Insurance is at the center of modern society with its value and importance resulting in it being made compulsory in certain areas. The insurance contract is one in which in return for the payment of a premium, an insured may transfer risk of loss to the insurer. However, despite the importance of insurance, the insurance contract has remained complex and virtually incomprehensible by the ordinary consumer. One such principle, which is critical to indemnity insurance is subrogation.
Subrogation in insurance expresses the right of the insurer who has settled a claim to be put in the position and become entitled to every right and remedy of the insured against third parties. Subrogation embraces a set of rules providing a right of recourse for an insurer, which has indemnified the insured. Like all triangular legal relationships, the legal position of insurer, insured and third party in the traditional subrogation situation can become rather complicated. Further, when applied in practice, these principles can become clouded.
The purpose of subrogation
The purpose of subrogation is to prevent the insured from retaining an indemnity from both the insurer and a third party. Further, through subrogation, the insurer is recompensed for the amount it has paid to the basis of the insured. This right of redress is the basis for the insured’s duty not to prejudice the insurer’s position. By affording the insurer a right of redress, the cost of insurance to the public is kept low, since the insurer is enabled to recoup its loss from a source other than premium income. On a social level, the doctrine serves to safeguard the principles that a person who has caused loss to another by his unlawful conduct must bear that loss since a wrongful cannot hide behind insurance. The doctrine of subrogation also strengthens the position of an insurer by creating a trust in favour of the insurer. In Ackerman v Boubser 1908 OPD 31, the court referred to an insured who had recovered compensation from a third party as a trustee for the insurer.
How does subrogation work/ subrogation in action?
It is important in subrogation situations to appreciate its application and scope. Once the insurer has indemnified the insured in full, the insurer enforces the rights of the insured against a third party. The insured thus has a positive duty to assist the insurer in enforcing these rights. This duty entails a right not to act in any way that may prejudice the insurer’s right of subrogation and
this may include not releasing a third party from any obligation partially or in full. A simple example in motor insurance will be used to illustrate how subrogation works. A (the insured) is insured with B (the insurer) for damage against her motor vehicle in the sum of $5 000. A and C (third party) are involved in an accident in which C is fully liable. The damages caused by C amount to $ 3500.
Parties often act of character immediately after a motor vehicle accident and the following reactions ensue; A to C, “Don’t worry, I am fully insured and will not claim any damages from you” C to A, “I am offering to pay $1000 upfront in full and final settlement”
Now of course, such conduct blissfully ignores B (insurer) who is not present but has interest in the matter. In terms of the subrogation principle, once B has paid out a claim in full, B is entitled at law to sue C. In the example above, A can therefore not release C from liability and cannot accept the partial offer from C. A has a duty to B to ensure that B will be able to claim from C. Simply put, the insured cannot release a third party partially or in full as this might prejudice the insurer’s right of subrogation. Should the insured breach this duty, they will be liable to pay damages to the insurer.
Subrogation is an important principle in indemnity insurance. It is crucial in subrogation matters to appreciate the principle and its potential scope. Subrogation remains one of the most litigated aspects of our insurance law, and thus its triangular relationship nature must thus be understood.
This article was written by Nobert Musa Phiri.
He is an Attorney of the High Court and Supreme Court of Zimbabwe