Subrogation

Subrogation is the legal technique under the common law by which one party, commonly an insurer (I-X) of another party (X), steps into X's shoes, so as to have the benefit of X's rights and remedies against a third party such as a defendant (D). Subrogation is similar in effect to assignment, but unlike assignment, subrogation can occur without any agreement between I-X and X to transfer X's rights. Subrogation most commonly arises in relation to policies of insurance, but the legal technique is of more general application. Using the designations above, I-X (the party seeking to enforce the rights of another) is called the "subrogee". X (the party whose rights the subrogee is enforcing) is called the "subrogor".

In each case, because I-X pays money to X which otherwise D would have had to pay, the law permits I-X to enforce X's rights against D to recover some or all of what I-X has paid out. A very simple (and common) example of subrogation would be as follows:

# D drives a car negligently and damages X's car as a result.
# X, the insured party, has Collision insurance, and claims (i.e., asks for payment) under his policy [This illustrates the etymology of the term "subrogate", in this context meaning "to ask for payment under the terms of the policy" (which as explained below is based on the original Latin sense, and not on the present-day legal meaning). The term "subrogate" descends from the Latin "sub" (under) and "rogare" (to ask). See "subrogate" in "Webster's New World Dictionary of the American Language", p. 1419 (2d College Ed. 1978) (from "subrogatus", "surrogatus"), and cross-reference to "surrogate", id., p. 1433. The denotative sense has been transmuted from an "asking under" to a substitution or succession with respect to the right of payment. "Subrogation typically arises when an insurance company pays its insured pursuant to a policy; the company is then subrogated to the cause of action of its insured." "Barron's Law Dictionary", p. 461 (2d ed. 1984). Although the term "subrogation" has come to mean the substitution - the insurance company replacing the insured as the party holding the right to payment - the insurance company is still called the "subrogee" (the person who has been "asked under" the policy) with the insured still referred to as the "subrogor" (the person "asking under").] against I-X, his insurer.
# I-X pays in full to have X's car repaired.
# I-X then sues D for negligence to recoup some or all of the sums paid out to X.
# I-X receives the full amount of any amounts recovered in the action against D up to the amount to which I-X indemnified X. X retains none of the proceeds of the action against D except to the extent that they exceed the amount that I-X paid to X.

If X were paid in full by I-X and still had a claim in full against D, then X could recover "twice" for the same loss. The basis of the law of subrogation is that when I-X agrees to indemnify X against a certain loss, then X "shall be fully indemnified, but never more than fully indemnified ... if ever a proposition was brought forward which is at variance with it, that is to say, which will prevent [X] from obtaining a full indemnity, or which will give to [X] more than a full indemnity, that proposition must certainly be wrong." ["Castellain v Preson" (1883) 11 QBD 380 at 386]

I-X will normally (but not always) have to bring the claim in the name of X. Accordingly, in situations where subrogation rights are likely to arise within the scope of a contract (i.e. in an indemnity insurance policy) it is quite common for the contract to provide that X, as subrogor, will provide all necessary cooperation to I-X in bringing the claim.

Subrogation is an equitable remedy and is subject to all the usual limitations which apply to equitable remedies.

Although the basic concept is relatively straightforward, subrogation is considered to be a highly technical area of the law.

Legal analysis

It is periodically argued that the concept of unjust enrichment provides the conceptual underpinning for the law of subrogation. [Goff & Jones, "The Law of Restitution", ISBN 0-421-89830-5] Whilst this is probably true as a matter of the English language (otherwise X could be paid twice in respect of the same claim), other academic commentators have disagreed that subrogation fits squarely with accepted legal reasoning relating to this field. [Burrows, "The Law of Restitution", ISBN 0-406-93244-1] In reality, the argument as to the conceptual underpinning for the legal technique is more theoretical than practical.

There is also lively debate in legal circles as to whether the rights of subrogation are the subject of an express or implied agreement, or whether they arise automatically by operation of law. The reasoning of the courts has not always been clear in relation to this, [In "Yorkshire Insurance Co v Nisbet Shipping Co" [1962] 2 QB 300 Lord Diplock indicated that subrogation was just shorthand for an implied term in contracts of marine insurance.] but the answer is probably all three in many cases. It is clear that subrogation rights can arise even where there is no contract between subrogor and subrogee, ["Esso Petroleum v Hall, Russell & Co Ltd" [1989] AC 643] so it is clearly not necessary for there to be an express or implied term. However, it clearly "is" an implied term of any policy of insurance or guarantee that the insurer or guarantor will be subrogated in the event of any payment by the insurer to the insured party. However, in practice, most policies of insurance will contain an express clause regulating subrogation rights as well. [Ironically guarantees usually contain a clause, at the behest of the bank, that the guarantor's subrogation rights against the borrower are subordinated until the bank has been paid in full; this is to avoid the guarantor competing against the bank in the event of a bankruptcy on the part of the borrower.]

Types of subrogation

Although the classes of subrogation rights are not fixed (or closed), types of subrogation are normally divided into the following categories:
# Indemnity insurer's subrogation rights
# Surety's subrogation rights
# Subrogation rights of business creditors
# Lender's subrogation rights
# Banker's subrogation rights

Although the various fields have the same conceptual underpinnings, there are subtle distinctions between them in relation to the application of the law of subrogation.

Indemnity insurer's subrogation rights

An indemnity insurer in fact has two distinct types of subrogation right. Firstly, they have the classic type of subrogation used in the example above; viz. the insurer is entitled to take over the remedies of the insured against another party in order to recover the sums paid out by the insurer to the insured and by which the insured would otherwise be overcompensated. ["Mason v Sainsbury" (1782) 3 Dougl KB 61; "Morris v Ford Motor Co" [1973] QB 792] Secondly, the insurer is entitled to recover from the insured up to the amount which the insurer has paid to the insured and by which the insured is overcompensated. ["Castellain v Preston" (1883) 11 QBD 380; "Re Miller, Gibb & Co" [1957] 1 WLR 703] The latter situation might arise if, for example, an insured claimed in full under the policy, but then started proceedings anyhow against the tortfeasor, and recovered substantial damages. [In practice there are many reasons why an insured may do this; to recover a related uninsurable loss, to establish a defence to other claims against the insured. However, in each case the law requires them to return the amount of any compensation received in respect of which they have also received insurance payments to the insurer.]

urety's subrogation rights

A surety who pays off the debts of another party is subrogated to the creditor's former claims and remedies against the debtor to recover the sum paid. ["Forbes v Jackson" (1882) 19 Ch D 615] This would include the endorser on a bill of exchange. ["Duncan, Fox & Co v North and South Wales Bank" (1880) 6 App Cas 1]

In relation to a surety's subrogation rights, the surety will also have the benefit of any security interest in favour of the creditor for the original debt. Conceptually this is an important point, as the subrogee will take the subrogor's security rights by operation of law, even if the subrogee had been unaware of them. [Charles Mitchell, "The Law of Subrogation", ISBN 0198259387] Accordingly, in this area of the law at least, it is conceptually improbable that the right of subrogation is based upon any implied term.

ubrogation rights against trustees

A trustee of a trust who enters into transactions for the benefit of the beneficiaries of the trust is generally entitled to be indemnified by the beneficiaries for personal loss incurred, and has lien over the trust assets to secure compensation. If, for example, the trustee conducts business on behalf of the trust and fails to pay creditors, then the creditors are entitled to be subrogated to the personal and proprietary remedies of the trustee against the beneficiaries and the trust fund. ["Re Johnson" (1880) 15 Ch D 548; "Re Oxley" [1914] 1 Ch 604] Where under the terms of the trust instrument the trustees are permitted to trade in derivatives as part of the trust's investment strategy, [In most jurisdictions the trustees would be prohibited from such risky investments by law unless expressly empowered by the trust instrument.] then the derivatives document will also normally contain a subrogation clause to bolster the common law rights.

Lender's subrogation rights

Where a lender lends money to a borrower to discharge the borrower's debt to a third party (or which the lender pays directly to the third party to discharge the debt), the lender is subrogated to the third party's former remedies against the borrower to the extent of the debt discharged. ["Butler v Rice" [1910] 2 Ch 277; "Ghana Commercial Bank v Chandiram" [1960] AC 732]

However, if the original loan was invalid (because, for example, it was "ultra vires" the borrower) then the lender generally cannot enforce the third party's claim against the borrower as this would indirectly validate an invalid loan. ["Sinclair v Brougham" [1914] AC 398; much criticised on this point.] Nonetheless the claim can subsist insofar as the "unlawfully" borrowed money was used to discharge "lawful" debts, by inferring the legality of the use of the funds to the right of subrogation. ["Orakpo v Manson Investments Ltd" [1978] 95, per Lord Goff] The law in this area has been subject to conflicting decisions. [For example, in "Nottingham Permanent Benefit Building Society v Thurstan" [1903] AC 6 the House of Lords held that a building society could be subrogated to an unpaid vendor's lien in respect of an unlawful loan to an infant to purchase land.]

Banker's subrogation rights

Where a bank, acting on what it believes erroneously to be the valid mandate of its client, pays money to a third party which discharges the customer's liability to the third party, the bank is subrogated to the third party's former remedies against the customer. ["B Liggett (Liverpool) Ltd v Barclays Bank Ltd" [1928] 1 KB 48]

Remedies

In "Lord Napier & Etterick v Hunter" [1993] 2 WLR 42, the House of Lords confirmed that an indemnity insurer's subrogation rights against the assured are not limited to a simple personal remedy; the insurer also has the benefit of an equitable lien over the damages received by the assured. That case also controversially held that in working out the overcompensation to which the insurer is entitled the assured cannot first recover the whole of his uninsured loss, and must instead bear the excess agreed.

Subrogation can thus be in conflict with Make Whole Doctrine, the right of an injured party to recover full damages. This abrogation of Make Whole doctrine puts the insurer in the position of having first claim to an at-fault party's assets, even if the assured is left destitute as a result (see Northern Buckeye vs Lawson - 2004). In other words, the law's intent to prevent dual recovery by the assured can lead to less-than-equitable recovery.

In the cited case, the Ohio Supreme Court ruled that the language of the assured's insurance contract overruled Ohio's statutory default Make-Whole Doctrine. For this reason, an insured client needs a full awareness of subrogation clauses in his insurance contracts, including insurance provided by employers, fraternal organizations, etc.

References

External links

* [http://www.subrogation.org NASP (National Association of Subrogation Professionals)]
* [http://www.sconet.state.oh.us/Communications_office/summaries/2004/0929/031880.asp Northern Buckeye vs Lawson - 2004]