What you need to know about your client’s subrogation rights

Subrogation is a doctrine where the insurer steps into the shoes of the insured and becomes entitled to recover what it can through litigation against a third party wrongdoer. It does not entail a transfer of the insured’s rights to the insurer! Legal proceedings are conducted by the insurer in the name of the insured, but the insured retains its rights against the third party wrongdoer at all times.

The first requirement for subrogation is that a valid contract of insurance exists. This is usually not an issue since the insured would have claimed and been paid the indemnity under the policy before the insurer elected to proceed with a recovery action.

Where the insurer does not indemnify the insured by admitting and paying all that is due in connection with the claim and, for example, makes an ex gratia payment, the insurer has no right of subrogation.

The insured may take the payment and then proceed with the recovery action for its own benefit too – because at common law, the insured must have received full indemnity in respect of its claim. This is not possible where the insured is liable for the first amount payable or where average applies.

The insurer’s right to subrogate is a right that can be exercised only against the insured.

The policy entered between the parties may vary the common law rights of subrogation and afford the insurer a right of subrogation in circumstances, for example, where a full indemnity is not paid or before the indemnity is paid.

Both the insured and the insurer have reciprocal duties to each other to preserve the insured’s claim against the third party. Policy terms also usually expressly prevent the insured from compromising any claim or agreeing any settlement without the insurer’s express authorisation. The insured should avoid waiving any rights of recovery against a third party.

The insurer has the duty to foot the costs of the litigation and to indemnify the insured in the event that the litigation is not successful. So the insured could, if it wishes, insist on an appropriate undertaking being given by the insurer in that regard. Usually that is not necessary. In turn, the insured has the duty to provide reasonable assistance to the insurer in respect of the recovery.

An insured who does not wish to be associated with recovery may wish to cede the claim to the insurer. In those circumstances, litigation would proceed in the insurer’s name. The insured would retain an obligation to provide assistance to the insurer in respect of a recovery but can insist that the insurer litigates in its own name (unless the policy provides otherwise).

The principles of subrogation (and perhaps the terms of the policy) would, however, not compel the insurer to take cession of the claim or proceed by way of subrogation in its own name. Insurers are usually sympathetic to the insured’s reputational or other concerns about litigating in its own name in such a recovery action.

Where the policy allows for subrogation – and in circumstances where there has not been a complete indemnity and the insured wishes to participate in any recovery – the insured should agree, before commencement of recovery proceedings, the basis on which the recovery will be pursued.

Issues that must be decided include the sharing of any recovery, the costs of recovery and third party’s costs in the event that the recovery is unsuccessful. Sometimes the policy deals with the issue but that is unusual.

An insured should, before launching its policy claim, have regard to the policy and its provisions – specifically those parts that deal with recovery cooperation and subrogation. It is not uncommon for the policy terms to vary the common law principles of subrogation.