Professional Liability Guide

PROFESSIONAL LIABILITY GUIDE

If, however, the insured recovered damages from a third party, section 67(3) is relevant, which effectively reverses the order of priority, as follows:

ƒ firstly, the insured is entitled to recover its uninsured loss (but not more); ƒ next, the insured is entitled to recover the actual legal and administrative costs incurred in connection with the recovery; ƒ next, the insurer is entitled to recover the amount paid to the insured by way of indemnity; and ƒ finally, the insured is entitled to the remainder (if any).

Sections 67(5), 67(6) and 67(7) provide for situations where an amount is recovered by an insurer and an insured jointly.

The order of distribution outlined in section 67 of the ICA is subject to the specific terms and conditions of the relevant insurance policy and any agreement between the insurer and insured after the loss occurred. 638 Limitations on an insurer’s right of subrogation Under the doctrine of subrogation, an insurer has all the rights that an insured has against a third party (as far as they are relevant to the loss). However, those rights can be constrained by the insured’s relationship with the third party and the relevant insurance policy. Contractual arrangements between an insured and a third party Contractual modifications or limitations of the insured’s rights will apply equally to an insurer’s right of subrogation. Accordingly, if the insured is prevented from making a claim against a third party, the insurer is similarly prevented from commencing recovery proceedings.

An insurer will also be unable to pursue a recovery action in the name of an insured where:

ƒ the insured has not suffered any loss because it has been fully indemnified under a contract with a third party; or ƒ an insured’s claim against a third party is out of time, either by way of contractual provision or the applicable statutory limitation period. It is, therefore, important for insurers to consider whether any recovery action is to be pursued early in the claim for indemnity.

Waiver of subrogation

An insurance policy may include a clause to the effect that an insurer agrees not to pursue its right of subrogation against a named third party or type of party. 639 Such clauses are common in the construction context and can include a waiver of any right of subrogation against an employee, agent or contractor.

Provisions of the Insurance Contracts Act 1984 (Cth) Section 65 of the ICA limits an insurer’s rights of subrogation against a party with whom the insured has a family or other personal relationship.

Section 66 of ICA states that an insurer has no right of subrogation against an insured’s employee, provided the employee conduct giving rise to the loss:

ƒ occurred during or arose out of the employment; and ƒ was not serious or wilful misconduct.

638 ICA s 67(9). 639 Woodside Petroleum Development Pty Ltd v H & R–E & W Pty Ltd (1999) 20 WAR 380.

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