UK: Subrogation Rights: No Absolution On Dissolution

The case for an assignment clause

The court held that where an insured company is dissolved before subrogated proceedings can be started by an insurer in the company’s name the insurer’s right to subrogate does not amount to a sufficient proprietary interest to enable the insurer to get a vesting order enabling the claim to be pursued.

The High Court has considered whether an insurer can apply to have an insured’s right of action vested in the insurer following dissolution of the insured. Insurers had indemnified the insured engineering company in respect of losses allegedly caused by a sub-contractor. The insured and the liquidators had previously disclaimed the right of action against the sub-contractor.

The case underlines the advisability of insurers not only recording their rights of subrogation in the policy but also stipulating that insurers have a right to insist on an assignment of any cause of action that the insured might have against a third party in respect of the loss in respect of which payment is made. Although it may be impossible to enforce the obligation to assign if left until after liquidation, a clause of this sort does improve the prospect of the insurer taking steps to safeguard his position if the financial position or continued existence of the insured is unclear.

To view the article in full, please see below:

Full Article

The case for an assignment clause.

The court held that where an insured company is dissolved before subrogated proceedings can be started by an insurer in the company’s name the insurer’s right to subrogate does not amount to a sufficient proprietary interest to enable the insurer to get a vesting order enabling the claim to be pursued.

The High Court has considered whether an insurer can apply to have an insured’s right of action vested in the insurer following dissolution of the insured. Insurers had indemnified the insured engineering company in respect of losses allegedly caused by a sub-contractor. The insured and the liquidators had previously disclaimed the right of action against the sub-contractor.

The case underlines the advisability of insurers not only recording their rights of subrogation in the policy but also stipulating that insurers have a right to insist on an assignment of any cause of action that the insured might have against a third party in respect of the loss in respect of which payment is made. Although it may be impossible to enforce the obligation to assign if left until after liquidation, a clause of this sort does improve the prospect of the insurer taking steps to safeguard his position if the financial position or continued existence of the insured is unclear.

Background

The insured engineering company suffered a loss during the construction of a sports pitch. The losses incurred were alleged to be the result of its sub contractor’s actions. Insurers indemnified the insured engineers and intended to seek recovery by way of a subrogated claim against the sub contractor.

The insured was later dissolved. Prior to dissolution, the liquidators had disclaimed the right of action against the former sub contractor on the basis that it was onerous property under the terms of the Insolvency Act. Insurers applied to the court for an order to vest the insured’s claim against the contractor in the insureds’ favour. If granted, the insurers would have been able to pursue its claim against the sub contractor despite the dissolution of the insured.

Decision

To enable the court to decide that the cause of action should be vested in the insurers, it had to be demonstrated, for the purposes of section 181 of the Insolvency Act 1968, that the insurers were a ‘person’:

1. who claimed an interest in the cause of action; and
2. who was entitled to the cause of action.

In determining the nature of the interest in the property, the court considered that insurers must have some form of proprietary right in the property and that a right of subrogation was not a sufficient interest. The court reached this conclusion on the basis of six primary factors:

• Insurers’ proprietary interest in the proceeds of a recovery was more consistent with principle than a proprietary interest in the insured’s cause of action. Comment in previous judgments had suggested that there was no proprietary interest in the cause of action.

• Previous decisions were inconsistent with the concept of an insurer having a proprietary interest in the cause of action. For example, an insurer cannot be substituted as claimant in an action already commenced in the name of the insured after it had been dissolved, unless there has been a valid assignment prior to the dissolution. The right of subrogation does not transfer the cause of action.

• An insurer cannot prevent an insured from exercising its recovery rights, even though it may compel an insured to use the right of action.

• An insured may compromise a claim against a third party in respect of his insured losses, without referral to insurers, but can validly bind them. Only the insured can give a valid receipt and discharge to a third party against whom a judgment has been given following a successful subrogated claim.

• An Insurer can only recover what it has paid to the insured in a subrogated action whereas if the right of action has been validly assigned to the insurer then they may be able to recover more.

Commentary

While this case relates specifically to the situation where a right of action has been disclaimed and an application is made under the Insolvency Act for a vesting order, it does suggest that where an insurer wishes to pursue a subrogated recovery and the financial position or future of the insured is unclear, a valid assignment of the claim in advance of any dissolution will be the best way to protect the insurer’s right of recovery against a third party, should it wish to protect its right to bring such a claim in the future.

Further reading: Re Ballast plc St Paul Travellers Insurance Co Ltd v Dargan and others [2006] EWHC 3189 (Ch)

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 12/10/2007.