Australia: Risks For Contributing Co-Insurers

Last Updated: 18 February 2009
Article by Mark Dobbie

Key Points

  • Review of "other insurance" provisions.
  • Review of the law of subrogation.
  • Double insurance - payment by a contributing co-insurer will not give rise to a right of subrogation.

Speno Rail Maintenance Australia Pty Limited v. Metals & Minerals Insurance Pte Limited

On 6 February 2009, the Western Australian Court of Appeal handed down a decision in which the Court considered a range of issues of basic importance to insurers.

The judgment in Speno Rail Maintenance Australia Pty Limited v. Metals & Minerals Insurance Pte Limited [2009] WASCA 31 (Speno) concerns the equitable right of contribution between co-insurers, and addresses matters of relevance to insurers involved in dual insurance situations including:

  • the operation of the duty of utmost good faith between insurers; and
  • the proper construction of section 45 of the Insurance Contracts Act 1984 which deals with "other insurance" clauses.

However, Speno is probably most notable for its consideration of a general principle which has not previously been considered: where there is double insurance, and insurer one indemnifies the insured, can insurer two (who has paid a contribution to insurer one) exercise a right of subrogation?

Subrogation – first principles

In addressing this question, Beech AJA (who wrote the leading judgment) undertook a comprehensive review of the English and Australian authorities dealing with subrogation and extracted from them the principles that justify the insurer's right of subrogation.

The following principles emerge from his Honour's judgment:

  • the principle of subrogation provides two rights to an insurer: first, a right to require the insured to pursue any remedy available to the insured against a third party for the benefit of the insurer; and secondly, a right to recover from the insured any amount received by the insured from the third party as compensation for the loss against which the insured has been indemnified. (Beech AJA referred to judicial and academic criticisms of the label "subrogation" to describe the second of these rights although his Honour did not provide any views on whether he accepted these criticisms)
  • the insurer's right of subrogation does not crystallise until the insurer has paid, or at least offered an indemnity for, the full amount of the insured's loss. Beech AJA referred to the "formidable body of judicial statements" and the "numerous texts" which "contain unequivocal statements" to this effect. (Where the insurance policy provides less than a full indemnity, there are competing views as to whether the insurer may exercise a right of subrogation after full payment under the policy)
  • the authorities have emphasised the need to avoid double recovery by the insured as the principal rationale for the insurer's right of subrogation. However, the right of subrogation may be exercised by the insurer where the insured would not sue the third party (for example, because of a family relationship). The right of subrogation is therefore intended to provide the insurer with some protection (although this seems to be secondary to the avoidance of double recovery).

Subrogation – double insurance

Having addressed the legal bases of subrogation, Beech AJA concluded that in cases of double insurance, a contributing co-insurer does not obtain a right of subrogation to the insured's rights against third parties. His Honour identified three reasons for this:

  1. the contributing co-insurer has not paid the full loss under its policy of insurance
  2. the payment by the contributing co-insurer was not made to the insured in satisfaction of the indemnity but to the other insurer by way of contribution
  3. the indemnifying insurer paid the full amount of the indemnity and obtained the right of subrogation.

The Court considered the submission made on behalf of the contributing co-insurer that the contribution made by the contributing co-insurer could be treated as the equivalent of a payment to the insured under the policy, and the two insurers could each be given rights of subrogation to the extent of their respective contributions. The Court rejected this proposition as being at odds with the principles underlying the concepts of subrogation and contribution. Beech AJA again returned to the fundamentals of subrogation and reasoned that:

"In a case of double insurance, payment by one insurer discharges the liability of both insurers. ... That gives rise to the right of contribution in favour of the insurer who indemnified the insured, against the other insurer. Contribution is an adjustment of the equities between the two parties who were equally liable to indemnify the insured. It can be said that the payment of contribution arises by reference to or by reason of the indemnity, but it is not a payment of the indemnification."

Practical issues

One of the consequences of the finding in Speno is that, in cases of double insurance, the insurer who indemnified the insured for the full amount of the loss will have an exclusive right of subrogation. This is normally the insurer from whom the insured seeks indemnity.

The Court acknowledged this but did not think that this situation would necessarily produce an injustice. Beech AJA reasoned that:

Upon the exercise of a right of subrogation by the indemnifying insurer, any benefits that insurer receives will need to be brought to account in determining the burden of the insurers' shared liability. It is that burden which is to be shared equitably for the purposes of contribution.

A contributing insurer should therefore ensure that potential rights of recovery against third parties are taken into account before making its contribution.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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