Subrogation

Subrogation is the right or rights of the insurer to assume the rights of the insured. Legal rights or to step
into the shoes of.[1] Rights of subrogation can arise two
dierent ways: automatically as a matter of law, or by
agreement as part of a contract.[2] 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[3] 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 banks claims against the son.

tance 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 indemnied).
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.

1 Types of subrogation

Although the classes of subrogation rights are not xed (or

closed), and vary between dierent legal jurisdictions,
The doctrine of subrogation can also pass proprietary types of subrogation are commonly divided into the folrights such as a security interest or claim to ownership of lowing categories:
goods. If a work of art is stolen, and the insurance company pays out under a policy of insurance to the owner
1. Indemnity insurers subrogation rights
and the art is later recovered, the art will belong to the in2. Suretys subrogation rights
surance company under rights of subrogation. Similarly,
if an insured ship sinks, the rights of salvage will pass to
3. Subrogation rights of business creditors
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
4. Lenders subrogation rights
mortgage over the debtors home, the guarantor will be
5. Bankers subrogation rights
subrogated to the banks rights as a mortgagee with respect to the debtors home.
6. Trustee's subrogation rights
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 partys
agreement that the party will provide all necessary assis-

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

1.1 Indemnity insurers subrogation rights

With insurance subrogation, there are three parties involved: the insured; the insurer; and the tortfeasor (the
1

2 REMEDIES

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.[4] 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.[5] 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.[6]
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.[7]

dies against the borrower to the extent of the debt

discharged.[13]
However, if the original loan was invalid (because, for
example, it was ultra vires the borrower) then the lender
generally cannot enforce the third partys claim against
the borrower as this would indirectly validate an invalid
loan.[14] 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.[15] The law in this area has been
subject to conicting decisions.[16]

1.5 Bankers subrogation rights

Where a bank, acting on what it believes erroneously to

be the valid mandate of its client, pays money to a third
1.2 Suretys subrogation rights
party which discharges the customers liability to the third
party, the bank is subrogated to the third partys former
A surety who pays o the debts of another party is subro- remedies against the customer.[17]
gated to the creditors former claims and remedies against
the debtor to recover the sum paid.[8] This would include
the endorser on a bill of exchange.[9]
In relation to a suretys subrogation rights, the surety will
also have the benet 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 subrogors
security rights by operation of law, even if the subrogee
had been unaware of them.[10] Accordingly, in this area
of the law at least, it is conceptually improbable that the
right of subrogation is based upon any implied term.

2 Remedies

In Lord Napier & Etterick v Hunter [1993] 2 WLR 42, the

House of Lords conrmed that an (indemnity) insurers
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 benet of an equitable lien over the
damages received by the assured in respect of the insured
1.3 Subrogation rights against trustees
loss. That case also controversially held that in working
out the compensation to which the insurer is entitled the
A trustee of a trust who enters into transactions for the assured cannot be said to have rst recovered the whole
benet of the beneciaries of the trust is generally enti- of his uninsured loss, and must instead be considered to
tled to be indemnied by the beneciaries for personal have owed foremost the excess agreed.
loss incurred, and has lien over the trust assets to secure
compensation. If, for example, the trustee conducts busi- Subrogation can thus in rare instances deprive the conness on behalf of the trust and fails to pay creditors, then sumer of the benet of the Make Whole Doctrine, the
the creditors are entitled to be subrogated to the personal right of an injured party to recover full damages. This
and proprietary remedies of the trustee against the ben- abrogation of Make Whole doctrine puts the insurer in
eciaries and the trust fund.[11] Where under the terms the position of having rst claim to an at-fault partys asof the trust instrument the trustees are permitted to trade sets, even if the assured is left with reduced damages from
as a result (see Northern Buckeye vs Lawson in derivatives as part of the trusts investment strategy,[12] the insurer
[18]
In
other words, the laws intent to prevent dual
2004).
then the derivatives document will also normally contain
recovery
by
the
assured can lead to less-than-equitable
a subrogation clause to bolster the common law rights.
recovery (see Roger Baron).

1.4

Lenders subrogation rights

Where a lender lends money to a borrower to discharge

the borrowers 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 partys former reme-

In the cited case, the Ohio Supreme Court ruled that the
language of the assureds insurance contract overruled
Ohios 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.

References

[1] What is SUBROGATION?". Retrieved 2013-01-31.

4 External links
NASP (National Association of Subrogation Professionals)

[2] Legal denition of subrogation. thefreedictionary.com.

Retrieved 2013-01-31.

Subrolitigators - Americas Subrogation Counsel

Registry

[3] http://www.irmi.com/online/insurance-glossary/terms/c/
collision-insurance.aspx

Northern Buckeye vs Lawson - 2004

[4] Subrogation and Insurance Claims. Adjusting Today.

[5] Mason v Sainsbury (1782) 3 Dougl KB 61; Morris v Ford
Motor Co [1973] QB 792
[6] Castellain v Preston (1883) 11 QBD 380; Re Miller, Gibb
& Co [1957] 1 WLR 703
[7] 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.
[8] Forbes v Jackson (1882) 19 Ch D 615
[9] Duncan, Fox & Co v North and South Wales Bank (1880)
6 App Cas 1
[10] Charles Mitchell, The Law of Subrogation, ISBN 0-19825938-7
[11] Re Johnson (1880) 15 Ch D 548; Re Oxley [1914] 1 Ch
604
[12] In most jurisdictions the trustees would be prohibited from
such risky investments by law unless expressly empowered
by the trust instrument.
[13] Butler v Rice [1910] 2 Ch 277; Ghana Commercial Bank
v Chandiram [1960] AC 732
[14] Sinclair v Brougham [1914] AC 398; much criticised on
this point.
[15] Orakpo v Manson Investments Ltd [1978] 95, per Lord
Go
[16] For example, in Nottingham Permanent Benet Building
Society v Thurstan [1903] AC 6 the House of Lords held
that a building society could be subrogated to an unpaid
vendors lien in respect of an unlawful loan to an infant to
purchase land.
[17] B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB
48
[18] http://www.supremecourt.ohio.gov/rod/docs/pdf/0/
2004/2004-ohio-4886.pdf

Waiver of Subrogation

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