South African Insurance laws is Roman-Dutch based but is significantly influenced by the English law of Insurance as well as increasingly constitutional values and international commerce.
So if one has regard to insurance judgments around the world, at least those with a common law history, the principles applied by the courts will not be unfamiliar to a South African reader and vice versa.
One of those common international insurance principles is that an insured may not be enriched at the expense of the insurer by receiving both the insurance indemnity and damages from a third party wrongdoer.
The insurer’s right to reimbursement is a primary right of subrogation. Subrogation is a doctrine of insurance providing a right of recourse for an insurer which has fully indemnified its insured. An insurer has a personal right against its insured in terms of which it is entitled to recoup itself out of the proceeds of any rights the insured has against third parties in respect of the loss. Because of the right to reimbursement the insured cannot actively deal with its rights against third parties to the detriment of the insurer.
One of the purposes of subrogation is to prevent the insured from receiving a double indemnity. The principle only applies to indemnity and not non-indemnity insurance.
Subrogation is a natural consequence of the contract of insurance but may be subject to special arrangements by the parties. The general principle is only enforceable when the insured has been fully indemnified but that may be altered contractually by the parties to allow for the insurer’s recovery of a partial indemnification.
Normally where there has not been a full indemnification of the insured by the insurer or an appropriate contractual arrangement, the insurer does not then get to share in a partial recovery made by the insured from a third party. But often subrogation clauses in policies empower the insurer to conduct, in the name of the insured and against a third party, proceedings for recovery of an insured loss against irrespective of whether the insured has been fully indemnified or not and to stipulate the way in which the proceeds of such recovery should be apportioned between the insurer and the insured.
Having regard to this principle the conclusion of the Hong Kong High Court in Falcon Insurance Co (HK) Limited v Chestshire Cat Restaurant ~ Pub Co Limited was unsurprising. The court reinforced the doctrine subrogation finding the insurer entitled to reimbursement for insurance monies paid to an insured under a fire policy when the insured subsequently received a settlement payment from a third party wrongdoer.
The insured operated a pub whose fixtures, fittings, furniture, decorations and tools of trade had been destroyed by a fire. The insurer paid its insured HK$491 453 under the fire insurance policy. The insured also signed a subrogation letter in favour of the insurer for receipt of the payment.
The insured was later successful in a recovery action against the security company in respect of damages for losses suffered. The action was settled by the security company for a capital payment of HK$760 000.
The court found that the actual loss suffered by the insured was not more than HK$760 000 and the insured had therefore been fully indemnified. On the basis of the principle subrogation required repayment to the insurer of the insurance monies of HK$491 453.
1. The court said that the doctrine of subrogation required the court to imply a term into the contract to ensure that where an insurer made a payment under the policy, the insured is not entitled to retain, as against the insurer, a sum greater than that which is ultimately shown to be actual loss. The court also applied equity to assist the insurer in recovery. Equity in this sense is not currently part of our common law, nor our statutory law of insurance, nor is subrogation based on an implied term of the policy.
2. Insurers would do well to revisit their subrogation clauses to ensure that, if desired, the policy:
2.1 Enables the insurer to control the litigation and conduct proceedings against third parties even if the insured has not yet been indemnified or not fully indemnified by the insurer;
2.2 Require the insured to institute proceedings against third parties even in instances where the insurer could not have compelled that at common law;
2.3 Authorises the insurer to receive payment from the third parties to protect the insurer against a loss of proceeds which could occur where payment is made to the insured;
2.4 Empowers the insurer to take charge of the insured’s defence to a third party claim;
2.5 Obtains the insurer’s consent to the use of the insured’s name in proceedings against third parties. (Though South African law also entitles an insured to sue in its own name.);
2.6 Apportions the costs and proceeds of any recovery actions where there has not been a full indemnity paid by the insurer.
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