Lloyd's Maritime and Commercial Law Quarterly
DEFENCES TO AN INSURER’S SUBROGATED ACTION
Charles Mitchell
When an insured suffers a loss covered by an indemnity policy and is accordingly paid by his insurer, the insurer is prima facie entitled at law
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to be subrogated to whatever subsisting rights of action the insured may possess in respect of the loss against third parties.
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The purpose of this article is to set out the defences which may be raised against an insurer’s subrogated action by an insured, or by a third party: according to circumstances the former as well as the latter may have an interest in preventing the insurer from enforcing the insured’s rights of action for its own benefit. Essentially these defences are of two kinds: defences which go to the question of the insurer’s entitlement to subrogation, and defences which go to the question of the third party’s liability to the insured.
1. Defences going to the insurer’s entitlement to subrogation
Even after he has been indemnified by his insurer, an insured can refuse to allow his name to be used in a subrogated action against a third party.3 If he does so, the insurer must bring an action in its own name, joining the insured and third party as co-defendants, and seeking a court order that the insured allow his name to be used.4 In these circumstances,
The following abbreviated citations are used in this article: Derham: S. R. Derham, Subrogation in Insurance Law (Sydney, 1985); Hecker: A. C. Hecker, Jr., “Subrogation–Potential Defenses” (1983) 18 The Forum 615; Keeton: R. E. Keeton, Basic Text on Insurance Law (St Paul, Minn., 1971); MacGillivray & Parkington: M. Parkington, N. Legh-Jones, A. Longmore and J. Birds (eds), MacGillivray and Parkington on Insurance Law, 8th edn (London, 1988).
1. In practice, most insurance policies contain express subrogation clauses, entitling the insurer to acquire the insured’s rights of action against third parties following payment on the policy: see J. Birds, “Contractual Subrogation in Insurance” [1979] J.B.L. 124. It should be borne in mind while reading this article that a subrogated action brought by an insurer exercising its rights under such a clause will certainly be subject to defences going to the question of the third party’s liability to the insured (discussed in Part 2), but may arguably be unaffected by defences going to the question of the insurer’s entitlement to subrogation at law (discussed in Part 1). Cf. Birds, ibid. 133–134.
2. An insurer’s right to bring a subrogated action against a third party does not arise until it has paid the insured under the terms of the policy: Dickenson v. Jardine (1868) L.R. 3 C.P. 639, 644, per Willes, J.; City Tailors Ltd v. Evans (1922) 91 L.J.K.B. 379, 385, per Scrutton, L.J.; A.F.G. Insurances Ltd v. City of Brighton (1972) 126 C.L.R. 655, 663, per Mason, J. See too Pacific Coyle Navigation Co. Ltd v. Ruby General Insurance Co. Ltd (1954) 12 W.W.R. (N.S.) 715 (insurer cannot have third party joined to action brought by insured against insurer for payment on policy); Scottish Union & National Insurance Co. v. Davis
[1970] 1 Lloyd’s Rep. 1, 5, per Russell, L.J. (insured owes no duty to account to insurer for third party recoveries until after the insurer has indemnified him under the policy). And cf. M.V.M. Inc. v. St Paul Fire & Marine Insurance Co. 1958 AMC 341, 345, per Levet, D.J., and U.S. cases cited there. For discussion of the situation where the insured is fully indemnified under the policy, but not fully compensated for his loss, see infra, Part 1 (b).
3. Cf. Coleman and Davis v. Biedman (1849) 7 C.B. 871 (indorser of promissory note paid holders, then brought action against maker in their names without their permission; action stayed for abuse of court process).
4. See cases cited infra, in fn. 29.
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