Subrogation is defined as the “substitution of one person or group by another in respect of a debt or insurance claim accompanied by the transfer of any associated rights and duties”.

The doctrine of subrogation allows an insurer to:

  1. bring a claim in the insured’s name against a third party responsible for a loss suffered by the insured; and
  2. claim from the insured any double recovery that has been made.

Bupa Australia Pty Ltd v Shaw (as Joint Executor of the Estate of Norman Shaw) & Anor [2013] VSC 507 (“Bupa Australia v Shaw”), related to an insurer’s right of subrogation and what occurs when an insurer makes a good faith payment under the policy of insurance.

Background

Mr Shaw underwent surgery in September 2005, originally to remove a tumour from the lining of his oesophagus, however, during surgery the surgeon performed a full gastrectomy, following which ongoing treatment was necessary.

Mr Shaw made a claim under his health insurance policy with Bupa Australia Health Pty Ltd (“Bupa”) for all hospital and treatment expenses that he incurred following the gastrectomy in September 2005. Bupa paid the sum of $338,953.56 for the benefit of Mr Shaw.

In September 2008, Mr Shaw commenced proceedings against the surgeon (“Negligence Proceeding”) seeking damages for medical negligence. Mr Shaw alleged that the surgeon had breached his duty of care and sought damages to cover his past and future care, as well as, damages to cover his medical expenses. The damages in respect of medical expenses included medical treatment costs that had already been paid by Bupa.

On 2 May 2010, Mr Shaw died and the Negligence Proceeding was continued by Mr Shaw’s wife on behalf of the estate. Subsequently, in December 2011, the Negligence Proceeding was settled against the surgeon.

Unaware of the settlement, on 16 February 2012, Bupa enquired with Mr Shaw’s solicitors as to the progress of the Negligence Proceeding. Bupa was subsequently informed that the Negligence Proceeding settled in December 2011 and that “[a]s part of the terms of settlement the Insurer of the [surgeon had] agreed to indemnify [the estate] against repayment to Bupa”.

Bupa demanded repayment of the Bupa payments from the estate, however, despite the demands, the executors of Mr Shaw’s estate denied liability to repay Bupa for the payments previously made to Mr Shaw.

Bupa commenced proceedings against the executors of the estate (“Recovery Proceeding”), for which the solicitors defending the recovery proceeding on behalf of the estate, also acted for the surgeon in the Negligence Proceeding as required by the Deed of Release.

Issues

Justice Almond posed three questions:

  1. Were the payments for medical expenses made by way of indemnification under the policy, thereby giving rise to an entitlement to exercise the right of subrogation?
  2. Was Bupa’s right of subrogation prejudiced by the terms on which the Negligence Proceeding was settled?
  3. Was Bupa prevented from exercising its right of subrogation as a consequence of its own conduct?

Findings

Were the payments for medical expenses made by way of indemnification under the policy, thereby giving rise to an entitlement to exercise the right of subrogation?

Justice Almond stated that “… the purpose and object of the health insurance policy is to indemnify policy holders for medical and like expenses…a reasonable person in the position of the parties would have understood from the Schedule … that insurance cover … would be immediate and comprehensive and that claims would be met to discharge liabilities incurred...

Justice Almond found that an obligation to indemnify under the policy had arisen, Bupa provided indemnity under the policy and as a consequence was entitled to rely on its right of subrogation.

Was Bupa’s right of subrogation prejudiced by the terms on which the Negligence Proceeding was settled?

Justice Almond stated that the Deed of Release “… diminished and compromised the benefit of the right to which Bupa was entitled to succeed and enjoy under its right of subrogation …” Accordingly, Justice Almond held that Bupa’s right to exercise its right of subrogation had been prejudiced by reason of the terms on which the Negligence Proceeding was settled.

Was Bupa prevented from exercising its right of subrogation as a consequence of its own conduct?

The estate submitted to the Court that Bupa elected not to exercise, or waived, its right of subrogation, by reason of the communications between Bupa and the solicitors for Mr Shaw and the fact that Bupa took no step to intervene and take over the running of the Negligence Proceeding.

Justice Almond rejected the estate’s argument and found that Bupa was not prevented from exercising its right of subrogation by reason of its own conduct.

Justice Almond ordered that Bupa was entitled to equitable compensation in the sum of $338,953.56 plus interest.