Insurance topic 13

SUBROGATION, SALVAGE AND

CONTRIBUTION
 Subrogation

• In indemnity-insurance contracts, the insured

is, subject to the terms of the contract,
entitled to a full indemnity against his or her
loss, and no more.
• His or her indemnity is also the maximum limit
of the insurer’s liability in terms of the
contract.
 Subrogation

• Very often, the insured’s loss occurs in

circumstances in which a third party is liable
to compensate him or her for it. In such event,
the operation of two principles may result in
the insured being overcompensated for his or
her loss:
 Subrogation

(1) The insurer has primary liability as far as the

insured is concerned, and cannot refuse
payment merely because the insured is
entitled to claim compensation for that loss
from the third party.
 Subrogation

• Ordinarily, the insurer is liable to indemnify the

insured against loss, and not merely against loss
for which compensation is not recoverable from a
third party.
• Of course, if the insured has already received
compensation from a third party, the insurer may,
in appropriate circumstances, take such
indemnification from an outside source
(indemnification aliunde) into account in
determining its liability in terms of the insurance
contract.
 Subrogation

(2) The existence of insurance cover, the liability

of an insurer and even the actual payment of
an indemnity in terms of an insurance
contract for the same loss for which the third
party is liable cannot be raised by the third
party when the insured seeks to recover
compensation for that loss from him or her.
 Subrogation

• The insurance is said to be a matter between

the other (two) parties (res inter alios acta) as
far as the third party is concerned.
 Subrogation

• In the light of the above, the doctrine of

subrogation operates to prevent an infringement
of the indemnity principle when the insured first
recovers from his or her insurer and then
recovers from a liable third party.
• The doctrine permits the insurer to recover the
compensation from the third party and to have
the benefit of that compensation, thus
preventing the insured from receiving more than
an indemnity.
 The nature of subrogation
• In law subrogation means the substitution of
one party for another as creditor.
• It is a concept know in Roman Dutch law that
a third party who paid the debt of another
was entitled to succeed to the rights of the
creditor against the debtor.
 The nature of subrogation
• The principle of sabrogation goes hand in
hand with the principle of indemnification.
• It serves to avoid unjust enrichment of the
insured at the expense of the insurer.
 The nature of subrogation
• Subrogation applies automatically to
indemnity (insurance) contracts (it is said to
be a naturale of such a contract), and applies
to all rights the insured may have against a
third party, whether by delict or contract, as
long as those rights serve to compensate the
insured against the very loss for which he or
she has already been indemnified by the
insurer.
 The nature of subrogation
• Subrogation should be distinguished from a
transfer of rights (ie, a transfer of the insured’s
rights against the third party to the insurer),
whether by means of agreement (thus,
cession), or by means of the operation of law.
• On the scope of subrogation and the types of
right against the third party that fall within the
ambit of its operation
 Requirements for subrogation
• No subrogation can take place where the
insurer has paid for the loss in terms of an
invalid insurance contract.
• In order to claim subrogation the insurer must
both admit and pay everything due by in
respect of a particular claim of the insured.
 Requirements for subrogation
• The insured must be fully compensated before
the insurer can claim subrogation, he must
stand second in line to the insured – especially
where he there has been deductibles.
• The right must be susceptible to subrogation.
 Requirements for subrogation
• Also, it should be noted that the insurer’s right
of subrogation, which is a right it has against
the insured, and not against the third party,
involves two distinct aspects:
 Requirements for subrogation
• (1) The first involves the insurer’s right (as against
the insured) to enforce the insured’s claim against
the third party in the insured’s name.
• The insurer is in charge of that litigation (it is
dominus litis).
• If found liable, the third party must ordinarily pay
the insured, not the insurer: after all, the action
was brought in the insured’s name, and the third
party need not even know that an insurer is
involved as the real claimant.
 Requirements for subrogation
• (2) The second aspect of the insurer’s right of
subrogation involves a right of recourse (against
the insured) to claim the proceeds of the
insured’s action against the third party from the
insured.
• The insured may have obtained those proceeds
either because the insurer exercised the first
aspect of its right of subrogation, or because the
third party paid voluntarily, and without any
action being instituted against him or her.
 Requirements for subrogation
• However, there is also a further (third) aspect
of the insurer’s right of subrogation.
• This may arise even before the first two
aspects can arise (ie, before the requirements
for subrogation have been met), and obviously
applies also after they have arisen.
 Requirements for subrogation
• The insured is under a duty not to prejudice the
insurer’s right of subrogation.
• He or she may, for instance, not settle with the
third party or release the third party from liability
prior to (or, for that matter, after) claiming and
receiving an indemnity from the insurer.
• In this regard, the insurer may be said to have a
conditional right of subrogation. On the insured’s
duties and the insurer's concomitant rights in this
regard,
 Salvage
(1) The insurer’s right to salvage arises in the case of total loss. The
object of the risk has to be totally destroyed to such an extent and
in such a way that there is nothing at all, or at least nothing of any
value.
(2) there is legally total loss if the object of risk has been damaged or
has deteriorated to such an extent, that although what remains is
of some calculable value, it is no longer an object of the type
originally insured.
(3) there is total loss in terms of loss if, although the object of risk is
merely damaged, the insured has been deprived of his possession
of it for a reasonable time and recovery is unlike or at least
uncertain.
(4) the parties to the insurance contract can agree what constitutes
total loss.
(5) Any loss which is not total loss is a partial loss.
 Insurers entitlement to remaining or
recovered property
• The insurers right to salvage is concerned
with those instances where the insurer has
paid the insured for a total loss, but where the
object of risk, or part of it is still in existence.
 Insurers entitlement to remaining or
recovered property
• Where the insurer has paid for the insured’s
total loss , he is entitled as against the insured
to the remains of the object of risk or the
recovered object as a whole.
• This right is the insurer’s right to salvage. E.g.
if insured property is lost or stolen and the
insured pays out, when the property is
recovered the insured is entitled to the
property.
 Nature and content of the right
• As with the right to sabrogation the right to
salvage is a natural consequence of the an
indemnity insurance contract.
• Its purpose is to prevent breach of the
principle of indemnity.
• The requirements for the right of sabrogation
are the same as those for the right of salvage.
 Differences with sabrogation

• Sabrogation is a rights against the insured

concerning the insured’s personal rights against
third parties. Whilst the right to salvage is a right
against the insured concerning his real rights of
ownership
• Sabrogation finds application in cases of total or
partial loss whilst salvage only applies in cases of
total loss.
• The right to salvage includes the right to claim
transfer of ownership of the object of risk, or the
remnants of the object of risk.
 Differences with sabrogation

• As a result of the right of salvage the insurer

becomes the owner of the object of risk, it may
therefore deal with it as it deems fit
• Analogous to the insurer’s right of subrogation is
its right, also against the insured, to salvage, that
is, to the object of risk or whatever may remain
of it. You should pay particular attention to the
circumstances in which this right may arise, and
to the similarities and differences between the
right of subrogation and the right to salvage.
 Contribution
• Double insurance occurs when the same
interest is insured by or on behalf of the same
insured against the same risk with 2 or more
independent insurers.
• The insurer may insure with as many insurers
as satisfies his need for security.
 Contribution
• The insured cannot recover more than is
necessary to indemnify him for his loss.
• Once he has been compensated in full, the
insured has not further claim because the
insurance contract is one of indemnity.
• The insurer has a choice in recovering the loss
from the various insurers. If he does not
succeed in full against any one insurer, he may
recover the shortfall in full from others.
 Requirements for double insurance
• The policies must overlap as to the event
insured against
• The policies must relate to the same interest
• The policies must relate to the same object of
risk
• The policies must be in force at the same time.
Right to contribution nature and basis
• In the case of double insurance the insured is
(subject to the terms of the contract) free to
decide how much of his loss he wishes to
claim from a particular insurer, but in total he
cannot claim more than the full amount of his
loss.
• If an insurer has paid more that its ratable
proportion of the loss it is entitled to claim in
its own name from other insurers.
Right to contribution nature and basis
• The right to contribution is therefore a right by
one insurer of recourse by one insurer against
another which has also insured the same loss.
• This right is in substitution of any right to
sabrogation which the paying insurer could
possibly have had to the proceeds of the
insured's rights against other insurers.
• The right to sabrogation is a natural of the
indemnity insurance.
• Contribution is restricted to indemnity insurance.
 Contribution requirements
• A right to contribution arises only if the
following requirements have been met
• The insurer claiming contribution must have
discharged its liability to the insured.
• The insurer claiming contribution must have
paid more than his ratable proportion of the
loss
 Contribution requirements
• The payment by the insurer claiming
contribution must have been in respect of an
interest in which is the object of double
insurance existing at the time of loss.
• The double insurance in respect of the insured
interest must have been for an amount in
excess of the loss.
• NB. The law is silent on the rules concerning
the apportionment of the loss.
 Self Assessment Questions
(1) Distinguish between the insurer’s right of recourse, its right to proceed against the third party,
and its right not to have its potential or conditional right of subrogation interfered with.
(2) The right of subrogation is the insurer’s right against the insured, not against the third party.
Explain.
(3) Distinguish between subrogation and cession.
(4) Can the insurer’s right of subrogation validly be excluded from an indemnity- insurance contract
through an express agreement to that effect? And can such a right validly be conferred upon a
non indemnity insurer through an express provision to that effect contained in the insurance
contract?
(5) What, for the purposes of the doctrine of subrogation, is a third party, and how are such a third
party’s rights affected by the operation of the doctrine? Also, what if the third party himself or
herself is insured against the liability he or she has incurred towards the insured?
(6) What are the requirements for the exercise of the right of subrogation, and what is the effect of
an express provision for subrogation upon these requirements?
(7) Distinguish between the insurer’s right of subrogation and its right to salvage.
(8) Distinguish among overinsurance, double insurance, and overinsurance through double
insurance.
(9) What are the requirements for the exercise of the right of contribution and what is the effect of
the provisions of a contribution clause on these requirements?