8.4 Subrogation

What Is Subrogation?

Subrogation is the right of the insurer, after paying a claim, to step into the shoes of the insured and pursue recovery from a third party who is responsible for the loss. Having indemnified the insured, the insurer may exercise any right the insured would have had to sue the responsible party and recover the amount paid out.

Subrogation is a corollary of indemnity. Its two purposes are:

1. To prevent the insured recovering twice. If the insured could keep both the insurance payment and damages recovered from the wrongdoer, they would be over-indemnified — placed in a better position than before the loss. Subrogation transfers the right of recovery to the insurer so the insured is confined to their actual loss.

2. To hold the wrongdoer liable. Without subrogation, a person who caused a loss would escape liability simply because the victim happened to be insured. Subrogation keeps the wrongdoer on the hook and is widely regarded as fairness to the insurer who has paid the claim.

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The Bases of Subrogation

Subrogation may arise on three distinct bases:

Subrogation by Tort

The most common basis. Where the loss was caused by the negligence (or other tort — nuisance, trespass, breach of statutory duty) of a third party, the insured has a right of action in tort against that third party. Once the insurer indemnifies the insured, the insurer may pursue that tort claim in the insured's name. A typical example is a motor insurer that pays for the repair of its insured's car and then sues the negligent driver of the other vehicle.

Subrogation by Contract

Subrogation may arise under a contractual clause. Some contracts include a subrogation clause granting the insurer express rights of recovery against a defined party. More commonly, a contract may contain a waiver of subrogation between two parties — for example, a landlord and tenant may agree that each will look only to their own insurer and will not pursue the other after a loss. The insurer's right is then shaped by what the contract allows or excludes.

Subrogation by Statute

A few statutory rights of subrogation exist. The most commonly cited in IF1 is under the Road Traffic Act 1988, which gives an insurer who has paid a third-party claim certain rights of recovery against an uninsured or identified driver in defined circumstances. Statutory subrogation is the exception rather than the rule; most subrogation in practice rests on tort or contract.

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Key Limits on Subrogation

Subrogation is not unlimited. Four limits are regularly tested in IF1:

1. The Insurer Cannot Subrogate Against Its Own Insured

The insurer cannot pursue its own insured for a loss it has indemnified. The whole point of the contract is that the insurer stands behind the insured for the insured's own negligent acts causing loss to the insured. If the insurer could then sue its own insured to recover the payment, the insurance would be worthless. This limit applies even where the insured has been negligent — the insurer pays and absorbs the loss.

The same principle extends, with care, to co-insureds named on the policy. If two parties are insured under the same policy (for example a landlord and tenant both named as insureds), the insurer generally cannot subrogate against one co-insured to recover a payment made to the other — they are both "the insured" under the contract.

2. Subrogation Does Not Arise Until Indemnity Has Been Paid

Subrogation is a post-payment right. The insurer cannot pursue the third party until it has indemnified the insured, because subrogation is the right to stand in the insured's shoes once the insured has been made whole. An insurer that has not yet paid the claim has no subrogation right in its own name. (In practice, the insurer may correspond with the third party or their insurer before payment, but the formal right of recovery crystallises on payment.)

3. The Insured Must Not Prejudice the Insurer's Rights

The insured must not act in a way that destroys the insurer's right of recovery. If the insured settles with the third party (or signs away their right to sue them) after the loss but before subrogation has been exercised, the insurer's right is lost — and the insurer may refuse to pay the claim, reduce the payment, or recover from the insured the amount it can no longer pursue. This is sometimes expressed as a policy condition requiring the insured to do nothing to prejudice subrogation and to assist the insurer in pursuing recovery.

4. The Insurer Cannot Recover More Than It Paid

The insurer's right of recovery is limited to the amount it paid to the insured (plus recoverable costs and interest as applicable). If the insured suffered an uninsured loss as well (for example an excess, or a loss above the sum insured), the insured retains their own right to pursue the third party for that uninsured portion. The insurer's subrogated claim and the insured's residual claim run side by side, but the insurer cannot "top up" its recovery beyond what it paid.

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Worked Scenario

A delivery driver negligently reverses into a parked car, causing £4,000 of damage. The car owner's comprehensive motor insurer pays £4,000 (less a £200 excess) to repair the car. The insurer then exercises subrogation:

• The insurer steps into the car owner's shoes and pursues the delivery driver (and their motor insurer) for the £4,000 it paid out.
• The car owner separately pursues the delivery driver for the £200 excess, which the insurer did not pay.
• The insurer cannot pursue its own insured (the car owner) for the loss, even though the car owner may have contributed by parking in a vulnerable spot — the policy covers the insured's own loss.
• The car owner must not sign any private settlement with the delivery driver that gives up the right to recover the £4,000, or the insurer's subrogation right is defeated.

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Waiver of Subrogation

A waiver of subrogation is an agreement — usually contained in a contract between two parties, or in a policy endorsement — that the insurer will not pursue a named third party after a loss. Common examples:

• A landlord and tenant agree in the lease that each will insure their own interests and neither will pursue the other after a loss. The insurers, by reason of the contractual waiver, cannot subrogate against the other party.
• A construction contract may require the principal and the contractor to waive subrogation against each other for loss covered by the project insurance.

A waiver is effective only if the insurer has agreed to it (typically by accepting the policy with knowledge of the waiver, or by expressly endorsing it). If the insured has agreed a waiver with a third party without the insurer's consent and the waiver defeats the insurer's subrogation right, the insured may be in breach of the policy condition not to prejudice subrogation.

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Subrogation vs Contribution — A Quick Contrast

Both subrogation and contribution are corollaries of indemnity, and both exist to prevent the insured recovering more than their actual loss, but they operate in different directions:

Contribution is covered in the next section.

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Key Takeaways

• Subrogation is the insurer's right, after paying a claim, to step into the insured's shoes and recover from a third party responsible for the loss.
• It is a corollary of indemnity that prevents the insured recovering twice and holds the wrongdoer liable.
• Subrogation may arise by tort, by contract, or by statute, and it cannot arise until indemnity has been paid.
• The insurer cannot subrogate against its own insured, and the insured must not prejudice the insurer's right of recovery.
• A waiver of subrogation extinguishes the right to recover against a named party, often by agreement in a lease or construction contract, and must be agreed with the insurer.