SUBROGATION

Definition

Subornation is the exercise, for one’s own benefit, of rights or remedies possessed by another against third parties. As a corollary (i.e. a natural consequence of an established principle) of indemnity, subornation allows proceeds of claim against third party be passed to insurers, to the extent of their insurance payments. At common law, an insurer’s subornation action must be conducted in the name of the insured.

Suppose, for example, that a car, covered by a comprehensive motor policy, is damaged by the negligence of a building contractor. The motor insurer has to pay for the insured damage to the car. As against the negligent contractor, the insured’s right of recovery will not be affected by the insurance claim payment. However, the motor insurer may, after indemnifying the insured, take over such right from the insured and sue the contractor for the damage in the name of the insured. From this, it will easily be seen how subornation seeks to protect the parent principle of indemnity, by ensuring that the insured does not get paid twice for the same loss.

How Arising

Subornation rights arise in several manners as follows:

(a) In tort: This usually arises where a third party negligently causes a loss indefinable by a policy. For example, a fire insurer, after paying a fire loss, discovers that the fire was caused by a negligent act of a neighbor of the insured. It sues the neighbor in the name of the insured for damages recognized by the law of tort.

(b) In contract: This arises where the insured (perhaps a landlord) has a contractual right (perhaps under a tenancy agreement) against another person (perhaps a tenant) for an insured loss. After indemnifying the insured for the loss, the insurer may exercise such right against that other person in the name of the insured.

(c) Under statute: If a person is injured at work, his employer, if any, will have to pay an employee compensation benefit to him in accordance with the provisions of the Employees' Compensation (‘EC’) Ordinance. The Ordinance will then grant subrogation rights to the indemnifying employer against another person who is liable to the employee for the injury. In turn, the employer has to pass these rights to the EC insurer who has paid the employee compensation benefit for or on behalf of the employer.

(d) In salvage: This we have already considered (see 3.4.5 above). The insurer may be said to have subrogation rights in what is left of the subject matter of insurance (salvage), arising under the circumstances already discussed.

How Applicable

As with contribution, subrogation can only apply if indemnity applies. Thus, if the life insured of a life policy is killed by the negligence of a motorist, the paying life insurer will not acquire subrogation rights, as this payment is not an indemnity.

Other Considerations

There are other features to note:

(a) In the common law, subornation rights are only acquired after an indemnity has been provided. Non-marine policies usually remove such restriction by stipulating that the insurer is entitled to such rights even before indemnification.

(b) Some considerations arise in respect of proceeds of subornation:

(i) The insurer cannot recover more under subornation than he has paid as an indemnity. By way of example, suppose there is an insured loss of an antique. The insurer pays, and sometime later when the antique is found, its value is much higher. The insurer can only keep an amount equal to what he has paid and any balance belongs to the insured.

(ii) The above saying is not true in the event of subornation arising after abandonment of the property to the insurer (see 3.4.6 above). There, all rights in the property belong to the insurer, of course including the right to ‘make a profit’!

(iii) Sharing of Subornation Proceeds Where the insurer has only provided a less-than indemnity on the basis of certain policy limitations, the insured may possibly be entitled to part of – sometimes even the whole of - the subornation proceeds, depending on what limitations have been applied in the process of claims adjustments. The following are illustrations of several manners in which the sharing of subornation proceeds between the insured and the insurer can be done:

(1) Excess: Suppose the insured is responsible for a loss (excess) of $10,000 before his liability insurer pays $40,000, and $20,000 is subsequently recovered from a negligent third party. The whole of $20,000 will belong to the insurer. However, if the subornation recovery is $45,000 instead, the insured will be entitled to $5,000 and the insurer $40,000.

(2) Limit of Liability: Suppose an insured contractor has incurred liability to a road user in the amount of $1.5 million, of which the insured has to pay $0.5 million out of his own pocket because his policy is subject to a limit of liability of $1 million. Any recovery from a joint toreador will belong to the insured, except where it amounts to more than $0.5 million in which case that part over and above the $0.5 million threshold will belong to the insurer up to the amount of insurance payment.

(3) Average: Suppose a fire insurer has paid 80% of a loss where there is a 20% under-insurance. The insured is entitled to 20% of subornation proceeds as if he was a co-insurer for 20% of the risk.