Subrogation is governed by Part 8 of the Insurance Contracts Act 1984 (Cth) (“ICA”) in the context of insurance law. In the simplest terms, subrogation in the context of insurance law permits an insurer to take on the obligations and rights of an insured in order to file a claim against a third party who has caused the insured loss.
Insurance companies utilising their subrogation rights
We’ll look at a situation where an insured driver is involved in a car accident without their fault in order to illustrate how subrogation works. In such a case, the insurance provider will cover the cost of the insured’s car’s repairs. The insurance company will subsequently file a claim in the insured’s name against the responsible party in an effort to recoup its losses. This instance serves as a straightforward illustration of how the ICA permits insurers to pursue losses under their subrogation rights.
The Court considered whether the insurer would be entitled to a right of subrogation to the rights of the Owners Corporation in The Owners Strata Plan 56587 v. TMG Developments Pty Limited [2007] NSWSC 1364. (being the insured). The Court took into account the Policy between the insured and insurer while determining whether the insurer had a claim to subrogation. According to the Court, the Policy that the insurer and the insured had in place confirmed the insurer’s rights of subrogation, allowing the insurer to file the claim in the name of the Owners Company.
This case example emphasises the significance of making sure the Policy between an insurer and insured supports the insurer’s rights of subrogation, regardless of the rights of subrogation as granted in the ICA.
Limiting the insurers’ ability to exercise their subrogation rights
The ability of insurers to file a claim against certain third parties is governed by the ICA. For instance, it is anticipated that insurers won’t enforce their right to subrogation if the insured and the third party have a family or other personal relationship or if the insured has given the third party express or implied permission to operate an insured motor vehicle. [1]
Additionally, the ICA’s Section 66, which addresses subrogation of rights against workers, restricts the ability of insurers to pursue damages against an insured’s employee.
In accordance with Section 66, the insurer is not entitled to subrogation to the insured against the insured’s employee when the employee’s acts did not constitute “serious or deliberate misconduct” and the employee’s loss occurred within the course of work. [2]
“Serious and wilful misconduct” was examined in the case of Boral Resources (Queensland) Pty Ltd v. Pyke (1989) 93 ALR 89, which stated, “”Wilful” misconduct involves just the performing of acts in reality amounting to misconduct, with awareness that such acts will amount to misconduct.”[3]
This leads us to question, if the employee is fired by the employer after an incident causing loss to the insurer and/or insured, can the insurer then exercise their rights of subrogation to bring a claim against the employee. In other words, if at the time the incident occurred, they were an employee acting in the course of their employment, the insurer cannot file a claim against them even after they are fired.
A good example is Section 66, which limits insurers’ ability to pursue claims they might have otherwise been entitled to as long as employees are acting in the course of their employment.
Distributing claim settlement funds
Section 67 of the ICA applies in circumstances where an amount is recovered (either by the insured or the insurer) from a third party in respect of loss, in instances where an insurer is liable under a contract of insurance and the insurer has a right of subrogation with respect to the loss. [4]
The way in which proceeds from a recovery action are dispersed are based upon the following:
- All administrative and legal fees incurred in a case must be paid by the party making the claim; if both the insurer and the insured are involved in making the claim, the administrative and legal fees must be paid proportionately or pro rata if there are insufficient funds;
- The leftover money are dispersed to the claimant’s party in the following ways:
– In the event that the insurer brings the claim, the insurer will receive compensation equal to the amount it has already paid to the insured under the insurance policy, with any remaining funds going to the insured;
– In the case of a lawsuit brought by the insured, the insured will get compensation for the loss incurred, with any residual monies going to the insurer;
– In a similar manner to what was said previously, if the insurer and insured file the claim jointly, each will receive compensation equivalent to their respective losses, or pro rata if there are insufficient funds. [5]
Part 8 of the ICA was previously discussed, which emphasises how crucial a function it plays in enabling insurers to recover losses from third parties. Insurers have the power to go after third parties through subrogation rights for losses that result from an insurance agreement with an insured.
Additionally, the application of rights of subrogation prevents both insurers and their insured from receiving a double recovery in a claim.
If you have any further questions, please contact our Legal-Litigation Lawyer Nikola Fratric on (03) 9999-1122 or by email nik.fratric@adclegal.com.au.