What is subrogation
Every day unfortunate events occur. From a building that burns down to the ground, a motor vehicle accident and a customer who slips on a wet floor in a retail store. Behind these misfortunes is a negligent party who is the cause.
An insurance company is usually happy to cover such risks for an agreed premium and on certain conditions. If you are not at fault and your insurer pays out your claim in respect of a risk that has occurred, your insurer has a right to sue the third party who caused the peril and recover the total amount it paid you. This insurer’s right of recourse is legally known as subrogation.
Origin of the principle
The principle dates back to 1883 when it was first established in England. It also found application in Roman–Dutch law in the case of Ackerman v Loubser in 1918. This case made it clear that the principle emanated from English Law. A combination of the English and Roman–Dutch law has formed part of Lesotho’s laws through a general law that was passed by the British High Commissioner in 1884. In terms of this law, all laws that were applicable in Lesotho when it was a British protectorate and earlier annexed to the Cape Colony in South Africa are presently still applicable alongside Lesotho’s customary law. The subrogation principle has evolved over time when more and more cases were decided in both English and Roman–Dutch law jurisdictions. Naturally, when it was applied in Lesotho Courts, there was now a collection of cases to guide the Courts.
The benefits of subrogation
Subrogation simply means that the insured person will not have to worry about legal battles with a third party to recover losses. Once the insurer honours the claim, it steps into the shoes of the insured and exercises the right to commence legal action against the third party to recover the loss. The insurer will have all the rights and remedies that the insured had against the party at fault; nothing more or less. The insurer will also have the benefit of having the insured as a witness to the proceedings. This makes it mutually beneficial for the parties.
Unpacking the process
The right of subrogation only arises when there is a valid insurance contract for indemnification. After a claim is lodged with the insurer, it must compensate the insured for the loss covered under the contract if all conditions under the contract have been met. Thereafter, the insurer derives the rights and remedies the insured would otherwise have against the third party. By acquiring such rights and remedies, the insurer replaces the insured as a claimant and must be reimbursed by the third party.
It should be clear that there is a difference between the liability of the insurer to compensate the insured, which arises when a specified risk under the insurance contract materializes, and the liability of a third party to compensate the insured for loss incurred that arose out of the third party’s wrongful conduct. When the insurer compensates the insured, it does so to fulfill its duty under the contract and not to absolve the third party from its liability. It means that the third party is not released from the obligation to pay for that loss. Instead, such party now becomes liable to reimburse the insurer.
What happens and by whom
Sometimes it is argued that the insurer must sue the third party in its own name since it has reimbursed the insured for loss caused by the third party. This is as opposed to an argument that the insured is the right party to sue in respect of loss suffered for damage to property or personal rights.
The former argument was advanced by the defendant in the case of Boithatelo Ratsoane v Baphuthi Matona..
In her judgment, Justice Banyane aligned herself with the statement of law to the effect that under the principle of subrogation, the insurer is substituted for the insured and placed in a position where it assumes the rights and remedies the insured has against third parties.
The judge went on to accept that the insurer can sue to recoup the cost of the loss it paid for, and can do this in the names of the insured.
So do not be surprised, if you are involved in a motor vehicle accident and your insurer indemnifies you, your insurer will use your names to sue the third party in order to recover the amount paid for the loss. Your insurer has no independent claim against the third party because it exercises the rights you have as the creditor in order to reap the benefits from a favourable judgment of the Court.
This is different from when you surrender your rights in writing to the insurer after your claim has been honoured. This principle is known as cession. It allows the insurer to sue in its own name once an agreement of cession has been concluded. So, unless the insured has ceded his or her rights to the insurer, the insurer must institute a case in the insured’s name once it has fully indemnified the insured. This distinction between when the lawsuit can be instituted in the name of the insurer and in the name of the insured was made by the judge in the above-cited case.
Another important question that arose in the same matter was whether the insured would be compensated twice if her case succeeded. That is not so. The Judge correctly held that insured is contractually bound to pay over to the insurer the money the court has awarded, the insured will not receive double compensation.
If you have been indemnified by your insurer and also accept compensation from a third party, you are by law mandated to remit the payment from the third party to your insurer. Failure to do so results in the violation of your insurer’s right of subrogation. You will be liable to pay the insurer for any loss that it suffers as a result of settling with the third party.
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Read the original publication at Webber Newdigate.
