‘In a large number of situations both insurers
“In a large number of situations both insurers and the courts recognise that the doctrine of subrogation in insurance may have unfortunate results and is wasteful. It is clear that the doctrine no longer serves any useful purpose”. Discuss.
INTRODUCTION
It has been recognised that fundamentally it is tort law that ensures compensation for loss in terms of compensation within the concept of the tortfeasor restoring loss through damages being paid to the person wronged[1]. In terms of insurance this liability can be revealed through the idea behind third party liability, the first party being the insured, the second party being the insurer, and the third party relating to any potential for restitution needing to be paid to anybody not included within the terms of the contract who might have met some sort of loss through the actions of the insured person, eventually becoming incorporated into the law of liability.
Meanwhile, subrogation[2] has been defined as “the substitution[3] of one person in place of another with reference to a lawful claim”[4] or, more simply, the recognition in law that a lawful claim may be pursued by a third party in accordance with the principles of substitution[5]. Various types of subrogation are recognised, revealed as legal, statutory and conventional subrogation, the latter relating specifically to the terms of a contract, the legal revealed in allowing one individual to assume the rights over another and the statutory occurring as a result of the law being applied in terms of legal subrogation.
This essay, focuses on the tenets of insurance law through which the principle of indemnity is revealed through the doctrine of subrogation in terms of its conventional interpretation within its statutory framework, i.e. as a remedy in “what might be classified as unjust enrichment in a legal system that is based upon the civil law”[6]. Subrogation originates from both common law and the laws of equity and it is also through both equity and common law that it continues to be administered, with the law of restitution recognised as a quasicontract within common law rather than incorporated into the laws of contract[7] or the law of tort.
It has, however, become clear that this doctrine of subrogation no longer serves any useful purpose and has by been recognised both insurers and the courts that, in many situations, it may have unfortunate results and is wasteful. This essay discusses the issues surrounding the concept of subrogation and presents an argument that suggests that the function of this doctrine is, indeed, outmoded, inefficient and costly.
DISCUSSION
No Profit Rule
Any capricious risk reassigned through a contract of insurance is subject to various fundamental assumptions, one of which is the factor surrounding that risk’s arbitrary nature. Through the element of ‘utmost good faith’[8] it is expected that the person to be insured discloses everything that could be relevant to the risk that the insurer is taking when it has agreed to insure the client[9]. Similarly, the client may not be put at a disadvantage by any actions the insurer may undertake, with a number of regulations to ensure that the insurer adheres to acceptable practices and the insured does not, through any misrepresentation, preclude any entitlements owed to the insurer[10]. Under the terms of the ‘made whole principle’ the insured person must be reimbursed in full prior to any profit being considered liable to the insurer, and the insurer may not implement the doctrine of subrogation until the insured person has been reimbursed in full[11], except where a clause in the policy enables the insurer to apply the principle of subrogation when only partial payment has been made.
Nevertheless, insurers are within their statutory rights to offer a voluntary settlement to the insured person and then pursue judgment with the expectation of receiving full compensation through implementing the doctrine of subrogation against the third party’s liability insurance. However, the client may not jeopardise the trust that exists between insurer and insured by claiming more than their loss[12], more recently the basis of a case where a Canadian Court of Appeal reduced the amount of compensation received by the Appellant, while they:
“imposed significant punishment for the bad faith of the respondent without upsetting the proper balance between the compensatory and punitive functions of tort law”.
Although in English law claiming more than the actual loss is not specifically illegal, to do so would be in breach of equitable principles and the doctrine of indemnity which assumes that the insured person would not make a profit from their loss. The doctrine of subjugation may be used in certain cases, stipulated by the courts, in order to remedy situations[13] whereby an unjust profit had been made, in accordance with the explanation given by Lord Diplock in Orakpo v Manson Investments Ltd:
“It is a convenient way of describing the transfer of rights from one person to another, without assignment or assent of the person from whom the rights are transferred and which takes place in a whole variety of widely different circumstances”[14].
Should the situation occur whereby the insured profits, it would be expected that they reimburse any excess to their insurer[15]. Meanwhile, if, after both the insured and the insurer has been fully indemnified, there is excess money from the claim, the insurer is within their rights to claim it, as in the case of Yorkshire Insurance Co v Nisbet Shipping Co[16]. Similarly, if a claim is settled in full by a third party and the money paid to the insurer, then that insurer is legally within their rights to deduct any excess from the compensation before paying the residue to the insured in accordance with the terms of their insurance agreement, as revealed in the case of Scottish Union & National Insurance Co v Davis[17].
Evidence of Loss
The Courts tend to interpret insurance policies in accordance with those rules relating to the laws governing contracts, taking the overall context as being consistent with the actual intended meaning[18] although, in situations where a meaning might be unclear it is usually the insured person who benefits in accordance with the doctrine of contra proferentem in terms of the guidelines of equity, although in the case of Leppard v Excess Insurance Co Ltd the actual sum awarded to the insured was reduced on Appeal as it was ruled the insured had been awarded indemnity in excess of his loss[19]. Accordingly, and in view of the fact that insurance policies are subject to the rules of contract, it is necessary to ascertain whether the client was insured and, if so, under what terms, as revealed in the case of Sprung v Royal Insurance (UK) Ltd[20] where it was decided that, although the plaintiff had clearly suffered a loss through the late payment of his claim, the:
“loss was recoverable in law from the defendants in addition to the interest element of the sum which had already been paid in respect of the loss under the policy”[21].
However, the figure awarded should be in accordance with the market value of the property and, in situations where a property was incomplete, the value of the loss should reflect the market value at the time the loss occurs, illustrated by the case of Richard Aubrey Film Productions Ltd v Graham[22] who, nearing completion of their filming, had their negatives stolen. At completion the film had an estimated market value of around ?20,000 but, as it still required further editing and other attention, thought to be around ?4,700 in value, prior to release the full market value was not considered to be appropriate. It was interpreted that compensation should be in accordance with the value of an ordinary indemnity contract, reflecting the sum a buyer would be prepared to pay for the film at the time of loss.
An overriding factor in assessing whether compensation may be payable is the legislation appropriate to each individual case, identified through either its comprehensive cover or through its specific limitations in terms of criteria. Policies need to take account for the devastation fire can cause, taking into account ‘reasonable reinstatement’ as clarified by Reynolds v Phoenix Assurance Co Ltd[23] relating to the proposed refurbishment of an old mill. On the advice of their insurance brokers they greatly increased their indemnity. Subsequently a fire destroyed most of the building. It was established that the policyholder genuinely intended to rebuild the property and should be properly indemnified, although an issue was raised with the doctrine of undue enrichment, which was taken into account.
Remedy of Restitution
According to case law, and especially clarified by Lord Diplock[24], it is generally an accepted principle that the rule of subrogation cannot be appropriate in every case and should be utilised reservedly for instances where it is especially pertinent and, as clarified in the case of Re TH Knitwear (Wholesale) Ltd[25], only to the satisfaction of the courts, as in the case of Campbell Auto Finance Co v Warren in 1933[26], and similarly in later rulings, e.g. Re Chobaniuk and Canadian Johns Manville Co Ltd[27], although there are always exceptions. Subrogation may occur through the breach of duty or duplicity by the defendant resulting in the plaintiff being owed some form of corrective justice and recognised as a fundamental principle that profit may not be assumed through deceit[28], or the doctrine of unjust enrichment[29], in accordance with Lord Goff’s ruling in Lipkin Gorman[30]:
“A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied, it is denied on the basis of legal principle”.
An insurer may enter into a simple subrogation by metaphorically standing in place of the insured person[31], after the insured person’s claim has been paid[32], and claiming the value of the insured person’s indemnity from this third party. This claim through subrogation must, however, be undertaken in the name of the insured person to reflect the fact that liability continues even though the insured person has already been indemnified. In effect, this means that the insurer is forcing the insured person to undertake further action despite the fact that they have already received full payment. The result will reimburse the insurer to the value of that which has already been paid to the insured.
In theory, this would enable an insured person who had suffered a loss from the actions of a third person, to receive double compensation through a secondary action against the third party, the tortfeasor, as in the case of Caledonia North Sea Ltd v London Bridge Engineering Co[33] during which the insurers were allowed to “exercise a right of subrogation and sue in the insured’s name under the contracts of indemnity”.
The perception of compensation has a dual function: the satisfaction of obtaining justice against a defendant and the plaintiff being compensated to the value of their loss. Nonetheless, debate[34] currently surrounds the issue of deducting collateral damages that might already have been paid to the plaintiff, the intention being that the plaintiff should be left in the position they were in before the liability occurred according to the precepts of common law as ruled in British Transport Commission v Gourley[35]. It was recognised in Parry v Cleaver[36] that common law offers no recognition of prior benefits being deducted or not with it being left to the courts’ discretion to rule in accordance with “justice, reasonableness and public policy”[37] and, despite the law of tort remaining at variance with any of the more updated methods of compensation, its procedures continue to be an important way of recompensing for loss with the result that collateral compensation often results in a breach of the doctrine of unjust enrichment, as revealed in British Transport Commission v Gourley:
“it is a universal rule that the plaintiff cannot recover more than he has lost…Before Gourley’s case it was well established that there was no universal rule with regard to sums which came to the plaintiff as a result of the accident but which would not have come to him but for the accident”[38].
This ruling was later upheld in Hussain v New Taplow Paper Mills Ltd[39] due, in part, to Lord Bridge’s view that the tortfeasor should not benefit because the plaintiff had paid insurance premiums or received other payments as the result of charity, i.e. an award of damages having a deterrent effect through the defendant having to pay compensation, highlighted in the case of Redpath v Belfast and County Down Railway[40], although this was later superseded by British Transport Commissioners v Gourley[41]. When Browning v War Office[42] was heard in the Court of Appeal it was noted that:
“whether the policy of the common law in these types of actions is to provide restitution for the plaintiff or to visit retribution on the defendant?”[43].
CONCLUSION
Insurance law does not necessarily correlate with the principles of common law, with indemnity considered to be non-deductible due to a variety of reasons, part of which appears to be a reflection on the courts’ attitude to social policy. It was ruled in the case of Caledonia North Sea Ltd v London Bridge Engineering Co[44], i.e. Caledonia North Sea Limited (Respondents) v British Telecommunications Plc (Appellants) (Scotland) and Others[45]:
“insurance company recoveries, under their right of subrogation, most often flow from tort actions is quite natural, but without significance. Subrogation is an equitable principle and applies to contract rights as fully as it does to tort actions… The insurer is subrogated to appellant’s contract right of indemnity. This sustains the cause of action against appellant for the identical reason that subrogation sustains a tort action where the plaintiff has been paid for his loss”
The case of Parry v Cleaver[46], decided in the House of Lords, illustrates the incongruous situation of continuing to recognise the doctrine of subrogation in insurance, recognised by both insurers and the courts as being wasteful and no longer serving any useful purpose, with both the opportunity and the possibility of various unfortunate results emerging from this practice continuing, the concept of insurance having diminished the influence tort alone now has in terms of restitution[47]. Insurance companies now reimburse up to 94% of all damages and 88% of all claims in tort through insurance premiums that have been pre-paid[48].
The law of restitution or quasicontract is recognised at common law rather than contractual remedies or remedies at tort. However, evidence provided by case law suggests that the circumstances in which these remedies are applied is reliant on a specific set of principles[49] and there appears to be considerable doubt as to the criteria for subrogation allowed to be applied, with it being suggested that applying it arbitrarily was unacceptable – it should be a “matter of principle”[50]. The definitive case that has been acknowledged as introducing the law of restitution into case law was Moses v Macferlan[51].
“The law of restitution is the law relating to all claims…which are founded upon the principle of unjust enrichment”[52].
It has been claimed that ‘federal class actions have tripled over the past 10 years’ represented by a burgeoning escalation of over 1000%[53] and is contributing to an incipient damage to the US economy with ‘litigation costs increased at four times the growth of the overall economy’[54]. Krauss observes that the law of tort is ‘not insurance against unfortunate losses…[it]…does not exist to protect against risks’. As he clarifies, the competitive nature of the insurance industry enables premiums paid by policy holders to cover the cost of most claims[55]. In the US this may be achieved through social insurance, welfare payments and tax law or by way of private insurance, none of which had evolved to such developments as modern society enjoys when the cases of Castellain v Preston[56] and Darrell v Tibbetts[57] were being heard in the Court of Appeal during the 19th Century.
Subrogation was ruled in Darrell v Tibbetts[58] as payment had been made for a loss which, in retrospect, was revealed not to have been a loss and, as such, the plaintiff was entitled to seek redress from the courts in order to be reimbursed for his loss. In Castellain v Preston, however, this was not the case and ultimately resulted in both sellers and purchasers, in effecting conveyance of property, to be required to insure that property against loss, an apparent example of a wasteful exercise.
The ruling made by Chitty J was on the premise that “The contract of sale was not a contract…for the preservation of the buildings insured”[59]. However, it was also recorded that Chitty, J correlated ‘subrogation’ with “the insurers are entitled to enforce all the remedies whether in contract or in tort”, thereby paving the way to future confusion between when subrogation was an appropriate action and blurring the distinction between the law of contract, that of tort and that of quasicontract administered through common law. The case went to Appeal where Brett, LJ[60] interpreted simple subrogation as a doctrine of subrogation interchangeable with the doctrine of indemnity.
The Law Reform Commission state that Brett, LJ ‘distorted the definition of subrogation so as to cover the case’[61] with the effect that it has subsequently been misapplied in many other cases[62], with its true application, equity, continuing to be incorrectly interpreted over the years as subrogation. The Commission states:
“…its long-term effect has been to introduce a confusion into the heart of the law in this area which has rendered its workings obscure and which must be stripped away before the remedies made available…to enforce the principle of indemnity can properly be understood”[63].
This reinforces their view of sufficient welfare provision and private insurance cover to preclude the need to subrogate a claim against a tortfeasor. In accordance with this view, the doctrine of subrogation can no longer serve any useful purpose and, in view of the amount of waste in terms of litigation costs and courts’ time that results from this doctrine far outweighs its continued value or rationale.
Total Word Count (excluding bibliography and footnotes): 3,000 words
BIBLIOGRAPHY
BOOKS:
Beatson, J (2002): Anson’s Law of Contract, Oxford: Oxford University Press, Page 20.
Bird and Hird (2001): Modern Insurance Law, London: Sweet and Maxwell, Page 256
Black’s Law Dictionary, 6th Edition (1990).
Burrows, (1993): The Law of Restitution, London: Butterworths, Page 1
Goff and Jones (1998): The Law of Restitution, [5th ed]. London: Sweet and Maxwell, Page 3
Krauss, Michael I (1992): Tort Law and Private Ordering, USA: St Louis University Press
Mitchell, Charles (1994): The Law of Subrogation. Oxford: Oxford University Press, Page 4
Oxford English Dictionary, The Compact Edition ( Oxford, 1987), ii. 3126
Virgo, Graham (1999): Principles of the Law of Restitution. Oxford: Oxford University Press
ARTICLES:
Barker, (1995): Unjust Enrichment: containing the beast. In OJLS, 15, 457,473
Barker, (1998): Rescuing Remedialism in Unjust Enrichment Law: why remedies are right. In CLJ, 57, 301.
Birds, John: Contractual subrogation in insurance. [1979] JBL 124, Pages 132 – 133
Connor, Martin F (2000, October): Taming the Mass Tort Monster, In the National Legal Centre for the Public Interest, Page 4
Hasson, Reuben: Subrogation in insurance law – a critical evaluation. [1985] 5 Oxford J Legal Stud 416, Page 425 – 428
HMSO: Report of the Royal Commission on Civil Liability and Compensation for Personal Injury [UK Pearson Commission (1978, Vol. 2, para. 509) [Cmnd 7054]
Law Reform Commission CONSULTATION PAPER ON COLLATERAL BENEFITS (LRC – CP 15 – 1999) Dublin: IPC House
ONLINE RESOURCES (Site visited 25/05/05. Hyperlinks functioning)
Krauss, Michael I (2004): Medical Malpractice: is it time for Tort Reform in Maryland, USA?: The Maryland Public Policy Institute http://www.mdpolicy.org/research/health/MDMedMal.pdf
Parsons, Chris (2002): Moral Hazard and Behavioural Aspects of Liability Insurance. http://64.233.183.104/search?q=cache:VR1wzB7SfwEJ:www.nottingham.ac.uk/business/cris/ukec/2002paper5.doc+Pearson+Commission%2Binsurance%2Bclaims%2B88%25%2Btort+=en
TABLE OF CASES:
British Transport Commission v Gourley [1956] AC 185, [1955] 3 All ER 796, [1956] 2 WLR 41, 2 Lloyd’s Rep 475, 34 ATC 305, [1955] TR 303, 49 R&IT 11
Browning v War Office and Another [1960 B. No. 3080] [COURT OF APPEAL] [1963] 1 QB 750
Caledonia North Sea Ltd v London Bridge Engineering Co [2000] Lloyd’s Rep IR 249
Campbell Auto Finance Co v. Warren [ 1933] 4 DLR 509 at 515
Canadian Johns Manville Co Ltd [1969] 39 WWR 680 at 681
Castellain v Preston & Others [1881-1885] All ER Rep 493
Castellain v Preston and Others [1882] 8 QB D 613 (April 4)
Castellain v Preston and Others [1883]11 QB D 380 (March, 12)
Commercial Union Ass Co v Lister (1874)LR 9 Ch 483
Darrell v Tibbetts (Court of Appeal) 5 QB D 560
Hussain v New Taplow Paper Mills Ltd [1988] 1 AC 514, [1988] 1 All ER 541, [1988] 2 WLR 266, [1988] ICR 259, [1988] IRLR 167
Leppard v Excess Insurance Co Ltd [1979] 2 All ER 668, [1979] 1 WLR 512, [1979] 2 Lloyd’s Rep 91, 2 ILR 107, 250 EG 751, [1979] EGD 246
Lipkin Gorman (A Firm) v Karpnale Ltd [1991] 2 AC 548, 578
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, 39
Morrison and Morrison v. Canadian Surety Co, n. 4 above, at 86 per Coyne, JA
Moses v Macferlan [1776] 2 Burr. 1005, 1012; 97 ER 976, 981
Napier v Hunter [1993] 2 WLR 42:
Lord Napier and Ettrick and Another v Hunter and Others and Lord Napier and Ettrick v RF Kershaw Ltd and Others [Consolidated Appeals] HL [1993] AC 713
Orakpo v Manson Investments Ltd and Others [ 1978] AC 95, [1977] 3 All ER 1, [1977] 3 WLR 229, 36 P & CR 1
Page v Scottish Insurance Corporation Ltd; Forster v Page (Court of Appeal) [1929] 33 Ll.L Rep. 134
Parry v Cleaver (House of Lords) [1970] AC 1, [1969] 1 All ER 555, [1969] 2 WLR 821, [1969] 1 Lloyd’s Rep 183, 6 KIR 265, (48 MLR 20)
Phoenix Assurance Co v Spooner [1905] 2 KB 753
Rayner v Preston (1881) 18 Ch D 1
Regal Films [1946 OCA]
Reynolds and Anderson v Phoenix Assurance Co Ltd and Others (Queen’s Bench Division) [1978] 2 Lloyd’s Rep 440 2 ILR 75, 3 ILR 51, 247 EG 995, [1978] EGD 172
Re TH Knitwear (Wholesale) Ltd [ 1988] Ch 275 at 286
Richard Aubrey Film Productions Ltd v Graham [1960] QB 2 Lloyd’s Rep 101
Scottish Union & National Insurance Co v Davis [1970] 1 Lloyd’s Rep 1
Sprung v Royal Insurance (UK) Ltd [1999] Lloyd’s Rep IR 111, (Transcript: Smith Bernal)
West of England Fire Insurance Co v Isaacs (Court of Appeal) [1895 – 1899] All ER Rep 683
Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595, 2002 SCC 18
Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd (Queen’s Bench) [1962] 2 QB 330, [1961] 2 All ER 487, [1961] 2 WLR 1043, [1961] 1 Lloyd’s Rep 479
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