Did you know: When either the insurer or the insured commences proceedings in a recovery action that involves subrogation, they are obligated to protect the rights of the other party.
Subrogation is defined as the “substitution of one person or group by another in respect of a debt or insurance claim accompanied by the transfer of any associated rights and duties”. Typically, it is the insurer who indemnifies the insured and then refers the matter off to a panel firm (hopefully William Roberts) to commence recovery. However, what happens to this right of subrogation if the insured jumps the gun and commences their own proceedings in relation to an indemnified event?
Simply speaking, if an insured has commenced their own recovery proceedings in relation to subrogated losses, the insurer has the ability to take over the conduct of those proceedings, including having the matter referred to their preferred legal provider. However, neither party should prejudice each other’s right to recover. That means the insured cannot issue proceedings that prejudice the right of the insurer by only pursuing damages over and above the amount that has already been compensated under the policy. So while the insured can settle with a defendant for only its uninsured losses, it cannot prejudice the right of the insurer to proceed to recover its indemnified loss under the policy. Similar obligations apply to the insurer.
A contract of insurance involves a requirement for the parties to act in good faith. If the insured fails to have proper regard to the interests of the insurer, and by doing so prejudices the insurer’s interests, the insurer is entitled to make a claim for damages (see Yorkshire Insurance Co. Ltd v Nisbet Shipping Co Ltd [1962] 2 QB 330; Broadlands Properties Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ Ins Cas 60-552). An insured is under a general duty not to engage in any conduct that would prejudice the subrogation rights of the insurer, even in the absence of an express term to that effect in the insurance policy. If the insured’s actions mean that the insurer is unable to pursue a defendant for the sums that it has paid to the insured owing to the insured’s conduct, it follows that the insurer has an actionable claim for breach of contract against the insured directly.
Accordingly, if you come across an insured who has commenced their own recovery proceedings in relation to subrogated loss, it is important that you urgently put them on notice of the insurer’s subrogated interest in the matter, including providing them with a subrogation agreement, and refer the matter to a panel firm as soon as possible. William Roberts has assisted on many occasions with the drafting of specific subrogation agreements for individual circumstances. Should you come across a matter like this, please do not hesitate to reach out to our office for assistance.
About me (Luca Nuzzo) – I have been an insurance litigation lawyer for 4 years and am an Associate in William Roberts’ Victorian team. I am assisting in the overseeing of the non-pay recovery project with one of our major clients, which has seen a significant uptick in the recovery of funds for the insurer. When not at work, you can usually find me organising my fantasy AFL team for the upcoming week (a coach’s job is never done) or tending to my growing veggie garden.
