Chapter 10 - Subrogation & Contribution

Question 1

What is subrogation?

Answer 1

The right of one person, having indemnified another under a 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

When will subrogation arise?

Answer 2

subrogation will arise only where the insured has suffered a loss and has another means of recovering for it, i.e. a claim on their insurance policy and a legal right or claim against some other person for the same loss.

Question 3

What insurance does subrogation not apply to?

Answer 3

The doctrine does not apply to non-indemnity
contracts, such as life insurance or personal accident insurance.

Question 4

Why does the law allow subrogation?

Answer 4

It is sometimes suggested that subrogation prevents the ‘guilty’ party who causes the damage from being ‘let off the hook’

Question 5

Whats the main purpose of subrogation?

Answer 5

The main purpose of subrogation is simply 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 6

How can the operation of subrogation arise?

Answer 6

Recovering for the same loss twice

where the insures brings action against the third party.

Question 7

When can an insurer use the right of subrogation?

Answer 7

only after the insured has been paid.

Question 8

Can the insurer claim a gift back from the insured?

Answer 8

In general terms, it appears that where the giver intends the money to be for the sole benefit of the insured it cannot be claimed by way of subrogation.

Question 9

What is meant by one action only?

Answer 9

When an action is taken by insurers in the name of the insured, it must be for the whole loss and not just for the portion which has been borne by the insurers. This is because, as a
general rule, the law only allows a person to sue once for a wrongful act that has been committed against them.

Question 10

What is meant by duty of assured?

Answer 10

preserve the insurer’s subrogation rights.

The insured might be obliged to start legal proceedings against the third party even though the insured has not yet been paid by the insurer.

Question 11

What kind of policies does subrogation support?

Answer 11

Indemnity policies only.

Question 12

what is meant by Where the insurers bring an action against the
third party?

Answer 12

The insurers may ‘step into the shoes’ of
the insured and pursue any right of action available to the insured to reduce the loss insured against.
The action will normally lie against a third party whose negligence

Question 13

What is meant by Action in the name of the insured?

Answer 13

The action must be brought in the name of the insured and legally it is regarded as the insured’s own action although, as we have seen, the insurers will, effectively, have the benefit of it. If the assured does not allow the insurer to use their name in the action against
the third party, the insurer can sue the assured and the third party in the same action.

Question 14

When do subrogation rights arise?

Answer 14

At common law the insurers must indemnify the insured (i.e. pay the claim) before they can exercise subrogation rights.

Question 15

what are the two factors the recovery of a loss depends on?

Answer 15

• the amount of the recovery in relation to the loss; and
• whether the insurance covers the loss in full.

Question 16

If a subrogation recovery is equal to the loss how is it shared between insured and insurer?

Answer 16

The insurers will be entitled to keep the whole of the loss.

Question 17

If subrogation is greater than the loss how is this shared?

Answer 17

If there is any surplus after the insurers have recovered their money the insured is entitled to keep it. Again, the insurer is not entitled to recover more than it has paid out.

Question 18

If subrogation recovery is less than the loss how is this shared?

Answer 18

If the insurers have paid for the whole of the loss they will obviously be entitled to keep the whole of the sum that has been recovered.

Question 19

How does subrogation arise under tort?

Answer 19

the third party will have negligently damaged property belonging to the insured which is covered under the latter’s property insurance.

Question 20

How does subrogation arise in contract?

Answer 20

Subrogation rights may exist in 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.

Subrogation rights in contract can also arise from indemnity (or ‘hold harmless’) clauseswhereby one party to a contract (A) agrees to pay back another (B) if the latter (B) should
suffer a particular sort of loss. In other words, a hold harmless clause is used as a release of liability in a contract that protects one party from, say, property damage caused by another
party.

Question 21

How does subrogation arise in statue?

Answer 21

a recovery by way of subrogation may be founded on a statutory right belonging to the insured.

The most common example is the statutory right of property owners to recover damages from the police authority if their property is damaged in the course of a riot. This right arises
under the Riot Compensation Act 2016 (RCA).

Question 22

Whats the differences between salvage and abandonment

Answer 22

subrogation gives the insurer the right to pursue a claim against a third party for the loss of the subject matter, whereas abandonment and salvage confer rights only over the subject matter itself;

an action by way of subrogation cannot be brought in the insurer’s own name (with oneexception), whereas an insurer who accepts abandonment becomes the owner of the goods;

the insurer can make a profit on the abandoned property, whereas subrogation allows theinsurer to recover no more than their own payment; and

subrogation operates automatically as a result of the principle of indemnity, whereas abandoned property need not be accepted by the insurer.

Question 23

What is meant by the modification or denial of subrogation rights?

Answer 23

It refers to instances where insurers either agree not to enforce their subrogation rights or are prevented by law from doing so.

Question 24

What are some examples of situations where subrogation rights might be modified or denied?

Answer 24

One example is voluntary market-wide agreements among insurance companies to waive their subrogation rights against third parties, particularly if the third party is insured.

Question 25

Why do insurers sometimes waive their subrogation rights against third parties?

Answer 25

It’s often to avoid extra administrative costs and potential litigation between insurers if they end up claiming from each other due to overlapping coverage of the same incident.

Question 26

How might insurers be affected if they regularly claim from each other due to overlapping coverage?

Answer 26

Over time, insurers engaging in frequent subrogation claims against each other may not see significant financial benefit, essentially engaging in “pound-swapping” without substantial gain.

Question 27

What is a subrogation waiver clause in an insurance policy?

Answer 27

It’s a clause where insurers agree not to exercise subrogation rights against certain parties associated with the insured, often included in the policy.

Question 28

How might a subrogation waiver clause be used in insurance policies?

Answer 28

It could specify that subrogation rights won’t be pursued against affiliated or subsidiary companies of the policyholder, aiming to prevent subsidiaries from reimbursing payments made to the parent company under an insurance claim

Question 29

Is a subrogation waiver clause the only way insurers might agree not to exercise subrogation rights?

Answer 29

No, even without such a clause, a non-consumer contract between the insured and another party could be interpreted to prevent insurers’ subrogation rights, especially in business contracts.

Question 30

Why would insurers agree to waive subrogation rights against certain parties?

Answer 30

It could be to streamline claims processes, avoid conflicts with affiliated companies, or maintain positive business relationships.

Question 31

What is contribution?

Answer 31

Contribution is the right of an insurer to call upon others similarly, but not necessarily equally liable to the same insured, to share the cost of an indemnity payment.

Question 32

How does contribution support the principle of indemnity in insurance?

Answer 32

Contribution prevents the insured from profiting from their loss by ensuring that if there is double insurance, insurers share the cost of indemnifying the insured in a fair manner.

Question 33

Does contribution only apply to certain types of insurance policies?

Answer 33

Yes, like subrogation, contribution applies only to insurance policies that are contracts of indemnity, where the insured is entitled to compensation for the actual loss suffered.

Question 34

How are common law rules regarding contribution modified in practice?

Answer 34

Common law rules regarding contribution are often modified by clauses in insurance policies known as contribution conditions. Additionally, internal market agreements between insurers can further modify how contribution is applied in practice.

Question 35

How can double insurance arise in the context of insurance policies?

Answer 35

Double insurance can occur in various ways, including instances where a second insurance policy is intentionally arranged, often as a precaution in case the first insurer becomes insolvent and unable to fulfill its obligations.

Question 36

When does contribution arise?

Answer 36

Contribution will arise only when the following conditions are satisfied:
* 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 37

Are all parties liable for the loss?

Answer 37

This may not be the case if one insurer has the right to avoid the contract, for example, for breach of condition or where an exclusion applies

Question 38

How do insurers handle claims when there are multiple policies covering the same loss?

Answer 38

Insurers can be claimed against in any order and for any proportion of the loss the claimant deems appropriate. They can choose to claim from one insurer and receive full compensation from them. After paying out, the insurer who settled the claim can then seek a contribution from the other insurer.

Question 39

Whats a contribution condition?

Answer 39

A contribution condition is a clause that sets out how the loss is to be met if the insured has another policy which covers it. The effect of the condition will be to change or override the
common law rules.

Question 40

Under contribution whats the escape clause?

Answer 40

An escape clause is a condition that effectively forbids the insured from taking out another policy without the consent of the insurers. It does this by providing that the insurance will be
avoided if the insured takes out any further insurance on the same risk without notifying the insurers and obtaining their consent.

Question 41

under contribution What happens if a person takes out two policies and both prohibit other insurances?

Answer 41

The second policy never operates because of the existing policy in force. This means that the first insurers are liable for the loss because no insurance other than their own has ever come
into effect.

Question 42

How do insurers determine contribution in property insurance?

Answer 42

The method for determining contribution in property insurance often depends on market practices, as there’s limited legal authority on the matter.

For property policies without average clauses and where the insured property is the same, the maximum liability method is typically used.

For policies without average clauses but covering different properties, a more complex “mean method” might be employed.

If the policies are subject to average or have varying loss limits within a greater sum insured, the independent liability method is used.

Increasingly, non-consumer property policies are subject to average, making the independent liability method the most common approach.

Question 42

What are the two main method of calculating contribution

Answer 42

maximum liability method and the independent liability method.

Question 42

what is ‘Rateable proportion’ clauses

Answer 42

Rateable proportion can be calculated in two ways. 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 43

What is the independent liability method?

Answer 43

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.

Question 43

What is the maximum liability method?

Answer 43

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:
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 44

How is contribution calculated in liability insurance according to established law?

Answer 44

The independent liability method is legally recognized as the proper basis for calculating contribution in liability insurance.

Question 45

In whose name must the action be brought in an insurance claim involving a third party?

Answer 45

The action must be brought in the name of the insured.

Question 46

Legally, how is the action regarded when brought in the name of the insured?

Answer 46

Legally, it is regarded as the insured’s own action, although the insurer will effectively benefit from it.

Question 47

What can the insurer do if the insured does not allow their name to be used in the action against the third party?

What would the insurer ask the court to do in this situation?

Answer 47

If the insured does not allow their name to be used, the insurer can sue both the insured and the third party in the same action.

The insurer would ask the court to order the insured to allow their name to be used in the legal action.

Question 48

What would the insurer claim in the action against the third party?

Answer 48

The insurer would claim the loss against the third party.

Question 49

What is the exception to the rule that actions must be brought in the name of the insured?

Answer 49

The exception is actions brought by insurers under the Riot Compensation Act 2016, where the insurers may sue in their own name.

Question 50

When can insurers exercise subrogation rights at common law?

Answer 50

Insurers must indemnify the insured (i.e., pay the claim) before they can exercise subrogation rights.

Question 51

What is the purpose of the ‘duty of assured’ clause included by insurers?

Answer 51

The ‘duty of assured’ clause requires the insured to take steps to preserve the insurer’s subrogation rights.

Question 52

What might the insured be required to do under the ‘duty of assured’ clause even before being paid by the insurer?

Answer 52

The insured might be obliged to start legal proceedings against the third party to protect the insurer’s rights, such as preventing the claim from being time-barred.

Question 53

What does the ‘duty of assured’ clause reinforce in relation to the insured’s conduct?

Answer 53

The clause reinforces and supplements the common law duty of the insured to act in good faith when proceeding against the third party.

Question 54

What does the Nisbet Principle state about an insurer’s right to subrogation?

Answer 54

The Nisbet Principle states that an insurer cannot claim subrogation rights until it has fully paid the insured for their loss.