Subrogation: Scrambling the egg a little more

In the February edition of FAnews I pointed out the growing confusion surrounding the law of subrogation in our South African courts, as clearly reflected in the Nkosi v Mbatha case. Now, some aspects of that case have been overruled in Des Smith v Banjo,

The background

Mr Des Smith owned a motor car, which was insured by the family trust. Apparently, he had borrowed money from someone to buy the car and was paying the car off in instalments. The judgment, unfortunately, does not state from whom Smith had borrowed the money. It could have been a bank or even the family trust, which makes a world of difference to the case. We also do not know if the insurer paid the family trust, although this is strongly implied. It is therefore clear that some crucial facts were never revealed to the court and as the case turned out a person being sued by an insurance company pretending to be the person who suffered the loss may not ask and the insurer does not have to tell. In short a person being sued has no way of finding out who is suing him or her.

The case

Smith and Banjo were involved in an accident. Smith, who clearly thought that Banjo negligently caused the accident, sued Banjo, who in turn raised a defense that Smith lacked locus standi. In plain language, Banjo argued Smith had no standing in law to sue him.

It is a seemingly strange defense. If I drive into Mr X’s motor car, Mr X can claim damages from me. For the past 2 000 years or so, that has been the law. Thus, by law, Smith does indeed have a standing in law to sue Banjo. Why then would Banjo believe Smith had no standing to sue him?

Banjo’s defense would have made more sense, if, for example, the family trust tried to sue him. In such a case, Banjo could have stated that the trust, which does not own the car and therefore did not suffer any loss at all, had no standing in law to sue him.

So, taken at face value, the defense is difficult to understand. It is the missing facts that make the difference.It was, in fact, not Smith who was suing Banjo, but an insurer, more specifically, the insurer of the trust.

Insurance conundrum

The judgment states that “The trust had insured the vehicle”. It is not clear what this means at all. The trust cannot insure the vehicle, since the trust is not a registered insurance company and cannot legally insure anything. Presumably, what the court meant was that the trust was the insured on the insurance policy, and the vehicle which belonged to Smith was insured in terms of that policy. Since the trust did not own the vehicle the trust never suffered any loss. By implication then, it appears that the insurer had paid the trust for a loss the trust never suffered and was now attempting to recover the payment it had made to the trust from Banjo.

An insurer simply cannot do that! The only known basis in terms of which an insurer can sue a third party, which in this case is Banjo, is in terms of subrogation. Having indemnified the insured against the loss the insured suffered, which in this case is the trust, the insurer stands in the shoes of the insured, the trust and avails itself of all the rights of the insured, the trust. But since the trust never suffered a loss, the trust certainly has no right whatsoever to sue Banjo. If the trust has no rights, the insurer has also no rights. Smith argued he was not relying on subrogation as he had a separate agreement with the insurer to finance the litigation – that is much worse – this action now becomes an admitted case of champerty, which can be both a delict and a crime. It is not at all clear that companies who are licensed to carryon the business of insurance can be in the business of financing speculative litigation.

Playing charades

Based on these deductions, the action of the unknown and unnamed insurer in suing Banjo in the name of Smith is totally unfounded. But instead of throwing the case out, the court went along with the charade.

The court decided that the case was a simple matter of an owner (Smith), suing a third party (Banjo) and therefore Banjo’s defense must fail. This would be correct if it was indeed Smith suing Banjo. If, in fact, it is the insurer suing Banjo, then that is clearly wrong, probably unlawful and possibly even fraud on the part of the insurer, which would be suing under false pretenses by assuming rights it did not have.

Private matter or public concern?

The only way to know the truth is to get an answer to the question: “Who is really suing Banjo: Smith or the insurer purporting to act in terms of subrogation?” The only way to find out if this is a lawful or fraudulent action is to know who is suing. To this question, the court answered: “The question of subrogation is res inter alios acta.” In plain English, the court said that the question of subrogation is a private matter between Smith and the insurer, and has nothing whatsoever to do with Banjo.

This statement is clearly wrong. If the insurer has no authority to sue and is pretending to have such authority, that is probably fraud. And fraud is everybody’s business, including and especially the court’s business! There is a well-known rule that no one may approach the courts with dirty hands. What the courts have often and correctly said is that the fact that a person is insured is res inter alios acta - a fact from which the defendant cannot benefit. But that is by no means the same thing as saying subrogation is res inter alios acta.

One cannot unscramble an egg

With all due respect to the court, this decision has only entrenched the confusion surrounding subrogation even further! As I pointed out in the previous article, once confusion sets in, it is unlikely that it can be disentangled: one cannot unscramble an egg. In this case, the egg has been scrambled even further.