We commence our series of articles on the basics of insurance with "Subrogation". Set out below is a very high level overview in the UAE, but the views are widely applicable across the GCC given the similarities in laws. Each case is subject to its facts. Please take legal advice for detailed guidance.
What is subrogation?
Subrogation is the right of an insurer, having indemnified its assured, to "stand in the shoes" of its assured and claim against responsible third parties. An assured's right to receive indemnity from insurers does not extinguish the assured's right to claim from third parties in respect of the loss. Through subrogation, any recovery made is to the benefit of the insurer, but only up to the extent of indemnity provided.
An insurer's right of subrogation under UAE law is set out in Article 1030 of the Civil Code (Federal Law 5/1985):
"It shall be permissible for the insurer to take the place of the assured in respect of any indemnity paid to him for loss, in bringing the claim of the assured against the person who caused the loss out of which the liability of the insurer arose, unless the person who caused the loss was an ascendant or descendant of the assured, or his spouse, or somebody living in one household with him, or a person for whose acts the assured is responsible".1
It is not unusual for an assured to be concerned about an insurer-driven subrogated recovery. Perhaps understandably, having been indemnified by the insurer for its loss, a commercially-minded assured might prefer to avoid recovery proceedings against a third party with which it has an ongoing commercial relationship. However, there are three main reasons why an assured will (or is obliged to acquiesce to a subrogated recovery:
- An insurer is legally entitled to exercise its right for subrogated recovery (see Article 1030 - above);
- the basic rule of jurisprudence is that the responsible party should be liable to repair/compensate for the harm it has caused; and
- a subrogated recovery, especially on larger claims, may reduce future insurance premiums.
Limits on the right of Subrogation
That said, insurers do not enjoy unfettered subrogation rights:
- An insurer cannot recover more than the amount of the indemnity paid. If an insurer recovers more, the balance must be paid over to the assured;
- Insurer's rights are no more extensive than those of the assured. For example, if the assured's contract with the responsible third party contains a limit on the third party's liability, then such limit also applies to the insurer;
- In accordance with Article 1030 of the Civil Code, an insurer is unable to bring a subrogated claim against an "ascendant or descendant" of the assured, or someone for whom the assured is responsible. The manner in which Article 1030 is drafted seems to be directed at an individual assured, rather than a corporate entity. But that does not mean that Article 1030 does not apply to corporate entities. It can be construed as applying to corporate parents or subsidiaries, as "ascendants and descendants".
Subrogation and Assignment
Subrogation and assignment are often used interchangeably in the UAE. However, assignment is not the same as subrogation and it:
- requires an express agreement between the assignor and assignee;
- may (subject to the terms of the assignment) allow an insurer/third party to commence proceedings in its own name, as opposed to under the assured's name. This is sometimes useful as it allows an insurer/third party to proceed without the cooperation of the assured and/or helps the assured to avoid embarrassment on a personal/commercial level; and
- may permit insurers to retain any profit element of a recovery, irrespective of the level of indemnity paid.
Points to keep in mind when considering Subrogated recovery actions
Subrogated recoveries (whether by assignment or under law) are one of the many parts of an insurer's business. In the US, UK and Europe, subrogation is considered early in the handling of a policy claim under a policy and, where possible, actively pursued. In comparison, subrogation is less developed in the UAE (and for that matter the GCC).
There are various issues for insurers/reinsurers to keep in mind when considering a subrogated/assigned recovery. In particular:
- Liability: To pursue a recovery action, the insurer/reinsurer should first be sure that there is a third party liable, whether under contract and/or in tort with supporting evidence.
- Evidence Gathering: The evidence required to support a subrogation action is not necessarily the same evidence that is considered when adjusting the primary claim. If there are prospects of a recovery, steps should be taken at an early stage to secure supporting evidence. This is particularly the case if there is any doubt about the assured's future cooperation in a subrogated recovery.
- Cost/Benefit Analysis: Inevitably, insurers will incur costs pursuing recoveries. Whilst certain TPAs or external subrogation managers can work on a "no-cure; no fee" basis, UAE law does not permit lawyers to work on a conditional fee basis. Further, costs are generally not recoverable in the UAE courts. Alternatively costs awards are minimal. It is therefore prudent to ensure that costs will not outweigh the likely benefit, which is possible by working 1 and 2 above.
- Ability of Third Party to pay/ Insurance Cover: An element of checking the "Cost/Benefit" will be an investigation, as far as is possible, of whether the responsible third party (i) has the capacity to pay the claim; and/or (ii) has insurance cover; and (iii) if so, is the insurance backed by the same insurer(s). In the case of (iii), then the insurer may well decide not to, in effect, sue itself. If there is insurance, but with other insurers, knowledge of the third party's insurance cover is a useful tool if commencing proceedings in the UAE, given that UAE law allows direct claims against a third party's insurers, provided that the policy covers third party claims.
- Jurisdiction: The UAE (and the wider GCC) has a multitude of jurisdictions, all with their own rules and procedures. Further, recovery proceedings may need to be commenced outside the GCC even though the loss may have occurred within the GCC. That is especially relevant to, for example, marine insurance. It is therefore imperative to identify the appropriate jurisdiction(s) and carry out a merits assessment specific to it.
- Type of Proceedings: Litigation should ideally be the last resort given its inherent uncertainties in every jurisdiction. Insurers may have other mechanisms available, such as direct settlement discussion, mediation or conciliation and arbitration. However, these will always be subject to the agreement of the third party and/or its insurers.
Subrogation is an important facet of every insurance cover and claim. Save in the limited circumstances where there is specific legislation, or where the insurer and assured have agreed otherwise, an insurer is legally entitled to a subrogated recovery for any claims paid out. However, subrogated recoveries are not straightforward and insurers should take appropriate legal advice, at an early stage, to preserve their rights to pursue, and investigate the merits of, subrogated recovery claims.
1 Translation provided by Thompson Reuters Westlaw Gulf
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.