Subrogation

Subrogation is the substitution of one person for another, or of one person into the place of another with respect to rights, claims, or securities. It is most commonly found in the context of insurance, whereby an insurer, having paid a claim to its insured (e.g., automobile collision, workers' compensation, health insurance, etc.) steps into the shoes of its insured and enforces a claim against a third-party tortfeasor responsible for causing the loss, in the name of the insured.

Rights of subrogation can arise three different ways: (1) automatically as a matter of law, (2) by agreement as part of a contract, or (3) by statute (e.g., workers' compensation, Longshore and Harbor Workers Compensation Act, Medicare, No-fault auto PIP benefits, etc.). Subrogation by contract commonly arises in contracts of insurance. Subrogation as a matter of law is an equitable doctrine, and forms part of a wider body of law known as unjust enrichment. Two areas where subrogation is relevant are insurance and sureties. In each case, the basic premise is that where one person (i.e. typically an insurer or a guarantor) makes a payment on an obligation which is the primary responsibility of another party, the person making the payment is subrogated to the claims of the person to whom they made the payment with respect to any claims or remedies which are exercisable against the primarily responsible party. For example, if a car owner has collision insurance coverage on his car and the car is damaged by a negligent third party, and if the car owner elects to claim under his or her insurance policy, then any claims which the car owner had against the negligent party will pass to the insurance company in jurisdictions which recognise the doctrine. Similarly, if a father guarantees the debts of his son to the bank (i.e. a contract of suretyship), and the bank elects to call upon the guarantee rather than claiming against the son directly, and the father pays out on the guarantee, the father will become subrogated to the bank's claims against the son.

Typically, an insurance policy will transfer the risk only and not the ownership of goods. However, the doctrine of subrogation will also pass proprietary rights such as a security interest or claim to ownership of goods. If a work of art is stolen, and the insurance company pays out under a policy of insurance to the owner and the art is later recovered, the art will belong to the insurance company under rights of subrogation. Similarly, if an insured ship sinks, the rights of salvage will pass to the insurer if the claim is paid out as a total loss. If a guarantee is paid out by a guarantor and the bank also held a mortgage over the debtor's home, the guarantor will be subrogated to the bank's rights as a mortgagee with respect to the debtor's home.

In many areas where subrogation arises as a matter of law, subrogation may be limited under the terms of the relevant contract. For example, in a contract of guarantee, the guarantee will often provide that the guarantor waives the right of subrogation or agrees not to exercise it unless the bank has been paid in full. In an insurance contract, in addition to right of subrogation at law, there will often be a right of subrogation bolstered by the insured party's agreement that the party will provide all necessary assistance to the insurance company in pursuing any subrogated claims.

Subrogation is sometimes misunderstood by lay people and criticized on the basis that payment under an insurance claim is simply a right based upon the payment of insurance premiums, and a belief that they should also retain a right to exercise any claims arising from the insured event. An insurance contract is a contract of indemnity, however, and to allow a party to receive insurance proceeds and claim against third parties would mean that the recipient might recover more than the total loss. Because subrogation operates to prevent such over-recovery, it is considered to form part of the general law of unjust enrichment (i.e. preventing a party by being unjustly enriched by pursuing a claim for a loss in respect of which they have already been indemnified).

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

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

Types of subrogation

Although the classes of subrogation rights are not fixed (or closed), and vary between different legal jurisdictions, types of subrogation are commonly divided into the following categories:

1. Indemnity insurer's subrogation rights
2. Surety's subrogation rights
3. Subrogation rights of business creditors
4. Lender's subrogation rights
5. Banker's subrogation rights
6. Trustee'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

With insurance subrogation, there are three parties involved: the insured; the insurer; and the tortfeasor (the party who is responsible for the damages). Under subrogation, the insurance company assumes the right to sue the tortfeasor for the amount of the damages reimbursed to the insured. An indemnity insurer has two distinct types of subrogation rights. 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. 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. 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.

Surety'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. This would include the endorser on a bill of exchange.

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. Accordingly, in this area of the law at least, it is conceptually improbable that the right of subrogation is based upon any implied term.

Subrogation 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. Where under the terms of the trust instrument the trustees are permitted to trade in derivatives as part of the trust's investment strategy, 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.

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. 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. The law in this area has been subject to conflicting decisions.

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.

Remedies

In Lord Napier & Etterick v Hunter [1993] 2 WLR 42, the House of Lords confirmed that an (indemnity) insurer's subrogation rights dictate that in a claim against the assured (for damages personally recovered by the assured) the insurer is not limited to a simple personal remedy; the insurer also has the benefit of an equitable lien over the damages received by the assured in respect of the insured loss. That case also controversially held that in working out the compensation to which the insurer is entitled the assured cannot be said to have first recovered the whole of his uninsured loss, and must instead be considered to have owed foremost the excess agreed.

Subrogation can thus in rare instances deprive the consumer of the benefit of the 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 with reduced damages from the insurer 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 (see Roger Baron).

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 their insurance contracts, including insurance provided by employers, fraternal organizations, etc.

External links

• NASP (National Association of Subrogation Professionals)
• Northern Buckeye vs Lawson - 2004
• eBook: Next-Generation Subrogation Solutions - 2014
• Waiver of Subrogationfr:Subrogation personnelle en droit civil français