In a recently published judgment by the Amsterdam Court of Appeal(1) the question of which law determines the extent of the rights that an insurer may exercise against the debtor of the insured arose – the law applicable to the insurance contract or the law applicable to the claim of the insured against the debtor.
The judgment is of particular interest in respect of maritime casualties such as fires on board vessels because, in most maritime cases, the law applicable to the insurance contract (hull and machinery) is not the same as the law applicable to the claim in respect of third-party liability for damage caused by a fire.
Insuring maritime risks is often an international undertaking. If a fire occurs, this may result in a claim in tort or a claim based on a specific agreement (eg, if the fire occurred during repair works because specific instructions were not followed). The law applicable to these claims is the law of the place where the incident occurred or the law applicable to the contract for the repair works. If the damage occurred because of fault of one of the contracting party's employees, as an employer that party is, in principle, liable for the damage (Article 6:170 of the Civil Code).
When Article 6:170 and other articles which impose the same strict liability (eg, Article 6:173) were introduced, the legislature determined that the favourable rule on strict liability would be accessible only to a limited circle of claimants and that not everyone should be able to benefit from the rule. Insurers were excluded through Article 6:197(2) of the Civil Code, which determines that the right to the claim is not accessible for subrogation. But does this rule also apply if the insurance contract is subject to, for example, English law?
Article 15 of the EU Rome I Regulation (593/2008) determines that where a party (the creditor) has a contractual claim against another (the debtor), and a third party has a duty to satisfy the creditor or has satisfied the creditor in discharge of that duty, the law which governs the third party's duty to satisfy the creditor will determine whether and to what extent the third party is entitled to exercise against the debtor the rights which the creditor had against the debtor under the law governing their relationship.
The issue with which the Amsterdam Court of Appeal recently dealt appears straightforward enough: the law applicable to the insurance contract must also apply to the content of the subrogated claim, raising the question of whether the insurer may initiate a claim against the debtor of the insured and, if so, to what extent. However, a closer look reveals that the outcome may be unfair because the debtor is confronted with the consequences of the contractual law agreed between the insured and insurer. What happens if the law applicable to the claim dictates that a third party cannot be subrogated to this right?
In the case at hand Zurich Insurance Plc settled with its insured, Guess Europe BV, for damage suffered by one of Guess's shops caused by flooding that occurred in a building situated above the Guess shop. Zurich Insurance subrogated to all Guess's rights and remedies on the basis of Article 79 of the Marine Insurance Act.
Zurich Insurance claimed damages from the owner of the building where the flooding started on the basis of Article 6:173 of the Civil Code, which governs specific subject matter (lex specialis) of the general rule on tort (Article 6:162 of the Civil Code). Article 6:173 creates strict liability for the owner of a structure that does not meet the reasonable requirements that apply for structures of that type in the given circumstances, and which therefore constitutes a danger to persons or other objects. If the danger materialises, causing damage, in principle the owner is liable for this damage.
The Amsterdam Court of Appeal stated that although the subrogation itself was governed by English law, this applied only to the question of if and to what extent Guess's rights and remedies were transferred to Zurich Insurance. The question of whether these rights and remedies could be transferred was subject to the law applicable to the claim – in this case, Dutch law. As a consequence, Zurich Insurance could claim from the owner of the faulty building not on the basis of Article 6:173 of the Civil Code, but only on the basis of the general rule for a claim in tort.
Interestingly, the Rotterdam District Court reached the same conclusion in 2011 in a similar case.(2)The two judgments appear to set out the rules on how to determine the law applicable to subrogation and recourse. Moreover, the decision appears to reflect the rule set out in Article 14(2) of the Rome I Regulation on voluntary assignment and contractual subrogation for contractual claims, and applies the same rule to other types of claim (eg, a claim in tort). It seems fair and reasonable to assume that the same rules apply to contractual subrogation and to subrogation on the basis of the law.
Implications for insurers
The Amsterdam Court of Appeal's decision means that insurers may be confronted with restricted recourse possibilities which they did not anticipate on the basis of the law applicable to the insurance contract. In addition to Article 6:197 of the Civil Code, Dutch law contains more particularities in respect of the right of recourse and subrogation. For instance, Article 7:962(2) of the Civil Code determines that the insurer cannot seek recourse if this would jeopardise the insured's chances of receiving payment for uninsured damage – for example, if the insured amount available on the other side is limited.
According to Article 14(2) of the Rome I Regulation, the law governing the subrogated claim shall determine:
- its assignability;
- the relationship between the assignee and debtor;
- the conditions under which the assignment or subrogation can be invoked against the debtor; and
- whether the debtor's obligations have been discharged.
Following the Amsterdam Court of Appeal's decision, Zurich Insurance's right of recourse could also be restricted by Article 7:962(2) of the Civil Code.
In maritime cases it is not uncommon for a party (or its insurer) to limit its liability using the instrument of global limitation. Therefore, the combined consequences of limitation of liability and Article 7:962(2) of the Civil Code would be interesting to see.
There is more to an insurance contract and the right of recourse than meets the eye and which is to be expected on the basis of the law applicable to the insurance contract. The scope of the chosen law may eventually prove to be more limited than intended. Moreover, it is important to tread carefully in connection with any international recourse case, and therefore any maritime casualty, as anomalies need to be addressed in the very early stages of drafting a (recourse) claim as well as the even earlier stages of settling an insurance claim.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.