Unscrambling eggs: Subrogation 101

Confused judges are a relatively recent phenomenon in South Africa. When a long-established legal concept such as subrogation is completely misunderstood by our courts, it is time to revisit to the basic principles involved. It is time for Subrogation 101

Commenting on the recent case of Nkosi v Mbatha July 2010, involving subrogation, Prof JP van Niekerk noted, “O dear. The doctrine of subrogation and its operation in our insurance law continue to provide our courts with opportunities to get it wrong. And get it wrong, they do.”

Donald Dinnie, attorney at Deneys Reitz, echoed these sentiments, saying: “This is a matter of a small case which went horribly wrong. Subrogation was completely misunderstood.”

When judges get confused, the consequences are far-reaching, because the ‘law’ which is applied in subsequent cases is also confused.

Understanding the concept

If technically knowledgeable persons in the insurance industry are asked what subrogation is, they would reply: “It is the right of the insurer, having indemnified the insured, to stand in the position of the insured and avail itself of the rights of the insured”.

When an insured event occurs, many different parties can claim that they have suffered a loss. For example, if an insured husband, the breadwinner in the family, is involved killed in a fatal motor car accident caused by a negligent third party, a number of parties could claim that they have suffered a loss as a result.

The motor insurer will suffer a loss by paying for the damage to the car. The medical scheme will suffer a loss by paying the medical bills. The life insurer will suffer a loss by paying out on the life policies. The dependants will suffer the loss of income of the family’s breadwinner. The bank will suffer a loss because the mortgage bond will no longer be paid. The local supermarket will suffer a loss since the deceased will no longer shop there. The Receiver of Revenue will suffer the loss of the deceased’s taxes. The church will suffer the loss of the deceased’s donations. The list is endless.

At law, initially, none of the parties mentioned - not even the insurer - had a claim against the third party. The losses suffered are all pure financial losses, which were irrecoverable in law.

Process of osmosis

The first change to the rule of no recovery was to make what is generally regarded as an exception to the rule: allowing claims from dependants. Actually, dependant’s claims, also known as “loss of support” claims, are not an exception to the rule. These claims were authorised by legislation, the Fatal Accidents Act (Lord Campbell’s Act), in England. The South African courts did not wait for parliament to introduce similar legislation. Rather, through a process of osmosis, our courts began to adopt the English position, recognising claims for loss of support.

Similarly, by osmosis, the idea has developed that indemnity insurers have the right to sue the third party to recover amounts paid. If the confusion continues, one day the courts will rule that life insurers also have such a right!

How did this osmotic process develop? When an insured event occurs - for example, damage to a car - the insured has two possible claims: from the insurer and from the third party. Should the insured claim from both the insurer and the third party, he or she will be doubly indemnified. To prevent this from happening, the courts ruled that if the insured is doubly indemnified, the insurer will have the right to recover, from the insured, amounts it had paid to indemnify the insured. In the end, with indemnity insurance, the insured can recover no more than the value of the actual loss.

Hijacking the right to sue

It did not take insurers too long to realise it was in their interest for the insured to sue the third party. And so, insurers quickly inserted a clause term in their policies that, if so required, the insured had to sue the third party. It can be argued that this term is against public policy. The right to sue the third party is for the exclusive benefit of the insured not the insurer. Insurers hijacked the right of the insured to sue for his/her own benefit. Insurers thus acquired a right, via the insured, that they in fact did not have.

But another change to the policy took this another step further: the clause term was changed to read the insurer had the right to sue the third party in the name of the insured, if the insurer so desired. This term, which exists in virtually all indemnity policies today, is legal gibberish. The insurer has no right to sue the third party. It cannot acquire such a right by inserting a clause in a policy to give it a right it does not have.

Entrenching the confusion

After insurers had been suing third parties in the name of the insured for a couple of decades, the courts and everyone else forgot that insurers have no such right.

With the passing of time, insurers therefore acquired a right they do not have. Initially, to the extent that they purported to exercise this right, it was because of a clause term in the policy. This migrated to the belief that insurers have an inherent right to sue third parties in the name of the insured.

The road to confusion was completed in 2008 when the Supreme Court of Appeal ruled in Rand Mutual Assurance Co Ltd v Road Accident Fund that the insurer has an independent right to sue the third party. Insurers moved from having no right to having an inherent right!

If this could happen, life insurers and the Receiver of Revenue may soon also be able to exercise this right. If one has such a right, why not all others?

So, whose right is it any way?

In Nkosi v Mbatha the plaintiff’s insured car was damaged and was repaired at a cost of R16 407.84. The repairs were paid for by the insurer and the plaintiff paid the excess of R2 500. The plaintiff then sued the defendant for the full amount of R16 407.84.

It was only at the trial stage that it was revealed that the plaintiff had been indemnified by an insurer and that the plaintiff was suing the defendant at the behest of the insurer. The court then wrongly decided that the insured had no right to sue the third party since, so the argument goes, the insured had been indemnified.

Now we arrive at an odd situation: insureds who have a right to sue, now have no right to sue; and insurers who have no right to sue, now have the right to sue!

Having been indemnified, so the argument went, the insured had no claim because the insured no longer suffered damages. It is anThis argument was rejected over 100 years ago. Nevertheless, the court argued it was expected that the plaintiff would claim only the R2 500 she had paid as an excess.

This decision is incorrect for yet another reason: it would allow the splitting of claims, enabling one claim from the insurer and another from the insured. The third party could end up defending the same case twice! In law there is only one bite at the cherry.

Scrambled eggs all over

The confusion is so entrenched nowadays it is unlikely it can be disentangled; one cannot unscramble an egg.

In fact, it is not only insurance law which is becoming confused – all law is becoming confused.