The principle is trite that an insurer who pays the insured’s loss so that the insured receives a full indemnity has the right to step into the insured’s shoes and bring an action against the person responsible for the insured’s loss.
Many policies also now provide for contractual subrogation even in circumstances where a complete indemnity is not paid.
In those circumstances, once the insured’s rights are vested in the insurers, those insurers have a right to pursue the action. If the insured gives away those rights it faces avoidance if not disclosed before inception or liability and damages for breach of the contract of insurance if effected after inception.
Subrogation applies to indemnity insurance.
It is useful if indemnity insurers remind the insured of their rights of subrogation at the time the claim is lodged.
In Bupa Australia Limited v Shaw & Another, the Australian supreme court confirmed that an insured who has a claim against a third party for damages indemnified by insurance cannot compromise that claim without breaching their duty towards the insurer.
The insurer had paid some of the insured’s hospital and general treatment expenses regarding surgery to remove a tumour. The insured, and later the insured’s estate instituted action against the surgeon for medical negligence. The damages included the medical expenses paid by the insurer. The estate and the surgeon settled the claim.
The insurer successfully claimed the amount of its indemnity payment from the estate because the rights of subrogation had been prejudiced by the terms of the settlement.
It is always useful if indemnity insurers remind the insured of their rights of subrogation at the time the claim is lodged, and to record in any agreement of loss the insurer’s election or rights of recovery, or to benefit from the proceeds of any recovery which the insured makes.