The Insurer's Right Of Subrogation Where The Insured Has Not Been Fully Indemnified: An Analysis Under Article 1472 Of The Turkish Commercial Code

1. INTRODUCTION

Subrogation is one of the legal consequences of an insurer's payment of an indemnity under indemnity insurance. Pursuant to Article 1472 of the Turkish Commercial Code ("TCC"), once the insurer has indemnified the insured, it is subrogated, to the extent of the indemnity paid, to the insured's rights against the third party responsible for the loss. Accordingly, the insurer is entitled to pursue the liable third party in order to recover the amount of the indemnity it has paid.

In practice, however, the insurance indemnity does not always fully indemnify the insured. Underinsurance, policy limits, deductibles, or the exclusion of certain heads of loss from cover may leave part of the insured's loss uncompensated despite the payment of the insurance indemnity. The issue becomes particularly significant where the amount recoverable from the liable third party is insufficient to satisfy both the insurer's subrogated claim and the insured's uninsured loss. In such circumstances, the interests of the insurer and the insured compete in respect of the same claim, giving rise to the question of which party should have priority over the limited recovery obtained from the liable third party.

The prevailing view in the doctrine is that the insured's full indemnification should take priority.¹ This view is based on the principle of nemo subrogasse censetur contra se, which provides that an insurer may not exercise its right of subrogation to the prejudice of the insured.² Accordingly, it is argued that the insurer should be entitled to exercise its right of subrogation only after the insured has been fully compensated for its loss.

However, the wording of Article 1472 of the TCC expressly provides that the insurer's right of subrogation arises upon payment of the insurance indemnity. It does not require the insured to have been fully indemnified as a condition for either the accrual or the exercise of the insurer's right of subrogation. Nor does the provision contain any express rule granting the insured priority over recoveries obtained from the liable third party. This raises the question of whether the solution advocated in the doctrine has a legal basis under the current legal framework.

Against this background, this article examines whether, under the existing legal framework, the insurer's right of subrogation may be limited where the insured has not been fully indemnified. To this end, it first examines the concept of subrogation under Turkish law (“Section B”). It then considers whether Article 1472 of the TCC and the case law of the Court of Cassation provide any basis for granting priority to the insured, while also analysing the prevailing academic view on the issue (“Section C”). Finally, it evaluates the practical and doctrinal implications of the competing approaches in light of the current legal framework and sets out the author's conclusions (“Section D”).

1. THE INSURER'S RIGHT OF SUBROGATION UNDER TURKISH LAW

Subrogation is, in essence, an institution of the law of obligations and is generally governed by Article 127 of the Turkish Code of Obligations ("TCO").³ Broadly speaking, subrogation arises where a third party performs, or is obliged to perform, an obligation owed by the debtor, thereby acquiring, to the extent of such performance, the rights of the creditor.⁴ In other words, although the creditor's claim is satisfied through the third party's performance, the underlying legal relationship does not entirely cease to exist in the internal relationship. Instead, the person making the performance succeeds, to the extent provided by law, to the creditor's legal position.

Although Article 127 of the TCO lays down the general framework governing subrogation, its final paragraph expressly preserves special statutory provisions governing other instances of legal subrogation. One such instance is the insurer's right of subrogation in indemnity insurance, which is specifically regulated under Article 1472 of the TCC. The provision reads as follows:

“Where the insurer pays the insurance indemnity, it shall by operation of law succeed to the rights of the policyholder. If the policyholder has a right of action against the persons responsible for the loss, such right shall pass to the insurer to the extent of the indemnity paid. Where proceedings or enforcement actions have already been commenced against the persons liable, the insurer may, without requiring the approval of the court or the opposing party, continue such proceedings from the stage at which they stand by proving the payment made to the insured pursuant to the rules on subrogation."

Pursuant to this provision, once the insurer has paid the insurance indemnity, it is subrogated, to the extent of the indemnity paid⁵, to the insured's rights against the third party liable for the loss. Accordingly, the insurer's right of subrogation in indemnity insurance constitutes a specific application of the general rules on subrogation. Furthermore, pursuant to Article 1486(1)⁶ of the TCC, Article 1472 is mandatory in nature. Accordingly, the insurer's right of subrogation in indemnity insurance does not depend on the parties' agreement but arises automatically as a consequence prescribed by law.

The insurer's right of subrogation is closely linked to the compensatory nature of indemnity insurance. It prevents the insured from obtaining double recovery in respect of the same loss by recovering both from the insurer and from the third party responsible for the loss, while at the same time ensuring, so far as possible, that the ultimate economic burden of the loss falls upon the person who caused it. It is therefore a remedy unique to indemnity insurance; as a general rule, insurers have no right of subrogation in life insurance.⁷ For the insurer to become subrogated to the insured's rights within the meaning of Article 1472 of the TCC, the following conditions must be satisfied:

(a)     a valid insurance contract must exist, and the payment made by the insurer must relate to a loss resulting from the occurrence of an insured risk covered by that contract;⁸

(b)     the insurance indemnity must have been paid by the insurer; and⁹

(c)      the insured must have a valid right of claim against the third party liable for the loss.¹⁰

Accordingly, the insurer's right of subrogation arises upon payment of the insurance indemnity and exists only insofar as the insured has a right of claim against the third party responsible for the loss. However, pursuant to Article 1472 of the TCC, the insurer's right of subrogation is limited to the amount of the indemnity paid. Any claim in excess of that amount remains vested in the insured. Consequently, the insurer and the insured may each have competing claims against the same liable third party. This, in turn, raises the question of how priority should be allocated where the amount recoverable from the third party is insufficient to satisfy both claims.

1. THE INSURER'S RIGHT OF SUBROGATION VIS-À-VIS THE INSURED'S REMAINING LOSS

As explained above, pursuant to Article 1472 of the TCC, the insurer becomes subrogated, upon payment of the insurance indemnity and to the extent of the indemnity paid, to the insured's rights against the third party liable for the loss. At the same time, any claim relating to the portion of the loss not covered by the insurance remains vested in the insured. Accordingly, the legislature has recognised that, where the insurance indemnity does not fully cover the loss, both the insurer and the insured may have claims against the liable third party. However, Article 1472 does not recognise any priority between the insurer and the insured.

The justification of Article 1472 also makes it clear that the purpose of the provision is to subrogate the insurer to the insured's rights to the extent of the indemnity paid. It does not refer to any priority in favour of the insured in respect of its remaining loss. On the contrary, it expressly states that the insured may “always” pursue the persons liable for the portion of the loss not covered by insurance, while remaining under an obligation not to prejudice the insurer's right of subrogation.¹¹

Similarly, in its Decision on the Unification of Judgments dated 31 March 1954, the Court of Cassation considered a dispute concerning the determination of the competent court in a recourse action brought by the insurer on the basis of subrogation. In its decision, the Court of Cassation held that, to the extent of the indemnity paid, the insurer succeeds to the insured's rights, whereas the insured remains entitled to bring an action against the party liable for the portion of the loss not covered by the insurance.¹² The noteworthy aspect of the decision is that the Court of Cassation did not treat the insurer's subrogated claim and the insured's claim for the remaining loss as mutually exclusive rights, but rather as claims arising out of the same legal relationship and capable of existing simultaneously. Indeed, the Court of Cassation stated that a contrary approach would mean that "the same debt, arising from the same origin, nature and legal basis, and indivisible in relation to the tortfeasor, could be litigated simultaneously before two different courts." Accordingly, the decision proceeds on the basis that the insurer's right of subrogation and the insured's claim for the remaining loss may coexist.

The Court of Cassation has consistently adopted the same position, holding that the insurer may pursue the third party liable for the loss from the date on which the insurance indemnity is paid:

"For the insurer to become subrogated to the rights of the insured, it must first indemnify the insured for the loss arising from the insured risk. The date of payment is the date on which the insurer acquires the right of subrogation, and from that date onwards the insurer is entitled to pursue recourse against third parties."¹³

In contrast, the prevailing view in the doctrine is that the insured should enjoy priority for so long as any uninsured loss remains uncompensated.¹⁴ This view is based on the principle of nemo subrogasse censetur contra se¹⁵, according to which an insurer may not exercise its right of subrogation to the prejudice of the insured. Accordingly, where the amount recoverable from the third party liable for the loss is insufficient to satisfy both the insurer's subrogated claim and the insured's uninsured loss, priority should be given to ensuring that the insured is fully indemnified.¹⁶ Only once the insured has been fully compensated should the insurer be entitled to exercise its right of subrogation to the extent of the indemnity paid.

The rationale behind this view lies in the compensatory nature of indemnity insurance. It is argued that the purpose of subrogation is not to guarantee that the insurer will recover the indemnity it has paid in every case, but rather to prevent the insured from obtaining a double recovery while ensuring that the person responsible for the loss does not escape from liability. Accordingly, where part of the insured's loss remains uninsured, the insurer's right of subrogation should not be exercised in a manner that operates to the insured's detriment.

The development of this approach in Turkish doctrine has been strongly influenced by comparative law, particularly German law. Indeed, those supporting this view argue that, although the German Insurance Contract Act served as one of the principal sources of inspiration during the preparation of the TCC, Article 1472 failed to incorporate the express rule in German law, that “the insurer's right of subrogation may not be exercised to the detriment of the insured”.¹⁷

Indeed, Article 86(1) of the German Insurance Contract Act expressly provides that the insurer's right of subrogation may not be exercised to the detriment of the insured. The relevant provision reads as follows:

" If the policyholder is entitled to claim damages from a third party, this claim is assigned to the insurer insofar as the insurer compensates for the loss. The claim may not be assigned to the detriment of the policyholder."¹⁸

A similar approach has also been adopted under Swiss law. The insurer's right of subrogation is regulated in Article 95c(2) of the Swiss Insurance Contract Act, which provides that:

" To the extent of, and upon, its payment, the insurance undertaking shall subrogate in the rights of the insured for the corresponding claim for loss and damage which it covered under the policy."¹⁹

Article 88 of the Swiss Federal Road Traffic Act expressly recognises the insured's priority in respect of its remaining loss. The provision reads as follows:

" If the insurance indemnity does not fully cover the loss suffered by the injured party, the insurer may assert its rights of recourse against the person liable or that person's liability insurer only insofar as the exercise of such rights does not prejudice the injured party."²⁰

The Swiss Federal Supreme Court has further developed this principle in its case law, holding that Article 88 of the Swiss Federal Road Traffic Act is not confined to motor insurance but applies generally to all forms of private indemnity insurance.²¹ As a result, the insured's priority in respect of any uninsured loss has become a general principle of Swiss insurance law.²²

1. CONCLUSION AND EVALUATION

The rationale underlying the approach advocated in the doctrine is understandable from the perspective of protecting the insured. In our view, however, the real issue is not the result that this approach seeks to achieve, but rather how such a result can be justified within the framework of Article 1472 of the TCC and how it can operate in practice.

As demonstrated in this study, neither Article 1472 of the TCC, its justification, nor the case law of the Court of Cassation supports the existence of an express statutory rule or an established principle granting priority to the insured. On the contrary, the wording of the provision, its justification and the case law of the Court of Cassation all proceed on the basis that the insurer's right of subrogation arises upon payment of the insurance indemnity.

Moreover, it remains unclear how the view adopted in the doctrine is intended to operate in practice. Indeed, if the insured is regarded as having priority notwithstanding that the insurer acquires a statutory right of subrogation upon payment of the indemnity, the procedural consequences remain uncertain. Would the insurer be prevented from bringing proceedings? Would proceedings or enforcement actions already commenced by the insurer have to be stayed until the insured is full indemnified? Or would the insured's priority arise only at the stage of distribution of the recovered amount? Likewise, where only a partial recovery is made from the party liable for the loss, the current law provides no clear criteria as to how that amount should be allocated or at what point the insured should be regarded as having been "fully indemnified". In our view, unless satisfactory answers are provided to these questions, granting priority to the insured solely on the basis of the objective of protecting the insured is likely to create new uncertainties rather than resolve existing ones.

Accordingly, if priority is to be given to the insured, this should be achieved through an express legislative amendment rather than judicial interpretation. In doing so, it would also be possible to draw on the different approaches adopted in comparative law. Thus, the legislature may choose to adopt a model under which, as in German and Swiss law, the insurer's right of subrogation is limited in favour of the insured's remaining loss, or alternatively a mechanism similar to that adopted in English law.

Indeed, under the English model, the insurer that has indemnified the insured is not entitled to pursue the claim against the third party in its own name; instead, the proceedings must be brought in the name of the insured. The conduct of the proceedings and the litigation costs are, however, generally assumed by the insurer.²³ The allocation of any sums recovered from the third party depends on the extent to which the insured has been indemnified under the policy and on the nature of the insurance cover. Thus:

• In the case of full insurance, since the insured's loss has been fully indemnified by the insurer, the recovery from the third party is, as a general rule, applied towards reimbursing the insurer for the indemnity paid. However, where the amount recovered exceeds, the indemnity paid by the insurer, the insured is entitled to retain the surplus.²⁴
• Where the insured is fully insured but the policy is subject to a deductible, the sums recovered from the third party are first allocated to reimburse the insurer up to the amount of the indemnity paid. Any remaining balance is then applied to compensate the insured for the deductible borne under the policy.²⁵
• Where the policy is subject to an average clause, the insurer and the insured are treated as bearing the insured risk in proportion to their respective shares in the insured interest. Accordingly, any recovery from the third party is apportioned between them on a pro rata basis, irrespective of whether the insured has been fully indemnified.²⁶

In conclusion, whether the insured's remaining loss should take precedence over the insurer's right of subrogation is not a question of interpretation but one of legal policy. Should such a policy choice be made, the legislation should regulate not only the scope of the insurer's right of subrogation, but also the manner in which that right is to be exercised, the parties' procedural rights in litigation and enforcement proceedings, and the principles governing the allocation of recoveries obtained from the liable third party. Accordingly, it is submitted that the current wording of Article 1472 of the TCC should not be interpreted so as to confer priority on the insured in the absence of an express legislative provision.

Footnotes

^{1 Sigorta Hukuku Cilt II Zarar Sigortaları, Samim Ünan, November 2016, 1st ed., pp. 258–261; Sigortacının Kanuni Halefiyetinin Şartları ve Sınırları, Bahar Kızılsümer, November 2019, 1st ed., pp. 62–63.}

^{2 Sigorta Hukuku Cilt II Zarar Sigortaları, Samim Ünan, November 2016, 1st ed., pp. 258–259; Kanuni Halefiyet Sigortalı Aleyhine İşletilebilir mi? Amaca Uygun Sınırlama Yöntemi Ekseninde Bir Değerlendirme, Sinan Sarıkaya, p. 944.}

^{3 Kanuni Halefiyet Sigortalı Aleyhine İşletilebilir mi? Amaca Uygun Sınırlama Yöntemi Ekseninde Bir Değerlendirme, Sinan Sarıkaya, p. 930; Zarar Sigortalarında Sigortacının Halefiyeti, Şaban Kayıhan, pp. 1598–1599; Sigorta Hukuku, Tamer Bozkurt, 12th Edition, p. 225}

^{4  Zarar Sigortalarında Sigortacının Halefiyeti, Şaban Kayıhan, p. 1599.}

^{5 Justification of Article 1472 of the Turkish Commercial Code No. 6102: “The insured's right to claim compensation against the person responsible for the loss passes to the insurer to the extent of the indemnity paid. [...]”; Sigorta Hukuku, Assoc. Prof. Dr. Hacı Kara, 2nd ed. (2021), p. 456.}

^{6 (Protective Provisions) Article 1486 – (1) Any contractual provision that is contrary to the second sentence of the second paragraph of Article 1453, the second sentence of the first paragraph of Article 1458, Articles 1459 and 1461, the first paragraph of Article 1463, or Articles 1472 and 1477 shall be void.}

^{7  Kanuni Halefiyet Sigortalı Aleyhine İşletilebilir mi? Amaca Uygun Sınırlama Yöntemi Ekseninde Bir Değerlendirme, Sinan Sarıkaya, p. 949}

^{8 Zarar Sigortalarında Sigortacının Halefiyeti, Şaban Kayıhan, p. 1600; Sigorta Hukuku, Tamer Bozkurt, 12th Edition, p. 228}

^{9 Zarar Sigortalarında Sigortacının Halefiyeti, Şaban Kayıhan, p. 1601–1603; Sigorta Hukuku, Tamer Bozkurt, 12th Edition, p. 228}

^{10  Zarar Sigortalarında Sigortacının Halefiyeti, Şaban Kayıhan, p. 1603; Sigorta Hukuku, Tamer Bozkurt, 12th Edition, p. 228}

^{11 Justification of Article 1472 of the Turkish Commercial Code No. 6102: “[…] On the other hand, where the insurer has compensated only part of the insured's loss, the insured may at all times pursue the persons liable for the portion of the loss that has not been compensated, in accordance with the general principles of liability.”}

^{12 Decision of the Court of Cassation on the Unification of Judgments, General Assembly, E. 1939/37, K. 1944/9, dated 22 March 1944.}

^{13 Court of Cassation, 11th Civil Chamber, K. 1979/325, dated 20 May 1999.}

^{14 Sigorta Hukuku Cilt II Zarar Sigortaları, Samim Ünan, November 2016, 1st ed., pp. 258–261; Sigortacının Kanuni Halefiyetinin Şartları ve Sınırları, Bahar Kızılsümer, November 2019, 1st ed., pp. 62–63; Sigorta Hukuku Sempozyumları, Sorumluluk Sigortalarında Sigortacının Kanununi Halefiyeti, Prof. Dr. Emine Yazıcıoğlu, August 2018, p. 475.}

^{15 This principle may be translated into Turkish as: “No one is presumed to have subrogated another to the detriment of his own interest.”}

^{16 Sigorta Hukuku Cilt II Zarar Sigortaları, Samim Ünan, pp. 258 et seq.}

^{17  Sigorta Hukuku Cilt II Zarar Sigortaları, Samim Ünan, November 2016, 1st ed., pp. 258–261; Sigorta Hukuku Sempozyumları, Sorumluluk Sigortalarında Sigortacının Kanununi Halefiyeti, Prof. Dr. Emine Yazıcıoğlu, August 2018, p. 469.}

^{18  German Insurance Contract Act of 23 November 2007 (Bundesgesetzblatt (BGBl.) 2024 I No. 119). Article 86(1): Steht dem Versicherungsnehmer ein Ersatzanspruch gegen einen Dritten zu, geht dieser Anspruch auf den Versicherer über, soweit der Versicherer den Schaden ersetzt. Der Übergang kann nicht zum Nachteil des Versicherungsnehmers geltend gemacht werden.”}

^{19 Swiss Federal Insurance Contract Act of 2 April 1908 (Recueil officiel (RO) 24 735). Article 95(c)(2): Im Umfang und zum Zeitpunkt seiner Leistung tritt das Versicherungsunternehmen für die von ihm gedeckten gleichartigen Schadensposten in die Rechte des Versicherten ein.}

^{20 ; Swiss Federal Road Traffic Act of 19 December 1958; Article 88: Wird einem Geschädigten durch Versicherungsleistungen der Schaden nicht voll gedeckt, so können Versicherer ihre Rückgriffsrechte gegen den Haftpflichtigen oder dessen Haftpflichtversicherer nur geltend machen, soweit dadurch der Geschädigte nicht benachteiligt wird.}

^{21  RO 93 II 407, 423 E. 6; ATF 96 II 355, 361; BGE 117 II 627; Subrogation Rights of Insurers and Recourse Claims a Comparison of Turkish and Swiss Law; Pelin Baysal & Cem Arıkan & Ilgaz Önder}

^{22  Kanuni Halefiyet Sigortalı Aleyhine İşletilebilir mi? Amaca Uygun Sınırlama Yöntemi Ekseninde Bir Değerlendirme, Sinan Sarıkaya, p. 938.}

^{23 Kanuni Halefiyet Sigortalı Aleyhine İşletilebilir mi? Amaca Uygun Sınırlama Yöntemi Ekseninde Bir Değerlendirme, Sinan Sarıkaya, p. 942.}

^{24  Yorkshire Insurance Co. Ltd. v. Nisbet Shipping Co. Ltd. [1962]}

^{25 Napier v. Hunter [1993].}

^{26 The Commonwealth [1907].}

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.