MANDATORY JUDICIAL NOTICE - SUBROGATION

4 5 TEXT AND IMAGE SOURCES, CONTRIBUTORS, AND LICENSES

5 Text and image sources, contributors, and licenses
5.1 Text
• Subrogation Source: http://en.wikipedia.org/wiki/Subrogation?oldid=635514933 Contributors: SimonP, Postdlf, Auric, JamesMLane,
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5.3 Content license

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 MANDATORY JUDICIAL NOTICE - SUBROGATION
3

3 References 4 External links

[1] “What is SUBROGATION?". Retrieved 2013-01-31. • NASP (National Association of Subrogation Profes-
sionals)
[2] “Legal definition of subrogation”. thefreedictionary.com.
• Subrolitigators - America’s Subrogation Counsel
Retrieved 2013-01-31.
Registry
[3] http://www.irmi.com/online/insurance-glossary/terms/c/ • Northern Buckeye vs Lawson - 2004
collision-insurance.aspx
• Waiver of Subrogation
[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 0-19-

825938-7

[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 Benefit Building

Society v Thurstan [1903] AC 6 the House of Lords held
that a building society could be subrogated to an unpaid
vendor’s 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
 MANDATORY JUDICIAL NOTICE - SUBROGATION
2 2 REMEDIES
party who is responsible for the damages). Under sub-
rogation, the insurance company assumes the right to
sue the tortfeasor for the amount of the damages reim-
bursed 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] Sec-
ondly, the insurer is entitled to recover from the insured
up to the amount which the insurer has paid to the in-
sured and by which the insured is overcompensated.[6]
The latter situation might arise if, for example, an in-
sured claimed in full under the policy, but then started
proceedings anyhow against the tortfeasor, and recovered
substantial damages.[7]
1.2 Surety’s subrogation rights
A surety who pays o the debts of another party is
subro- gated to the creditor’s 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 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.[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.
1.3 Subrogation rights against trustees
A trustee of a trust who enters into transactions for the
benefit of the beneficiaries of the trust is generally enti-
tled 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 busi-
ness 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 ben-
eficiaries and the trust fund.[11] Where under the terms
of the trust instrument the trustees are permitted to trade
in derivatives as part of the trust’s investment strategy,[12]
then the derivatives document will also normally contain
a subrogation clause to bolster the common law rights.
1.4 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 reme-
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 party’s 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 conflicting decisions.[16]
1.5 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.[17]
2 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 as-
sured (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 con-
sumer 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 as-
sets, even if the assured is left with reduced damages from
the insurer as a result (see Northern Buckeye vs Lawson -
2004).[18] 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 subro-
gation clauses in their insurance contracts, including in-
surance provided by employers, fraternal organizations,
etc.
 MANDATORY JUDICIAL NOTICE - SUBROGATION
Subrogation
Subrogation is the right or rights of the insurer to as-
sume the rights of the insured. Legal rights or to step
into the shoes of.[1] Rights of subrogation can arise two
di erent ways: automatically as a matter of law, or by
agreement as part of a contract.[2] Subrogation by con-
tract commonly arises in contracts of insurance. Subro-
gation as a matter of law is an equitable doctrine, and
forms part of a wider body of law known as unjust en-
richment. 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 surety-
ship), 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.
The doctrine of subrogation can 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 com-
pany pays out under a policy of insurance to the owner
and the art is later recovered, the art will belong to the in-
surance 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 guar-
antee 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 re-
spect 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 rele-
vant 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 assis-
tance to the insurance company in pursuing any subro-
gated claims.
Subrogation is sometimes misunderstood by lay people
and criticized on the basis that payment under an insur-
ance claim is simply a right based upon the payment of
insurance premiums, and a belief that they should also re-
tain 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 pro-
ceeds 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 en-
richment (i.e. preventing a party by being unjustly en-
riched 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.
1 Types of subrogation
Although the classes of subrogation rights are not fixed (or
closed), and vary between di erent legal jurisdictions,
types of subrogation are commonly divided into the fol-
lowing 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 un-
derpinnings, there are subtle distinctions between them in
relation to the application of the law of subrogation.
1.1 Indemnity insurer’s subrogation rights
With insurance subrogation, there are three parties in-
volved: the insured; the insurer; and the tortfeasor (the