Subrogation: Principles and Practice Pointers
| Publication year | 1991 |
| Pages | 11 |
| Citation | Vol. 20 No. 1 Pg. 11 |
1991, January, Pg. 11. Subrogation: Principles and Practice Pointers
At the same time that insurance companies are changing or adding subrogation clauses in policies, appellate decisions in Colorado and in the United States Supreme Court have changed the rules which apply to subrogation. Increased insurance costs have prompted insurers to pursue subrogation more vigorously than in the past, while the appellate courts have continued the trend of denying subrogation to the insurers in spite of unambiguous language in the policy.
For the practitioner, subrogation can lead to malpractice or it can be used to an advantage in third-party actions. Subrogation is usually a shotgun marriage, a forced partnership of what may be competing interests for limited assets. The success of any claim may depend on whether the subrogation issue is recognized and how it is handled. This article discusses the underlying principles, the alternatives and the unresolved problems.
Subrogation developed as an equitable doctrine. In the insurance context, the company that pays has a legal right to recover compensation from another person or entity which may be liable on tort or contract theories. This means the insurer is substituted for the insured and has the same or some portion of the rights of the insured. A subrogation clause is commonly found in an insurance policy as well as in the settlement agreement made at the conclusion of any first-party claim with an insured. Subrogation may also arise by statute, and in many states the courts have recognized, by judicial determination, equitable subrogation known as "legal subrogation." (fn1)
In states where there is a judicial adoption of subrogation, in the absence of a right of subrogation either by statute or in the insurance policy, the courts usually are concerned with whether an insured receives more than full indemnification as a result of recoveries from the insurer and other sources.(fn2) Subrogation is favored when it appears that a third-party tortfeasor might escape financial responsibility if the insurer were not accorded a subrogation right. Subrogation is said to serve the ends of justice by placing economic responsibility for injuries on the party whose fault caused the loss.
The insurer's right of subrogation is derived from rights which its insured had and is limited to those rights.(fn3) Often, this is characterized as "the insurer standing in the shoes" of its insured. This gives an insurer whatever rights the insured possesses against responsible third parties and no more,(fn4) much as a trustee in bankruptcy has no more rights than the bankrupt.(fn5)
An insurer cannot assert a claim that the insured has waived. For example, the standard construction contract contains a waiver by the general contractor against "subcontractors" for damages caused by fire or other perils to the extent covered by insurance, and these clauses are enforceable. The insurer that pays on a claim cannot pursue a right that has been waived by its insured.(fn6)
Subrogation against an insured is rarely allowed since the reason for buying insurance is to avoid the very risk for which the insurance premium is paid.(fn7) If the insurer can accept the premium and then subrogate against the
J. Kent Miller, Denver, is a shareholder in the firm of Miller & McCarren, P.O. and author of the two-volume reference work, Colorado Personal Injury Practice---Torts & Insurance.
Litigation of this principle often arises when the definition of "insured" includes subcontractors of a general contractor "named insured."(fn8) General tort law allows a vicariously liable master or principal to have indemnity claims against the tortfeasor servant. If both the general contractor and subcontractor have the same coverage, there is a conflict of interest in such a subrogation right.(fn9) An insurer cannot subrogate against its own insured to assert an indemnification claim of its named insured.(fn10)
Insurance policies rarely contain an express waiver or limit of subrogation rights. Surprisingly, a number of cases have held that, even in the absence of a subrogation provision in a property insurance policy, together with the omission of such a clause in the settlement papers, there might still be an enforceable subrogation right.(fn11)
There are several alternatives to presentation of the subrogation claim. The insurer might bring the subrogation claim in its own name, in the name of its insured, or bring its own cause of action.
Most jurisdictions do not allow splitting of a tort cause of action. The subrogated insurer and the insured usually cannot proceed independently on their respective shares of the cause of action.(fn12) However, in jurisdictions which do not allow splitting a cause of action, a court may conclude that the conflicting interests of subrogor and subrogee outweigh the additional litigation burden imposed on the court by separate causes of action. The more common approach is for the insurer to pursue the claim in the name of the insured.
Subrogation claims usually are brought in the name of the insured rather than the insurer. The controversy is then constructed to appear as a dispute between the insured and the third party. Justification for this approach is more persuasive when the insurer has paid only part of the loss, so that the insured continues to have a beneficial interest in the claim. Courts which treat an insurer asserting a subrogation right as the "real party in interest" will require that the insurer bring the action in its own name.(fn13)
In an effort to circumvent this, many insurers do not settle a claim but simply make an "advance payment," getting a signed "loan receipt" from the insured. The "loan receipt" states that the insured agrees to pursue the tortfeasor (in the insured's name, of course) and repay the insurer out of any recovery from a third party.
When Medicaid has provided benefits for medical expenses, the injured party cannot personally recover for the expenditures made by the state. The Medicaid statute operates as an assignment of this cause of action to the state.(fn14) The Department of Social Services, which administers the Medicaid program, has three options: join in the action against the tortfeasor, assign its right to the injured beneficiary or file an action in its own name.(fn15) The second alternative, assignment of the Medicaid claim, creates a potential conflict of interest for the attorney, as discussed below.
The majority rule allows a subrogated insurer to proceed against a tortfeasor who had notice of the subrogation claim but then settled with an insured in violation of the insurer's subrogation rights. Moreover, a general release signed by the insured usually will not discharge the third party's liability to the extent of the insurer's subrogation interest.(fn16) However, in Colorado, the decisions consistently characterize the subrogation interest as rising or falling with the rights of the subrogor. Subrogees get no greater rights than their insureds, since the subrogees' status is derivative.(fn17)
A release creates a significant, if not insurmountable, barrier to the subrogee. However, as a practical matter, no liability insurer on notice of a subrogated interest will settle without proof of resolution of the subrogation interest, such as an assignment of claim or release by the subrogee. The more likely malpractice potential is the release and settlement with a tortfeasor's insurer when that liability insurer has no notice of a subrogated interest.
The remedies available to an insurer depend on whether or not the insurance coverage has yet been used to pay the claim. If the insurer has not yet paid policy benefits to the insured, the insured's violation or compromise of the subrogation right will operate as a partial or complete defense to a subsequent claim for insurance benefits. When insurance benefits have already been paid, a subrogated insurer may be entitled to sue the insured for breach of contract.(fn18) Other remedies include a claim in equity for quasi-contract, a claim for constructive trust or injunctive relief.(fn19)
Arguably, the insurer must show that it would have (1) won the tort claim and (2) actually recovered on the judgment against the alleged tortfeasor if the insured had not prejudiced the subrogation claim (by settling and signing a release, for example). This is analogous to the burden of proof in legal malpractice claims, where a client who sues a lawyer for a mistake which extinguishes a legal claim must demonstrate not only that the claim would have succeeded, but that the judgment debtor could have paid the judgment.(fn20)
A fairer rule may be to require proof that the insurer could probably have won the case and that some recovery was likely either by compromise settlement or collection of judgment. In a leading case, the court stated that, to prove the harm done by violation of its subrogation rights, an insurer "must show that in fact it might have recovered against the third party as a wrongdoer."(fn21)
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