insurer B, A will pay 1/3 of any loss and B will pay 2/3, as in the following example:

Loss of £6,000
A pays £ 10, 000 /£ 30, 000 × £ 6, 000 = £ 2, 000
B pays £ 20, 000 /£ 30, 000 × £ 6, 000 = £ 4, 000

Question 17

What is the independent liability method?

Answer 17

Under the independent liability method, the liability of each insurer for the particular loss which has occurred is assessed as though its policy were the only one in force. The figure
that results in each case represents the independent liability of the insurer for the loss. The loss is then shared in proportion to the independent liabilities of the two insurers.