Subrogation

Last updated

Subrogation is the assumption by a third party (such as a second creditor or an insurance company) of another party's legal right to collect debts or damages. [1] It is a legal doctrine whereby one person is entitled to enforce the subsisting or revived rights of another for one's own benefit. [2] A right of subrogation typically arises by operation of law, but can also arise by statute or by agreement. Subrogation is an equitable remedy, having first developed in the English Court of Chancery. It is a familiar feature of common law systems. Analogous doctrines exist in civil law jurisdictions.

Contents

Subrogation is a relatively specialised field of physical development; entire legal textbooks are devoted to the subject. [3] [4]

Doctrine

Countries which have inherited the common law system will typically have a doctrine of subrogation, but its doctrinal basis in a particular jurisdiction may vary from that in other jurisdictions, depending upon the extent to which equity remains a distinct body of law in that jurisdiction.

English courts have now accepted that the concept of unjust enrichment has a role to play in subrogation. [5] In contrast, this approach has been stridently rejected by the High Court of Australia, where the doctrinal basis of subrogation is said to lie in the prevention of unconscionable results: for example, the discharge of a debtor or one party getting double recovery. [6]

Types

The situations in which subrogation will be available are not closed and vary from jurisdiction to jurisdiction. Subrogation typically arises in three-party situations. Some common examples of subrogation include:

Indemnity insurer's subrogation rights

"Subrogation" has been used in this context to refer to two distinct situations.

First, after paying out under a policy of indemnity insurance, an insurer may be entitled to stand in the shoes of the insured and enforce the insured's rights against the third party tortfeasor who is responsible for the loss. [7] This is subrogation in its proper or core sense. Insurance subrogation, and, specifically, the types and amounts of payments that can be recovered, differs from jurisdiction to jurisdiction.

Secondly, after paying out under a policy of indemnity insurance, an insurer may be entitled to sue the insured where the insured has already had his loss made good by the third party tortfeasor. That is, the insurer has a claim against the insured so as to ensure that the insured does not get double recovery. [8] This situation might arise if, for example, an insured claimed in full under the policy, but then started proceedings against the third party tortfeasor, and recovered substantial damages. [9] Strictly speaking, this is not a case of subrogation; it is a case of recoupment.

Travel insurance subrogation process

In an "excess" or "supplemental" travel insurance policy where there is a 'first payer' clause, through the subrogation process an insurer is legally entitled to seek cost-sharing up to a certain percentage from a member's private group health insurance provider after the insurer pays out a travel insurance claim. [10] These plans are less expensive but if there is a major claim made, Insurance carriers, such as RBC insurance, [11] can offer [11]

Any of our policies are excess insurance and are the last payers. All other sources of recovery, indemnity payments or insurance coverage must be exhausted before any payments will be made under any of our policies.

— RBC Insurance Saltzman CBC 2016

While these supplemental travel insurance policies may be less expensive in the short run, they can have devastating consequences if a serious and costly health crisis occurs while travelling. [10] That means that if a client makes a claim, the insurer will recover that amount from the member's private group health insurance provider such as $100,000 of the $200,000 total. That can become problematic if the member later has a serious illness because many private group health insurance providers have a lifetime maximum coverage amount, such as $500,000, for its extended health plans. If the member purchases travel insurance from their own extended health-care provider, a claim would not have affected the lifetime maximum. [10]

Surety's subrogation rights

A surety who pays off the debts of another party may be entitled to be subrogated to the creditor's former claims and remedies against the debtor to recover the sum paid. [12] That would include the endorser on a bill of exchange. [13] The surety will then 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. [14]

Subrogation rights against trustees

A trustee of who enters into transactions for the benefit of the beneficiaries of the trust is generally entitled to be indemnified out of the trust assets; this is secured by way of an equitable lien or first charge over the trust assets. This is a proprietary security interest.

Trust creditors (that is, persons who have become creditors of the trustee qua trustee) may be entitled to be subrogated to the trustee's lien. This is a particularly precarious 'right' of trust creditors: a trustee may not have a right of indemnity (for example, because the trustee has committed a breach of trust in incurring the liability to the creditor in question) or it may be limited (for example, where the trustee has committed an unrelated breach of trust and the clear accounts rule operates). In some jurisdictions it is possible for the trustee's right of indemnity to be excluded altogether. In these cases, subrogation may be rendered worthless or impossible.

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 may be entitled to be subrogated to the third party's former rights against the borrower to the extent of the debt discharged. [15]

Miscellaneous

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. [16]

Effects

If subrogation is available, the subrogated party is entitled to stand in the shoes of another and enforce that other party's rights. If the equity is established, the court may effect the subrogation remedy by way of equitable lien, charge, or a constructive trust with a liability to account. Crucially, the claimant's rights are wholly derivative, hence the claimant has no higher rights than the person to whom he or she is subrogated.

Waiver of subrogation

In practice insurers may agree to a waiver of their subrogation rights. [17]

Subrogation in civil law jurisdictions

Analogous doctrines exist in civil law countries; for example, Articles 1651-1659 of the Civil Code of Quebec deal with subrogation under Quebec's civil law:

A person who pays in the place of a debtor may be subrogated to the rights of the creditor.
He does not have more rights than the subrogating creditor. [18]

Related Research Articles

Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by a court order, often initiated by the debtor.

<span class="mw-page-title-main">Maxims of equity</span> Principles that govern the operation of equity within English law

Maxims of equity are legal maxims that serve as a set of general principles or rules which are said to govern the way in which equity operates. They tend to illustrate the qualities of equity, in contrast to the common law, as a more flexible, responsive approach to the needs of the individual, inclined to take into account the parties' conduct and worthiness. They were developed by the English Court of Chancery and other courts that administer equity jurisdiction, including the law of trusts. Although the most fundamental and time honored of the maxims, listed on this page, are often referred to on their own as the 'maxims of equity' or 'the equitable maxims', it cannot be said that there is a definitive list of them. Like other kinds of legal maxims or principles, they were originally, and sometimes still are, expressed in Latin.

A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.

In finance, a surety, surety bond or guaranty involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. Usually, a surety bond or surety is a promise by a surety or guarantor to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. The person or company providing the promise is also known as a "surety" or as a "guarantor".

<span class="mw-page-title-main">Bankruptcy in the United States</span> Overview of bankruptcy in the United States of America

In the United States, bankruptcy is largely governed by federal law, commonly referred to as the "Bankruptcy Code" ("Code"). The United States Constitution authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States". Congress has exercised this authority several times since 1801, including through adoption of the Bankruptcy Reform Act of 1978, as amended, codified in Title 11 of the United States Code and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).

A guarantee is a form of transaction in which one person, to obtain some trust, confidence or credit for another, engages to be answerable for them. It may also designate a treaty through which claims, rights or possessions are secured. It is to be differentiated from the colloquial "personal guarantee" in that a guarantee is a legal concept which produces an economic effect. A personal guarantee by contrast is often used to refer to a promise made by an individual which is supported by, or assured through, the word of the individual. In the same way, a guarantee produces a legal effect wherein one party affirms the promise of another by promising to themselves pay if default occurs.

Liability insurance is a part of the general insurance system of risk financing to protect the purchaser from the risks of liabilities imposed by lawsuits and similar claims and protects the insured if the purchaser is sued for claims that come within the coverage of the insurance policy.

Repossession, colloquially repo, is a "self-help" type of action in which the party having right of ownership of a property takes the property in question back from the party having right of possession without invoking court proceedings. The property may then be sold by either the financial institution or third party sellers.

In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.

Marine insurance covers the physical loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the final destination. Cargo insurance is the sub-branch of marine insurance, though marine insurance also includes onshore and offshore exposed property,, hull, marine casualty, and marine losses. When goods are transported by mail or courier or related post, shipping insurance is used instead.

<span class="mw-page-title-main">Addison Gardiner</span> American judge

Addison Gardiner was an American lawyer and politician who served as the lieutenant governor of New York from 1845 to 1847 and Chief Judge of the New York Court of Appeals from 1854 to 1855.

Insurance law is the practice of law surrounding insurance, including insurance policies and claims. It can be broadly broken into three categories - regulation of the business of insurance; regulation of the content of insurance policies, especially with regard to consumer policies; and regulation of claim handling wise.

<span class="mw-page-title-main">Marine Insurance Act 1906</span> United Kingdom legislation

The Marine Insurance Act 1906 is a UK act of Parliament regulating marine insurance. The act applies both to "ship & cargo" marine insurance, and to P&I cover.

According to the law, the term adjustment may appear in varied contexts, as a synonym for terms with unrelated definitions:

<i>Lister v Romford Ice and Cold Storage Co Ltd</i>

Lister v Romford Ice and Cold Storage Co Ltd[1956] UKHL 6 is an important English tort law, contract law and labour law, which concerns vicarious liability and an ostensible duty of an employee to compensate the employer for torts he commits in the course of employment.

<span class="mw-page-title-main">Doctrine of marshalling</span>

Marshalling is an equitable doctrine applied in the context of lending. It was described by Lord Hoffmann as:

[A] principle for doing equity between two or more creditors, each of whom are owed debts by the same debtor, but one of whom can enforce his claim against more than one security or fund and the other can resort to only one. It gives the latter an equity to require that the first creditor satisfy himself so far as possible out of the security or fund to which the latter has no claim.

Financial law is the law and regulation of the commercial banking, capital markets, insurance, derivatives and investment management sectors. Understanding financial law is crucial to appreciating the creation and formation of banking and financial regulation, as well as the legal framework for finance generally. Financial law forms a substantial portion of commercial law, and notably a substantial proportion of the global economy, and legal billables are dependent on sound and clear legal policy pertaining to financial transactions. Therefore financial law as the law for financial industries involves public and private law matters. Understanding the legal implications of transactions and structures such as an indemnity, or overdraft is crucial to appreciating their effect in financial transactions. This is the core of financial law. Thus, financial law draws a narrower distinction than commercial or corporate law by focusing primarily on financial transactions, the financial market, and its participants; for example, the sale of goods may be part of commercial law but is not financial law. Financial law may be understood as being formed of three overarching methods, or pillars of law formation and categorised into five transaction silos which form the various financial positions prevalent in finance.

Insurance in South Africa describes a mechanism in that country for the reduction or minimisation of loss, owing to the constant exposure of people and assets to risks. The kinds of loss which arise if such risks eventuate may be either patrimonial or non-patrimonial.

<span class="mw-page-title-main">Cayman Islands bankruptcy law</span>

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

<i>Lord Napier and Ettrick v Hunter</i> 1993 English House of Lords legal case

Lord Napier and Ettrick v Hunter [1993] AC 713 was a judicial decision of House of Lords relating to the right of subrogation where an insurer pays with respect to an insured risk and the assured later recovers damages from a third party with respect to that same loss. The case also determined that the right of subrogation is fortified by an equitable lien over the proceeds of the claim against the third party.

References

  1. ↑ "Definition of SUBROGATION". www.merriam-webster.com. Retrieved 2018-09-24.
  2. ↑ Charles Mitchell; Stephen Watterson (2007). Subrogation (1st ed.). Oxford University Press. paragraph 1.01. ISBN   9780199296644. In English law the term 'subrogation' denotes a process by which one party is deemed to have been substituted for another, so that he can acquire and enforce the other's rights against a third party for his own benefit.
  3. ↑ Charles Mitchell; Stephen Watterson (2007). Subrogation (1st ed.). Oxford University Press. ISBN   9780199296644.
  4. ↑ Henry Newton Sheldon (2017). The Law of Subrogation (1st ed.). Andesite Press. ISBN   978-1375572576.
  5. ↑ See, e.g., Bank of Cyprus v Menelaou [2015] UKSC 66; it was first recognised in Banque Financiere v Parc [1999] 1 AC 221.
  6. ↑ Bofinger v Kingsway [2009] HCA 44; Heydon, Leeming and Turner, Meagher, Gummow & Lehane's Equity: Doctrine and Remedies (5th ed, 2015) 391-2.
  7. ↑ Mason v Sainsbury (1782) 3 Dougl KB 61; Morris v Ford Motor Co [1973] QB 792
  8. ↑ Castellain v Preston (1883) 11 QBD 380; Re Miller, Gibb & Co [1957] 1 WLR 703
  9. ↑ 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.
  10. 1 2 3 Saltzman, Aaron (20 March 2016). "Buy travel health insurance, end up with less coverage: A couple's hard lesson If you buy travel insurance, be aware of the 'first payer' clause". CBC. Retrieved 23 March 2016.
  11. 1 2 "RBC Insurance History". 2016. Retrieved 23 March 2016.
  12. ↑ Forbes v Jackson (1882) 19 Ch D 615
  13. ↑ Duncan, Fox & Co v North and South Wales Bank (1880) 6 App Cas 1
  14. ↑ Charles Mitchell, The Law of Subrogation, ISBN   0-19-825938-7
  15. ↑ Butler v Rice [1910] 2 Ch 277; Ghana Commercial Bank v Chandiram [1960] AC 732
  16. ↑ B Liggett (Liverpool) Ltd v Barclays Bank Ltd [1928] 1 KB 48
  17. ↑ Blackfriars Group Insurance, What is Subrogation Under An Insurance Policy?, accessed 8 October 2022
  18. ↑ Légis Québec, CCQ-1991 - Civil Code of Québec, section 1651, accessed 6 October 2022
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.