UK: Subrogation Checklist

Subrogation litigation can be a minefield for insurers seeking to balance commercial relationships with insureds against the likelihood of obtaining a recovery of any payout from a third party. We have set out below some basic guidelines, which will provide a pathway for insurers.

• Identify whether or not the insured itself is culpable in the event which has caused the loss, e.g. a fire. If not, and it appears that an identifiable third party is involved, then identify the legal basis of the potential cause of action.

• Identify any key contractual exclusions relating to the third party which may render it not worthwhile pursuing a complex forensic and factual investigation.

• Send the legal advisers a complete set of contractual documents. Primary information will include any clause limiting liability; any applicable exclusions; any clauses requiring early commencement of proceedings; any peculiarity in respect of the jurisdiction or choice of law clause; and the existence, or otherwise, of any alternative dispute resolution clause, including arbitration.

• Identify any potential parties who may be entitled to a subrogation waiver specifically identified in the policy or who may alternatively have the benefit of the policy without being named.

• Establish whether the insured has purchased any other insurance policy covering the loss, and obtain a copy.

• Identify whether there is any potential contribution claim in addition to the potential subrogation recovery.

• Ensure that instructions to the forensic expert pass through legal advisers so there is a better chance of arguing that privilege attaches and the investigation is focused on the evidence needed to support the issues in contention.

• Ensure that the correct experts are involved as it is only too easy to leave the investigation to the generalist whereas it may be important, for example, to use an expert who is either familiar with the industry concerned and/or familiar with the specific mechanism which caused the loss. This is probably the most important decision to be taken in the course of any technical subrogation recovery.

• Passing adjusters’ reports through the legal advisers will help support a claim for retaining privilege. This is often difficult because the reports have a dual purpose - adjustment of the claim and the subrogation litigation.

• Ensure that the adjuster’s report does not include any admissions of liability.

• Determine what further evidence on quantum may be necessary if the matter were to proceed to litigation.

• Bear in mind that the primary witness in the proof of quantum will be the insured itself and any particular experts, such as surveyors, forensic accountants and others. The evidence of the adjuster will largely be irrelevant.

• Simultaneously, undertake a factual investigation. Give careful consideration to the involvement of legal advisers in this process.

• Having completed the steps set out above, a decision can be made as to whether to pursue the subrogation claim against the third party.

• If the subrogation claim is to be pursued, the insurer will need to enter into an agreement with the insured as to how the recovery is to be made.

• If the insured has any uninsured losses or wishes to recover its deductible then those claims must also be included in the litigation as the claim will be brought in the name of the insured and the court will only allow one action for recovery.

• Seek to retain the co-operation of the insured: assistance on factual evidence and, on more complex claims, technical matters, is likely to be required.

• In the absence of any clause in the policy concerning subrogation, consider entering into a separate agreement whereby the proceeds of the recovery and associated costs are on a proportional basis in order to avoid potential conflicts that can arise over settlement. Insurers will need to be satisfied that the uninsured losses are genuinely recoverable. This may require some negotiation as to the relative proportions.

• Ensure that the agreement deals with the continued co-operation of the insured and, if possible, identifies who will have ultimate authority in respect of any future settlement.

• Ask the insured to identify one person at the insured company who will act as the main point of contact for marshalling witness evidence and documentation.

Finally:

• Always consider whether the litigation can be resolved outside the courts even if there is no alternative dispute resolution clause in the contract.

• Unsurprisingly, subrogation litigation often results in disputes between property first party insurers and liability insurers. Despite the fact that these disputes are frequently resolved by a mediated settlement following extensive litigation, rarely do insurers attempt to negotiate commercially prior to litigation being commenced. Perhaps there is an opportunity for more proactive claims handling at an earlier stage.

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.