Origins and nature of the right of subrogation
The insurer’s right to take legal proceedings in the name of the assured against a third party who has caused loss of or damage to the goods is of particular importance in marine cargo insurance. The amounts recovered in subrogation actions, known in practice simply as “recoveries”, form a significant element in the balancing of the cargo insurer’s underwriting account by improving the loss record. These recoveries apply to all types of transit risks, whether by land, sea or air as well as to storage risks.
The insurer is subrogated to the assured’s rights whether the loss be a total loss or merely a partial loss, though in the case of a total loss the insurers are also entitled to take over the property in the goods, known as “salvage” The Marine Insurance Act 1906 section 79 (1) deals with subrogation and salvage in the following terms:
“Where the insurer pays for a total loss, either of the whole, or in the case of goods or any apportionable part, or the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.”
Insurer’s rights to subrogate on payment of a partial loss are dealt with in section 79 (2) of the 1906 Act which provides as follows:
“Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act by such payment for the loss.”
The effect of these provisions is to apply similar rights of subrogation whether the claim is for a total, or a partial loss.
This right of insurers to be subrogated, as consolidated in the 1906 Act, has been recognized for more than 200 years. A judgment gave the classic definition of subrogation:
“… As between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured can be, or has been diminished.”
Described the basis for subrogation as follows:
“No foundation for the right of underwriters, except the well-known principle of law that where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed him for a loss.”
The differences between subrogation and assignment, in the context of cargo insurance, are illustrated. This case highlights the main disadvantage of the assignment procedure, which is the need for notice, or, in the absence of notice, the presence of the assignor before the court. A cargo of soya bean meal, insured for carnage aboard, was delivered short at destination. The insurers paid the shortage claim and took a so-called “Subrogation Receipt” governed by law which, arguably, amounted to an assignment of the assured’s rights to the insurers. A legal action was commenced in the name of the insurers against the vessel and her owners claiming the amount due from the shipowners “in respect of rights of subrogation under contracts of insurance”. Initially, the shipowners had the claim struck out on the basis that the proper claimants should have been the assured, but on appeal, the court allowed the insurers to amend to plead that the action has been assigned to them and that they, as insurers, were the proper claimants. However, the amendment was only allowed on condition that the insurers joined the cargo-owners as defendants because they as assignors should be before the court. The requirement that the assignors, the cargo-owners, be “before the court” can only be avoided by way of a legal assignment which, as explained below, requires notice. In the circumstances, although an assignment has the potential advantage of enabling the insurers to recover more than their loss, it may be that the need for notice, or, in the absence of notice, for the assured to be before the court, is the reason why assignment is little used in practice. As to notice, under English law an assignment may be legal or equitable. An equitable assignment requires the assignor to be a party to the action (i.e., to be before the court). In the context of a subrogated cargo recovery action, the “debtor” for these purposes means the bailee, whether shipowner or warehouse-keeper. Moreover, this notice must be given by the assured as assignor to the shipowner or other bailee before the recovery proceedings are commenced. In practice this disadvantage has outweighed any advantage to be gained in those rare cases where insurers stand to recover more than they have paid.
The nature of the right of subrogation is still being explored by the courts. It has two roots one in the common law; where it is seen as a matter of the implied terms of the contract, and the other in equity, in the principle of unjust enrichment. A recent case has emphasised the contractual basis of the right as an implied term of the contract, rather than the principles of unjust enrichment, though the equitable lien over the proceeds of any recovery relies upon the equitable origins of the right. The nature of the right is such that where the insurance claim has been paid, the insurers are subrogated to the assured’s rights, whether or not the claim is actually payable under the policy.
Subrogation and assignment of rights: applicable law
As an alternative to subrogation, the insurers can take an assignment of the assured’s right of action and, if they do so they can recover more than the amount of the claim paid assuming a bona fide payment under the policy, not merely a voluntary gift.
In those cases where an assured company may cease to exist, for financial or re-structuring reasons, tile insurers may be wise to take ail assignment. If the assured ceases to exist as a legal entity, and cannot be revived, there will be no claimant and no subrogation rights,
Co-assureds and waiver of subrogation
The general principle is that insurers cannot exercise subrogation rights against their assured or a co-assured. The basis of this principle, in relation to co-assureds was explained as follows:
“The explanation for the insurers’ inability to cause one co-assured to sue another co-assured is chat in as much as the policy on goods covers all the assured on an all risks basis for loss and damage, even it caused by their own negligence, any attempt by an insurer after paying the claim of one assured to exercise rights of subrogation against another would in effect involve the insurer seeking to reimburse a loss caused by a peril (loss or damage even if caused by the assured’s negligence) against which he had insured tor the benefit of the very party against whom lie now sought to exercise rights of subrogation. That party could stand in the same position as the principal assured as regards a loss caused by his own breach of contract or negligence. For the insurers who had paid the principal assured to assert that they were now free to exercise rights of subrogation and thereby sue the party at fault would be to subject the co-assured to a liability for loss and damage caused by a peril insured for his benefit … it is necessary to imply a term into the policy of insurance to avoid this unsatisfactory possibility. . . the purported exercise by insurers of rights of subrogation against the co-assured would be m breach of such a term and would accordingly provide the co-assured with a defence to the subrogated claim.”
This implied term approach depends on the construction of each individual contract, but in cargo insurance it is generally the case that no subrogated action will be set against a co-assured.
In practice, the usual target of a recovery action will be the bailee of the cargo, whether shipowner, haulier or warehouse-keeper. Such a bailee may be the assured who has taken out the policy or may be named as a co-assured. In the first case, where the bailee is the assured, it has been held that he has a sufficient interest to insure the cargo on all risks terms even where he has no liability to the owner of the goods. If we assume that a haulier takes out insurance oil the goods under the Institute Cargo Clauses (A), and that he negligently damages the goods, he will have a claim under the insurance for that damage and will hold the proceeds of that claim in trust for the owners of the goods. One of the effects of court’s decision is that the insurers cannot exercise subrogation rights against such an assured haulier as there is an implied term of the contract of insurance which prevents the exercise of subrogation rights in such circumstances.
As expressed co-assurance clauses, the usual practice in insurance market open covers is to define the assured in wide terms, such as XYZ S.A., and/or as agents and/or subsidiaries and/or associated companies and/or for whom they may have instructions to insure. This allows for the case where large assureds may have their own subsidiary carriers, particularly carriers by road but also occasionally carriers by sea, or warehouse-keepers, as part of a group of companies involved in the carriage and storage of cargo. Alternatively, there may be an express Waiver of Subrogation Clause in the policy as follows:
“Insurers waive all rights of subrogation and/or recourse against the Assured and/or subsidiary companies of the Assured engaged in the carriage of and/or storage of the subject-matter insured.”
The effect of this clause is probably the same as naming each carrier or warehouse-keeper as a co-assured as this equally will prevent the exercise of subrogation rights, as we have seen above. It may be noted that inthere was an express waiver clause reading as follows:
“Underwriters agree to waive rights of subrogation against any Assured and against person, company or corporation whose interests are covered by this policy.”
In the above should the circumstances be examined where a carrier or other bailee may be an assured or a co-assured. It is appropriate here to mention the converse situation where a bailee, who is not an assured or a co-assured, nevertheless seeks to put himself in that beneficial position by imposing contractual terms on the cargo-owner by which he, the carrier or other bailee, takes advantage of the cargo-owner’s insurance.
Before the introduction of the Hague Rules, which prohibited the practice, it was common for shipowners to insert in their bills of lading a provision entitling them to take advantage of the cargo-owner’s insurance policy. In order to frustrate this practice the Institute Cargo Clauses (All Risks) introduced the “Not to inure Clause” which provided that the “insurance shall not inure to the benefit of the carrier or other bailee”. The revised Institute Cargo Clauses now ensure that third parties, such as carriers, cannot take the benefit of the insurance by the more up-to-date wording” in Clause 15.2, which now provides as follows:
15. This insurance
15.2 shall not extend to or otherwise benefit the carrier or other bailee.”
When the words “not to inure” were replaced during the revisions leading up to the introduction of the 2009 Clauses no change of meaning was intended.
The exercise of subrogation rights
Lloyd’s Standard Subrogation Form
Clause 16 of the revised Institute Cargo Clauses requires the assured “to ensure that all rights against carriers, bailees or other third parties are properly preserved and exercised”. On payment of a claim it is the usual practice in the London market, and worldwide, for the assured to sign a subrogation form, sometimes called a subrogation receipt or a letter of subrogation. The standard Lloyd’s market subrogation form (the “Subrogation Form” includes the following two paragraphs:
“I/We acknowledge that by virtue of such payment you are subrogated to all my/our rights and remedies in and in respect of the goods as provided by the law governing the Contract of Insurance and in the case of total loss you are entitled at your option to take over my/our interest in whatever may remain of the goods it being understood that iny/our delivery to you of the documents of title relating to the goods shall not be construed as an exercise of such option.
I/We also record that you have authority to use my/our name to the extent necessary effectively to exercise all or any of such rights and remedies; in it I/we will furnish you with any assistance you may reasonably require of me/us when exercising such rights and remedies on the understanding that you will indemnify me/us against any liability for costs charges and expenses arising in connection with any proceedings which you may take in my/our name in the exercise of such rights and remedies.
The first paragraph of this standard Subrogation Form reflects the Marine Insurance Act 1906 section 79 which is set out above, whilst the second paragraph introduces a new agreement between the parties not expressly provided for by English law. We shall consider each paragraph of the Subrogation Form in turn.
The Marine Insurance Act 1906 section 79 provides that where the insurer pays for a loss whether total or partial, he is subrogated to “all the rights and remedies of the assured”. This right only takes effect on payment, not agreement, of the claim but is retrospective so that when an insurer pays he acquires all the rights that were vested in the assured at the time of the loss. The first paragraph of the Subrogation Form then goes on to provide, in line with section 79(1) of the 1906 Act, that, in case of total loss, the insurers are entitled to take over the assured’s interest in whatever may remain of the goods. There is then added a warning that the delivery to the insurers of “documents of tide relating to the goods shall not be construed as the exercise of such option”. This reflects the insurers’ concern that taking over the goods may involve insurers in responsibility and liability (e.g., for cleaning-up or pollution costs).
The second paragraph of the Subrogation Form gives the insurers the authority to use the assured’s name to exercise the “rights and remedies” referred to in the first paragraph, in particular, by the commencement of legal proceedings. In practice the Subrogation Form is not always signed immediately on payment of the claim, but is dealt with in due course at the same time as additional documents are provided to assist insurers in their recovery proceedings. The Marine Insurance Act 1906 section 79 Act gives retrospective rights to insurers who are entitled, on payment of the insurance claim, to all the rights and remedies of the assured from the time of the casualty. However, the authority in the second paragraph of the Subrogation Form is not expressed as being retrospective. Where legal or arbitration proceedings have been commenced urgently before the claim is paid (whether or not this may be before it has been agreed) in order to protect a time limit, or to arrest a vessel to obtain security, it will be necessary for solicitors, or others involved, to obtain direct authority from the assured to commence proceedings or take whatever action is necessary.
The second paragraph of the Subrogation Form also imposes on the assured the obligation to provide insurers with any assistance they may reasonably require. Such assistance would most obviously be provision of the documents relating to the claim though, particularly in larger claims, it may involve the assured’s assistance on other matters, such as their knowledge and expertise in relation to a specialized cargo; the circumstances of the loss; and the negotiations for the contract of carriage or storage. These obligations can potentially be quite onerous, particularly in circumstances where the assured has no continuing interest in the claim. However, there can be no real doubt that the Subrogation Form constitutes a binding contract in its own right by which the insurers and assured can vary or enhance insurers’ rights of subrogation. In a judgment said, “the rights of the parties depend on what the agreement was”. The Judge was speaking there in the context of a specific legal action against a particular carrier to which the insurers had agreed, but his words are equally applicable to a case where the claim has simply been settled without any specific agreement as to how subrogation should be pursued. In other words, these issues are a matter for agreement between the insurers and the assured at the time the claim is settled and the courts will look upon any commercial agreement made at that time as binding.
Finally, there is the question of legal costs. The Subrogation Form constitutes an agreement by the insurers to indemnify the assured against liability for “costs charges and expenses arising in connection with the proceedings” taken in the assured’s name by the insurers. This wide indemnity covers any legal costs awarded against the assured as the nominal claimant in any legal proceedings as well as associated expenses incurred (e.g., in assisting the insurers with their case by the provision of documentary or oral evidence). The legal costs and expenses that may be incurred by the assured before settlement of the insurance claim (e.g., in commencing proceedings to protect the time limit against a carrier) are recoverable under Clause 16 of the Institute Cargo Clauses now known as the Duty of Assured Clause. Clause 16 provides that insurers will reimburse the assured for “any charges properly and reasonably incurred in pursuance” of the duty, inter alia, to ensure that rights against carriers and bailees are properly preserved and exercised. The agreement by insurers in the Subrogation Form makes it clear that where insurers take over such proceedings commenced by the assured they will be responsible for all the costs including costs against the assured. Where the assured and insurers have a joint interest in the recovery, in the absence of any agreement to the contrary, costs will be apportioned in accordance with their respective interests in the recovery.
