Abolish insurer’s undisclosed involvement in subrogation
01 February 2013
Robert W Vivian, Agata MacGregor, University of the Witwatersrand
The insurers’ exception to disclose its involvement in the litigation processes should be abolished as soon as possible.
Subrogation is once again under consideration, and has been undergoing drastic changes in the courts. Until recently, it was accepted that once an insurer has indemnified the insured, the insurer can evoke subrogation, but only in the name of the insured, to sue a third party.
But, in the matter of Rand Mutual v Road Accident Fund 2008 SCA, this acceptance was changed for the first time holding that an insurer can sue a third party in its own name.
Re-examine the exception to disclosure
In the case of Smith v Banjo 2011(2) SA 518 (KZP), subrogation was under consideration after parties were involved in a motor vehicle collision. Smith was the owner of the vehicle, however, he was not the insured. The Des Smith Family Trust was. After the accident Smith sued Banjo for the damages caused to his car.
But, it was only revealed during the court proceedings that the litigation process was being conducted at the behest of an unnamed insurer of the trust. The involvement of the insurer was never disclosed during the pleadings stage. The insurer had also agreed that it would pay Smiths’ legal costs of litigation.
In essence, it was an insurer litigating pretending to be Smith, without disclosing to the defendant that it was Smith’s insurer suing. The insurer, once revealed, agued it was not obliged to reveal its involvement, as is usually obligatory during the pleading stage in litigation.
This case gives the opportunity to re-examine the advisability of this exception.
The element of surprise
The usual position where one person takes legal action in the name of another was considered by Justice Selikowitz in Goodwin Stable Trust v Douhex 1998 C, who stated this position as follows:
"It is in my judgment, generally, not permissible for a person to litigate in the name of another without disclosing that fact, and the legal basis therefore. Such conduct – unless explicitly disclosed and justified – undermines the integrity of the administration of justice. Where such action lacks transparency it can be misleading.
"The doctrine of subrogation, which permits the insurer to proceed in the name of the insured, is a special case which is to the best of my knowledge, only applied in the field of insurance. Because of its specialised application, persons involved in insurance litigation will be aware of the doctrine of subrogation, and ought not to be misled nor taken by surprise.”
Disclose insurer’s involvement
Smith v Banjo demonstrates the sentiment of the court, that the exception may be justified, is misplaced. The case clearly indicates that the exception should be abolished, and insurers should come in line with the general position, where a person sues in the name of another. The law should be of general application and binding on insurance companies. The insurer should be compelled to disclose its involvement and justify its right to sue in the name of the insured. In the Smith matter, serious doubts exist if the insurer in fact had any right, to sue in the name of Smith. Thus, Banjo was denied his right to have this point tested in a court of law.
Indemnity…
Indemnity is the fundamental principle of insurance whereby the insurer agrees to place the insured, after the loss, in the same position he occupied immediately before the loss. There is no evidence that the insured (Des Smith Family Trust) suffered any losses at all, and consequently the insured, the trust, had nothing to be indemnified against.
The loss was suffered by Smith and not the family trust. A similar situation arose in the case of Manderson t/a Hillcrest Electrical v Standard General Insurance Co Ltd 1996 (3) SA 434 (D) where a principal, Hillcrest Electrical, had insured the car of its independent contractor.
The independent contractor was the owner of the vehicle but not the insured. The car was subsequently stolen. The court held that the insured, Hillcrest Electrical, had not suffered any loss as a result of the theft of the car and therefore the insurer was not obligated to pay anything to Hillcrest Electrical.
Insurer has no obligation
From the above case it is clear that, since the family trust did not suffer a loss due to the damage caused to Smith’s motor vehicle, the insurer had no obligation to pay either the family trust or Smith. Nevertheless, it decided to do so. Prima facie, therefore, the insurer made a payment for which it had no legal obligation to make, resulting in a voluntary payment.
Subrogation…
Subrogation is the right of a person, having indemnified the other, at law to stand in the place of the other person and thereby to avail himself of all rights and remedies of that other person. Once the insurer indemnified the insured, the insurer acquires the right through subrogation of the insured, to sue the third party.
In this case the insured is the family trust, which never suffered a loss and thus has nothing to indemnify and consequently could not be indemnified by the insurer. The insurer thus acquires no right subrogation against Banjo.
In an old American case, Hartford Fire Insurance Co Ltd v Payne 1922 11 SE 736, it was pointed out the insurer who makes a voluntary payment does not acquire any right of subrogation.
The judgment
Disregarding the proper application of the principles of indemnity, the insurer chose to compensate Smith for the damage to his motor vehicle, and then instituted action against Banjo to recover the amount it had paid. And, because the insurer did not acquire subrogation rights, it could recover through subrogation.
Furthermore, Mr Banjo should have had every right to have the insurer’s role in the case tested in a court, but was denied this, because the insurer’s involvement was not disclosed.
Unsympathetic
Mr Banjo raised this point once he discovered the undisclosed involvement of the insurer, but the court was not sympathetic. The Court’s dealing of this entire issue was problematic. It decided that the "question of subrogation is res inter alios acta”. Meaning, subrogation is a private matter between the insured and the insurer, thus according to the court has nothing to do with Banjo.
A skewed view
No one has previously suggested that subrogation is res inter alios acta. Since, Banjo was being sued by the insurer it is difficult to see how he has no right to know who is suing him and if that person has the right to sue him.
The court never suggested any authority for its view. So, for example in Ackerman v Loubser 1918 OPD 31, person being sued argued that since the insured had been indemnified by an insurer, it could no longer be liable to the insured, because the insured no longer suffered a loss.
The court ruled the fact that the insured had been indemnified, was res inter alios acta. Indemnification and subrogation are two different things, and does not lead to the conclusion that subrogation is a matter res inter alios acta.
Abolish insurer’s secrecy
Clearly indemnification of the insured cannot have bearing on the third party’s delictual obligation to the insured. That subrogation is a vastly different matter.
Banjo had a clear defence against the insurer, but was denied the right to present this defence, because of the exception to the rule requiring the insurer to plead its involvement. It should thus be clear to all that this exception should not exist. It should be abolished.