Professional Liability Guide

CHAPTER 16 – SUBROGATION

Similarly, if an insured were to receive a claim payment under the terms and conditions of its insurance policy and a subsequent contribution towards the loss from a third party, the latter would usually be payable by the insured to the insurer. This is because an insured should not gain a windfall by receiving the benefit of both a claim payment under an insurance policy and damages from a culpable third party. 636

However, an insurer is not obliged to pursue those rights. It may choose not to. That is, an insurer may elect not to pursue a remedy that an insured has against a third party.

Prejudice by the insured An insured has a general duty not to engage in conduct that would prejudice an insurer’s right of subrogation. Prejudice by an insured is often considered in the context of any settlement entered by the insured. In State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd , Barwick J said: ‘It is … settled law that an insured may not release, diminish, compromise or divert the benefit of any right to which the insurer is or will be entitled to succeed and enjoy under his right of subrogation. On occasions an attempt by the insured to do so will be ineffective against the insurer because of the knowledge of the circumstances which the person under obligation to the insured may have. On other occasions, when the insured’s act has become effective as against the insurer, the insured will be liable to the insurer in damages, or possibly, on some occasions for money had and received. But such conduct on the part of the insured will not in general avoid the insurer’s liability to indemnify, though in some circumstances the insurer may be entitled to set off the amount of the damages against the amount otherwise payable under the indemnity.’ 637 Accordingly, if an insured prejudices an insurer’s right of subrogation, it may be accountable to the insurer for damages, or an insurer may set off those damages against the amount to be indemnified under the policy. It is, however, arguable that such a settlement would not prejudice an insurer’s rights if, before indemnity is confirmed, an insured is instructed to act as a prudent uninsured and, in doing so, enters into a settlement agreement. Distribution of the proceeds of a subrogated recovery action Section 67 of the ICA governs the priority of distribution of any funds recovered by way of subrogation, depending on whether the insurer or the insured had responsibility for the conduct (and cost) of the recovery action.

Under section 67(2), if an amount is recovered by an insurer exercising its right of subrogation, distribution is in the following order:

ƒ firstly, to the extent available, reimbursement of the insurer’s indemnity payment to the insured; ƒ next, reimbursement of the insurer’s actual legal costs and outlays incurred in pursuing the recovery; ƒ next, to the extent available, reimbursement of the insured’s uninsured losses (including any policy deductible); and ƒ finally, any balance to the insurer.

636 British Traders’ Insurance Co v Monson (1964) 111 CLR 86, 94–95. 637 (1969) 123 CLR 228, 241.

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