Research Subrogation and Apportionment of money recovered

Scenario: The insurers commenced subrogation action against a tortfeasor to recover the amount they have paid to the insured. (“subrogated amount/ insured losses”) In the subrogation action, on top of claiming for the subrogated amount/insured losses, the insurers also assisted the insured to sue for their uninsured losses. However, the amount recovered from the tortfeasor is not enough to cover both the subrogated amount and the uninsured losses. Question: Whether the insurers are entitled to: - (a) the entire subrogated amount in priority leaving the balance to the insured for the uninsured losses OR (b) whether the insurer and the insured have to share the amount recovered proportionately. Finding: To have a right of subrogation, Castellian v Preston (1883) 11 QBD 380 at 386. “In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used… [A]s between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled, or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise of acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished.” the insurer must have paid and indemnify the insured for sums due under the contract of insurance, Page v Scottish Ins Corp (1929) 140 LT 571 at 576 as per Scrotton LJ. “if you get one car, one accident, one policy and one premium, I do not think the underwriter can claim to be subrogated until he has satisfied all the claims arising under that policy and paid for by that one premium in respect of that one accident and that one car.” before he can exercise the right of subrogation. Having the satisfied the preliminary, the right of subrogation will arise, either by operation of implied term or equity. Malcolm A Clarke, The Law of Insurance Contracts, (LPP 2002, 4th ed) para 31-2 Lord Templeman explained: - Lord Napier v Hunter [1993] AC 713 at 738& 739 “The principles which dictated the decisions of our ancestors and inspired their references to the equitable obligations of an insured person towards an insurer entitled to subrogation are discernible and immutable. They establish that such an insurer has an enforceable equitable interest in the damages payable by the wrongdoer. The insured person is guilty of unconscionable conduct if he does not provide for the insurer to be recouped out of the damages awarded against the wrongdoer. Equity will not allow the insured person to insist on his legal rights to all the damages so far as they are required to recoup the insurer under the doctrine of subrogation. Where the insured person has been paid policy moneys by the insurer for a loss in respect of which the insured person recovers damages from a wrongdoer the insured person is guilty of unconscionable conduct if he does not procure and direct that the sum due to the insurer shall be by way of subrogation be paid out of the damages.” The jurisprudence in Malaysian law seems to hint the equitable tone as to the operation of subrogation, i.e. to avoid over compensation of the insured by preventing instance of unjust enrichment. Malcolm A Clarke, The Law of Insurance Contracts, (LPP 2002, 4th ed) para 31-2A In Teo Kim Kien & Ors v Lai Sen & Anor [1980] 2 MLJ 125, the Federal Court held: - “If the damages suffered by the insured himself either to his person or to his car had been settled and paid to him by the insurer under the policy of comprehensive insurance, the doctrine of subrogation still applies and the insurer may require the insured to take an action against the wrong-doer for the recovery of all the damages flowing from the latter’s negligence. He insured’s own interest in the action may be limited to the first part of the damage claim which he had to pay under the excess clause or to the excess of his personal injury claims over what he had been paid by the insurer. If the action succeeds and he recovers a sum in settlement of his claims, he is bound to refund to the insurer what he had been paid by the insurer. If the wrong-doer was himself covered by a policy of insurance, the existence of a knock for knock agreement between the insurers of the plaintiff and the wrong-doer did not deprive the plaintiff of his right of action against the defendant for the full amount of the damage that he had sustained. Though he would also be under a duty to hand over to his insurer that part of the total damages recovered for which he had already been indemnified by it” An insurer holding a right to subrogation will step into the shoes of the insured and claim against the tortfeasor for whatever indemnity paid in the insured’s name Morris v Ford Motor Co [1973] 1 QB 792 at 812. “In my judgment the right to subrogation in contracts of insurance depends upon the essential element of the contract being one of indemnity… Where there is a contract of indemnity there exists a right in the indemnifier to reimburse himself to the extent that he has paid, and to this end the law provides that he can exercise the personal rights and remedies of the person indemnified by proceeding in that person’s name.”: - “What is an insurance but a contract of indemnity? … If Hicks had received an indemnity before the payment of the money by the company, it would clearly have been contrary to equity that he should retain that money. Park on Marine Insurances [8th ed. (1842)] says, that a contract to insure is one of indemnity only, and that the insured shall not receive double compensations for a loss; but in case the loss has been paid, and the insured afterwards recovers the amount of damages from another source, the insurer shall stand in his place to the extent of the sum they have paid.” White v Dobbinson {1844) 116 LTOS 233 as Lord Lyndhurst LC The right of the insurer against third parties arises where the insured has been fully indemnified. But complication arises when an insurer had indemnified the insured based on the policy, but the losses insured under the policy was inadequate to meet the actual loss, and that the money recovered from the tortfeasor was also inadequate. In the situation of underinsurance, and before the determination of the House of Lord in Lord Napier v Hunter [1993] AC 713, the principle of average Margaret C Hemsworth, Subrogation: the problem of competing claims to recovery monies [1998] JBL 111 at 121. “The principles of average bring similar results, that is to say that where the policy is subject to average the assured is deemed to be his own insurer for part of the loss. Thus property insured for £50,000 which has a true worth of £100,000 will result in the insured recovering £15,000 on a loss of £30,000 as he as agreed to bear 50 per cent of any loss. The principle of average also has an effect on the allocation of recovery monies. Thus if £30,000 is recovered from a wrongdoer the insurer will recover 50 per cent , or his outlay on the claim being £15,000. It is submitted that the justification for this result can be appreciated if one substitute a second insurer in place of the assured since that second insurer would not be in any better position vis-a-vis the first insurer.” was that as contained in The Commonwealth [1907] P 216. A schooner, Welsh Girl, was run down by the steamship, The Commonwealth, and was totally lost. Welsh Girl was valued at £1,350, but was only insured for £1,000. After the insurers had paid the owners of the Welsh Girl the indemnity of £1,000, they pursued the owners of The Commonwealth by way of subrogation and recovered £1,000. Insurers contend that they are entitled to the whole of £1,000. However the Court of Appeal ruled against the Insurer’s preposition and adopted a proportionate apportionment to the damages recovered. Thus, the apportionment was that the insured will be entitled to £350/1,350 whilst the insurer will be £1,000//1,350. The Commonwealth [1907] P 216 as per Sir Gorrell Barnes. “It seems to me, however, that when the underwriter pays the assured he is subrogated to his rights having regard to the risk he has taken—that is to say, in the present case, when the assured's name is used for the purpose of enforcing an action against the wrong-doer, the remedy is sought for the underwriter to the extent to which he had insured, and for the assured to the extent to which he had left himself uninsured. That being so, it seems logically to follow that when the money which is recovered is in hand it ought to be divided in proportion to the respective interests. That seems to me reasonable in principle, and, although there is no authority for it, it also seems to me to be analogous to the case of salvage where there is abandonment. That being so, it follows that the proportions which ought to be recovered in a case of this kind are easily ascertained; 1000l. was recovered from the wrong-doer, partly for the owner and partly for the underwriter, and therefore the proportion becomes 350–1350ths in the one case and 1000–1350ths in the other.” The House of Lord in the case of Lord Napier v Hunter [1993] AC 713 considered the apportionment of the money recovered on through a different approach. Instead of apportioning or sharing the damages recovered on a pro rata basis, the apportionment was based on priority of the person claiming it. The facts are as follows. Lloyds syndicate (insured) took out a stop loss policy with insurers. The policy contained both an excess clause and an agreed limited on the liability. The syndicate suffered loss due to negligent management of their managing agents in contract and tort, and commenced action to recover the excess and uninsured losses. A settlement was reached, A proceeding was taken between the insured and insurer to establish the respective claims on these monies given that these monies were insufficient to meet the totality of the insured and uninsured losses. The following chart will demonstrate the situation faced, as described by Lord Templemen: - Lord Napier v Hunter [1993] AC 713 at 729 and 730 Net Loss £ 160,000 Policy Limit £ 125,000 Excess £ 25,000 Policy payout £ 100,000 Recovered sum £ 130,000 Insured sum £ 125,000 Uninsured loss £ 35,000 His lordship dealt with the aforementioned situation in the following manner: - “The problem must, in my opinion, be solved by assuming that the name insured the first £ 25,000 of any loss and also insured the excess over £125,000 as well as insuring the £ 100,000 payable under his policy with the stop loss insurers. There would then be three insurance policies as follows: (1) a policy for the payment of the first £ 25,000 of any loss; (2) a policy for payment of the next £ 100,000 of any loss; (3) a policy for payment of any loss in excess of £ 125,000. When the name suffer a loss of £ 160,000 the name received £25,000 under the first policy, £100,000 under the second policy and £35,000 under the third policy. The damages payable by Outhwaite were £130,000. The third insurer is entitled to be the first to be subrogated because he only agreed to pay if the first two insurances did not cover the total loss; accordingly the third insurer must be paid £35,000. The second insurer is entitled to be the second to be subrogated because he only agreed to pay if the first cover proved insufficiently; accordingly the second insurer must be paid £95,000. The sum of £35,000 payable by way of subrogation to the third insurer and the sum of 95,000 payable by way of subrogation to the second insurer exhausts the damages of 130,000 received by the name from Outhwaite. There is nothing left by way of subrogation for the first insurer in respect of the first £25,000 which he agreed to bear. Under the stop loss insurance the name agreed to bear the first £25,000 loss and any loss in excess of £125,000. In my opinion the name is not entitled to be in a better position than he would have been if he had taken out the three insurances I have mentioned. The name in fact acts as his own insurer for the first £25,000 loss and acts as his own insurer for any loss in excess of £125,000. So the name must pay £95,000 to the stop loss insurers just as he would have been liable to pay £95,000 to the second insurer if he had taken out three policies. In the result, out of the loss of £160,000, the name will have borne the first £25,000 because he agreed with the stop insurers that he would bear that loss. The stop loss insurers having paid £100,000 under the policy will receive back £95,000 by way of subrogation.” Also reaching the same decision as the House of Lord, Lord Jauncey had a more interesting preposition: - “the context of recoveries subrogation is concerned only with the loss against which the assured is insured rather than any general loss. If an assured has suffered an insured loss and an uninsured loss full indemnification of the former subrogates the insurers irrespective of the fact that the assured has not yet recovered the uninsured loss.” Following this ‘recover down’ principle, it can be discerned that those who under insured themselves will absorb the ‘top’ layer of loss over and above the policy limit. Margaret C Hemsworth, Subrogation: the problem of competing claims to recovery monies [1998] JBL 111 Evaluation: In answering question posed, two possible outcomes may be reached. On the one hand, it can be argued that the insured is entitled to that portion of the damages recovered which reflects the money paid for the losses insured for. If excess clause was applicable, then the insured will only have an interest on the damages recovered for the quantum reflecting the excess. Teo Kim Kien & Ors v Lai Sen & Anor [1980] 2 MLJ 125 Insured will however first refund such portion of the damages recovered which was equivalent to the money paid by the insurer for the loss insured, and then the remaining to himself. Lord Napier v Hunter [1993] AC 713, Lord Jauncey; White v Dobbinson {1844) 116 LTOS 233, Lord Lyndhurst “[W]here an insurer has paid for the loss and damage under an insurance policy, under the principles of subrogation, it is entitled to the benefit of any recovery from the cause of action relating to the loss or damage.” Newfield Peninsula Malaysia Inc v The Owners of the Ship or Vessel ‘Tanjung Pinang 1’ [2013] 10 MLJ 650 at 674. Thus, it is arguable that the Insurer could have the first bite on the ‘benefit of any recovery’. However, the dicta of Lord Templeman suggested that the insured might not have the first bite onto the damages recovered. Because of the shortfall, between the net losses suffered and the payout of the insured, the damages recovered will go to cover the uninsured loss: - If, the amount of the uninsured loss was greater than the amount recovered, the insurer will be left with nothing. This situation could be maintained in law, for the insured at the end of the day will not violate the notion of overcompensation. There was no concern of double recovery, nor unjust enrichment. Lord Napier v Hunter [1993] AC 713, Lord Templeman If, the amount of the uninsured loss was lesser than the amount recovered, only then the remaining amount recovered then be refunded to the insurer. Scenario (i) under Lord Napier v Hunter Net Loss £ 250,000 Policy Limit £ 125,000 Excess £ 25,000 Policy payout £ 100,000 Recovered sum £ 130,000 Insured sum £ 125,000 Uninsured loss £ 150,000 Refund £ 130,000 - £ 150,000 = - £ 20,000 Scenario (ii) under Lord Napier v Hunter Net Loss £ 160,000 Policy Limit £ 125,000 Excess £ 25,000 Policy payout £ 100,000 Recovered sum £ 130,000 Insured sum £ 125,000 Uninsured loss £ 35,000 Refund £ 130,000 - £ 35,000 = £ 95,000 (£ 5,000 being the shortfall of recovery for the insurer) It is submitted that principle evaluated in A. may and should be applicable for one reason. The dicta in Lord Napier v Hunter [1993] AC 713 had yet to be considered by local courts. As such, the preposition in Teo Kim Kien & Ors v Lai Sen & Anors [1980] 2 MLJ 125 applies. This entails that ‘[i]f the action succeeds and he recovers a sum in settlement of his claims, he is bound to refund to the insurer what his insurer had paid to him under the policy insurance.’ The scenario to be followed would be that in (a) and not (b). Research on apportionment of money recovered under subrogation 26/5/2018 6