SUBROGATIO

N
What is subrogation?
 It literally means the substitution of one person for another
with reference to a lawful claim.
 It is used in insurance to refer to a situation where the insurer
who has extended indemnity to the insured under a policy of
insurance, becomes entitled to exercise the rights that the
insured has against a third party who caused or contributed to
the harm/damages sustained by the insured.
 East Africa Industries Ltd –vs- Nyarangi civil app 331 of 2001
(2009) 98 KLR.The respondent was a commercial transporter
who had contracted one of his trucks to the appellant for the
conveyance of various products from Nairobi to Kisumu. The
truck was involved in a road traffic accident apparently due
to brake failure and as a result, the appellant’s merchandise
was not delivered at the designated terminal.
East Africa Industries Ltd –vs- Nyarangi civil app 331 of 2001
(2009) 98 KLR.

 The appellants claimed the respondents were negligent

resulting to accident. The respondent claimed it was an act of
He denied the allegations of negligence and averred that as
the appellant had been compensated by its insurer, he was
not obliged to pay the appellant further compensation as
claimed
 HELD
 Even if the appellant was compensated by its insurer for loss
of the goods, on the basis of the doctrine of subrogation,
policies of insurance are contracts of indemnity by virtue of
which the appellant was entitled to be placed in the position
of the insured and to succeed to all their rights and remedies
against third parties in respect to the subject matter of
insurance.
Subrogation and Indemnity
 McCardie J, the principle of subrogation is
ever a latent and inherent ingredient of the
contract of indemnity, but…it does not
become operative or enforceable until actual
payment be made by the insurer. It derives its
life from the original contract.
 If subrogation is not exercised then

indemnity automatically fails because the

insured will be more than indemnified.
ESSENTIAL OF SUBROGATION
 CORROLARY TO THE PRINCIPLE OF INDEMNITY- The function
of insurance is to return the insured to the position he was
which is indemnity, subrogation ensures it is nothing but
indemnity. case Castellain –vs- Preston
 SUBSTITUTION- It cast upon insurer’s rights of the insured,
the rights are to claim from the insured any double recovery
made by him and exercise in the name of the insured the
right he has against third parties Castellain –vs- Preston
 The insurer can only subrogate up to the amount paid to the
insured.
 Wrongdoers/tortfeasors should reimburse the insurer for the
payments that he has made to the insured. Jindra –vs-
Clayton (1995) 247 Ned 597. the insurer does not relieve the
third party which he doesn’t pay premiums for.
APPLICATION OF SUBROGATION
 Subrogation only applies to true indemnity insurance contracts, the
doctrine does not apply to personal insurance( life insurance and
personal accident insurance).
 This is because amongst many other reasons it is impossible to
attach value to life lost or bodily injuries to persons. In such
instances the insurer will pay the amount agreed in the policy
however the insured will still claim from third party and such
benefits will go to the insured and not insurer. Michigan –vs- Sharp
(1954) 339 Mich357 an accident victim recovered USD 2000 under
Blue Cross Hospital Policy, he then sued the tortfeasor who was
found liable and settled the claim at USD 18,000 in full satisfaction.
Blue Cross came for the amount of $2000 extended indemnity. The
court in denying Blue Cross subrogation said that the contracts of
life insurance was not that of indemnity.
 Another good reason is that, the right of subrogation can only be
exercised only on full indemnity of the insured. In such personal
insurances when is full indemnity said to be reached, the insured can
never be returned to his former position of health or life.
INSURER EXERCISING RIGHT OF
SUBROGATION
 The following conditions must be met whenever the insured wants
to exercise right of subrogation.
i) THE INSURER MUST BE LIABLE FOR THE LOSE- the insurer will not be liable
under insurance policy that is not valid or void contract therefore,
he cannot claim subrogation rights given he was not supposed to
pay in the first instance. In the Ugandan case Suffish International
Food Processors & Panword Insurance –vs- Egypt Air Corp civ
Appeal 15 of 2001the appellants entered into contract with the
respondent to transport a consignment of perishable goods to
Europe, due to negligence on part of the respondents, it got spoilt
and was discarded. The 2nd appellant indemnified the 1st appellant
sum USD 48,100. The 2nd appellant brought an action against
respondents under doctrine of subrogation. The respondents
claimed that there was no contract between the two appellants and
placed them on strict proof. Matter went up to the supreme court
and there was consistency in the holdings that the claim failed as
there was no contract between the appellants themselves.
INSURER EXERCISING RIGHT OF
SUBROGATION cont.….d
ii) THE INSURER MUST FULLY INDEMNIFY THE INSURED- this right
can only be exercised only if the insurer as fully indemnified the
insured to the extent of the policy. Page Vs. Scottish Insurance
(1929) 98 LJKB308 in this case the insurer indemnified the insured
some damages under some policy but refused liability on other
damages under the same policy. It was held that until the insurer
had discharged all its obligations under the policy, the insurer was
not entitled to exercise rights of subrogation.
Scottish Union & National Insurance Co –vs- Davis(1970) the
insured a car was handed to a garage for repair with the consent of
the insurer. The work was unsatisfactory and the insured took it to
another garage. The 1st garage sent bill of cost to the insurers and
they paid. The insured claimed from the third party and paid the
cost. The insurance thus brought an action against Davies claiming
to recover the amount, it was held that the insurers had not fully
indemnified him since the repairs claimed by them were
unsatisfactory.
INSTITUTING SUBROGATION
PROCEEDINGS
 Due to many reasons, the proceedings in this cases are
instituted in the name of the insured, the insured also
controls the proceedings. The contract that exist is
between the insured and insurer in no way will the third
party be liable to the insurer, the insurer’s do not have
locus standi.
 Octagon Private Investigation Security Service –vs- Lion of

Kenya Insurance Company Civil App 185 of 1991(1994) at

pg 173 the insured company sued the appellant in the H.C
seeking judgment for 913,781/= which the respondent
claimed was stolen while on transit by the agents of the
appellants. The insurance company had indemnified the
Bank for the loss entitlement under subrogation.
Octagon Private Investigation Security Service
–vs- Lion of Kenya Insurance Company
 The appellant’s ground for asking the High Court to strike out
the plaint because it disclosed no cause of action against it
(appellant) was that there was no privity of contract between it
and the respondent. The respondent was not a party to the
contract of transportation of money between the appellant and
the Bank.
 HELD
 The right of subrogation in a contract of insurance cannot create
privity of contract between the insurance company and third
parties. All that it gives an insurance company is the right to take
over the rights and privileges of the insured under an insurance
policy but if the insurance company wishes to exercise against
third parties the rights and privileges so taken over from the
insured, then it (the insurance company) can only do so on behalf
of and in the name of the insured.
Octagon Private Investigation Security Service
–vs- Lion of Kenya Insurance Company
 “The insurance company is not given rights
against third parties. The rights must and can
only be enforced by the insured personally (to
whom they are actually owed). Normally, the
insurance company will use its rich resources
to prosecute the claims; but, even then, it will
do so on behalf of and in the name of the
insured person.…” STATING J B Byamugisha in
“Elements of Insurance Law in East Africa”
THE INSURED CAN REFUSE TO BRING
PROCEEDINGS?
 It is a requirement that an insured must act in good faith at
all times in such proceedings. Even if the matter is settled
out of court, the insured should act in the best interest of
the insurer. Diplock J in Hobbs –vs- Marlowe (1977)2 ALL ER
241 said equity’s only function in subrogation was to compel
insured to institute the suit.
 If the insured refuses to institute the proceedings at the
detriment of the insurer then the insurer can bring such suit
joining both the insured and the third party has defendants.
 A wrondoer cannot bring a defence that in actual sense the
claimant is the insurer and not the claimant who has already
been paid. East Africa Industries Ltd –vs- Nyarangi civil app
331 of 2001 (2009) 98 KLR.
SURPLUS
 Any surplus that results from the suit instituted by the
insured remains to the insured. This is a limitation of
subrogation, the insurer cannot claim that the insured will be
unjustly enriched, since the proceeds cannot be returned to
the third party, it his the insured’s money. Yorkshire
Insurance Co –vs- Nisbet Shipping Co (1962) 2 QB 330 in
this case the insured’s ship was got lost in 1945as a result of
collision and the insurers paid 72,000 Sterling Pound. The
insurers started proceedings against the Canadian
government owners of the other ship, a sum of 75,000 was
paid on being found liable it was converted to Canadian
dollars. When it was converted Sterling Pound it was 126,000
due to the depreciation of the pound. Diplock J held that
subrogation only extended to the amount they had paid out.
Limitations of Subrogation
 The insurer does not have extensive rights
than the creditor
 The insurer must agree to indemnify the

insured in respect of cost of bringing the suit.

 The insured has the right to retain any

surplus claimed from third party after he has

accounted to the insurer.
RESTRICTIONS ON RIGHT OF
SUBROGATION
 THE INSURED- An insurer cannot subrogate from the insured
himself. It is like the insured bringing an action against
himself. Simpson –vs- Thomson (1877)3App Cas 279 two
ships in the ownership of the same insured collided. Having
indemnified the owner in respect of one ship, the insurers
attempted to subrogate against him by virtue of the ownership
of the vessel. The H.L dismissed the claim has an insured has
no action against himself. Jindra –vs- Clayton (1995) 247 Ned
597. where the insurer wanted jindra to institute
proceedings against own daughter(clayton)
 CONTRACTS BETWEEN INSURED AND THIRD PARTY- This

happens where contractual arrangement has been made

between the insured and third party that a cover is going to
be taken in his favor/benefit.
RESTRICTIONS……
 Mark Rowlands Ltd vs Berni Inns Ltd (1986) 1 QB 211In this case a
landlord leased a building to a tenant and the property was subsequently
damaged by fire through the tenants negligence. The property was
insured by the landlord and once indemnified the issue was whether a
subrogated action could be brought against the tenant. The answer was
No.
 The view of the court of appeal was that contractual arrangements
between landlord and the tenant as encapsulated in the lease were such
that the landlord had taken insurance cover for his benefit and tenant’s,
in the event of loss the landlord looked at the insurer to cover for the
loss.
 CO-INSURANCE/ MULTIPLE INSUREDS-Special difficulties with exercising
rights of subrogation arise in the case of insurance taken out in joint
names by two or more parties for their respective rights and interests. In
particular, it is generally accepted that an insurer will not bring an action
against a coinsured who has a sufficient interest in the loss.
Restrictions
 In Petrofina ltd vs Magnaload ltd (1984)1QB127 it was held insurers
under a contractors all risk insurance policy could not use the name
of principal insured's, the owners of the property and contractors
working thereon to sue negligent contractors negligent for the loss.
 Awang bin Dollah v Shun Shing Construction & Engineering Co Ltd

[1997] 3 SLR 677. A different result was reached by the court of

singapore that he Court expressed the view that a main contractor's
insurance policy, providing for "3 General Labourers (Sub-
contractors' Workers)" was not wide enough to include the
workman of a sub-sub-contractor.
 The restriction of co-insureds has been applied in three ways

i) Circuity of actions
ii) It would be inequitable to subrogate
iii) it is implied in the contract that the insurer will not subrogate
RESTRICTIONS…..