This blog was co-authored by: Anika de Kock, associate and Zinhle Mdluli, candidate attorney
The doctrine of subrogation literally means the substitution of one party for another as creditor. The doctrine is an incidence of the law of indemnity. The Court would allow the insurer to do so “in the name of the insured whether the latter likes it or not”.
In South Africa, the doctrine of subrogation is an implied term of a contract of indemnity insurance which emphasises three rules:
- A wrongdoer is not entitled to benefit from the fact that the innocent party was insured.
- The insured may not be enriched at the expense of the insurer by receiving both the insurance indemnity and damages from the wrongdoer.
- The insurer replaces the insured so that the insured is subrogated by the insurer, which entitles the insurer to claim a loss from the wrongdoer, either in its own name, or in the name of the insured without having to take cession of the right of action.
The rules of subrogation are only applied to indemnity insurance contracts which are structured to compensate an insured for damages proximately caused by perils insured against.[1]
Once an insurer has compensated an insured in full for its proven damages or the policy terms allow it prior to payment, the insurer will be entitled to institute legal action against any third party legally liable for all losses suffered by the insured and not only its insured losses.[2] The insurer will “step into the shoes of the insured”[3] and becomes is in charge of the claim against the third party wrongdoer[4]. Where a policy contains an excess clause, it remains the responsibility of the insured to pay the insurer the excess. The insured will be entitled to recoup the excess that was paid from the insurer only once the insurer has recovered the insured’s proven damages from the third party wrongdoer liable for the losses suffered by the insured. An insured is not entitled to recover the excess that was paid to its insurer directly against the third party wrongdoer where an insurer has compensated an insured in full.
Where an insurer has not compensated an insured in full and only partially indemnified the insured, the insured will remain in control of the claim against the third party wrongdoer and the insured will be entitled to recover its excess directly from the third party wrongdoer and not its insurer. There is often however an overriding contractual right of subrogation in the policy in favour of the insurer whose consent may be needed before the policyholder proceeds.
[1] Reinecke and Others South African Insurance Law (2013) par 16.1.
[2] Reinecke and Others South African Insurance Law (2013) par 18.61
[3] Smith v Banjo 2011 All SA 577 KZP par 11.
[4] Nagel and Others Commercial Law 4th edition (2011) par 25.62.
