Subrogation and contribution

Question 1

Subrogation ( does not apply to non indemnity contracts)

Answer 1

Subrogation can be defined as 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.

In the context of insurance, subrogation refers to the right of an insurer who has indemnified an insured in respect of a particular loss (i.e. paid a claim) to recover all or part of the claim payment by taking over any alternative right to indemnity which the insured possesses.

Question 2

Since subrogation is a corollary of indemnity, the doctrine does not apply to

Answer 2

Non indemnity policies like life or pa

Question 3

How subrogation operates

Answer 3

1. Where the insured has ‘recovered for the same losstwice’

2. Where the insurers bring an action against the thirdparty ( for the whole loss)

Question 4

What happens when recovery is greater than loss I.e How is it shared by insurer and insured

Answer 4

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 5

Ex Gratia and subrogation

Answer 5

subrogation arises only from payments made under the terms of the policy. If the insurers make a payment outside the terms of the policy, making it clear that no legal obligation to pay is accepted, and that payment is made merely as a favour (known as an ‘ex gratia’ payment), they are not entitled to subrogate against a third party. The insured is entitled to retain any amounts secured in this way.

Question 6

Source of subrogation rights

Answer 6

Subrogation rights can arise in tort, in contract or under statute.
Insurers’ subrogation rights can be modified or restricted by market agreements; contractual waivers; in coinsurance cases or as a matter of public policy.

Question 7

Difference subrogation and salvage

Answer 7

• 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 one exception riots), whereas an insurer who accepts abandonment becomes the owner of thegoods;
• the insurer can make a profit on the abandoned property, whereas subrogation allows the insurer 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 8

knock-for-knock’ agreements

Answer 8

When an accident (such as a collision) occurs involving vehicles covered by different insurers, each insurer pays for the damage to its own policyholder’s vehicle (provided the policy covers the damage) and gives up any subrogation rights that may exist against the other motorist.

Question 9

Contribution

Answer 9

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

Contribution is concerned with the sharing of losses between insurers when such double insurance exists, the overriding principles being that the insured cannot recover for the same loss twice and that the insurers should share the loss in a fairway.

Question 10

Contribution will arise only when the following conditions are satisfied:

Answer 10

• 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 11

Common law rules for contribution

Answer 11

the insured can claim against the insurers in any order and for such proportion of the loss as they think fit. In particular, they may choose to claim from one insurer only and recover in full from that insurer. Having satisfied the loss, the insurer who pays may then, and only then, claim a contribution from the other insurer(s).

Question 12

Contribution conditions

Answer 12

common law rules are frequently modified by clauses in the policy known as contribution conditions.

1. Escape clause
2. non-contribution clauses
3. more specific insurance’ clauses and 4. ‘rateable proportion’ clauses.

Question 13

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

Rateable proportional clause

Answer 14

The clause states that the insurers will be liable for a ‘rateable proportion’ only of any loss that is also insured by another policy.

Question 15

Basis of contribution

Answer 15

There are two main methods of calculating the ratio of contribution: the maximum liability method and the independent liability method

Question 16

Basis of contribution liability

Answer 16

Independent liability

Question 17

Basis of contribution property

Answer 17

• property policies that are not subject to average and in which the subject matter of insurance is identical- the maximum liability method
• non-average policies are in contribution but they are not concurrent (in other words the property covered is not identical)- mean method
• policies that are subject to average, or where a lower loss limit applies within a greater sum insured- independent liability method ( most common)

Question 18

Market agreement under contribution

Answer 18

market agreements between insurers will modify the application of contribution itself. This can happen in two ways:

• Insurers may agree to share losses in cases where, strictly speaking, contribution does not arise in law.
• They may sometimes agree to waive rights of contribution in cases where such a right clearly exists, so that the whole of the loss is borne by one insurer.

Question 19

More specific clauses

Answer 19

Ythe policy will respond only when the cover provided by the more specific insurance has been exhausted. In other words, the policy operates like an excess of loss policy (above), but only where the ‘primary’ cover is more specific.