Subrogation is the insurance law term used to refer to an insurer's right, after having paid a claim and having indemnified the insured, to take the place of the insured to recover the insured's loss from the responsible third party. In the GCC subrogation is often described as being similar to an "assignment". This is a befitting description considering that in many respects subrogation in the GCC is similar to an assignment as, effectively, subrogation results in the insured's rights being passed to the insurer on payment of the indemnity.
How does subrogation work in practice?
Subrogated recoveries take the form of actions in which the insurer “stands in the shoes” of the insured with respect to the insured's rights so as to allow the insurer to recover the indemnified losses in tort or contract.
An example of a UAE subrogation claim in practice is a claim in which Clyde & Co represented an insurer in proceedings against a firm of engineers (and ultimately their professional indemnity insurers). The insured had, pursuant to a professional services contract, engaged the engineers to assist in designing a method to move expensive equipment. Unfortunately, when the equipment was moved, it was damaged beyond repair. The equipment's insurers indemnified the insured for the damage and then, relying on their right of subrogation, sought to recover the indemnity payment on the basis that it appeared that the services by the engineering firm was defective.
The relationship between the insured and the engineering firm was based on a professional services contract, which contained an arbitration clause. Although the proceedings were in the insurer's name, the legal principles applicable to subrogation meant that the insurer effectively had the same rights as the insured. In the circumstances, the insurer was obliged to commence arbitration proceedings to recover the loss. In the subsequent arbitration the arbitrator found that the engineers had breached the services contract and that this had caused the loss. In the circumstances the subrogated insurer was successful and was able to recover roughly $8 million. The award covered the indemnity payment and the costs of the arbitration.
The position in the GCC
Historically, the principal area in which subrogated recoveries took place was in respect of marine claims. However, elsewhere in the world, subrogated recoveries on non-marine insurance business have also become very much part and parcel of everyday business for insurers who often have sophisticated systems in place to manage their subrogated recoveries.
In the GCC subrogation is also expressly recognised by the codified insurance laws and, as such, insurers have an expressly recognised right to pursue subrogated recoveries. However, subrogation in the MENA insurance market is currently underdeveloped when compared to other more sophisticated markets namely Australia, USA and the UK.
Our research and discussions with loss adjusters, insurers and reinsurers suggests that subrogation claims are currently not as actively pursued in the GCC when compared with other jurisdictions.
The reasons for this are varied, but the main reasons appear to be due to:
- The participants involved in settling claims have a lack of understanding of the local laws, and how such laws differ say from common law jurisdictions.
- Loss adjusters not being required to focus specifically on the possibility of recovery, resulting in a reduced focus on recovery potential and a lack of admissible evidence in relation to claims that have subrogation potential being obtained at the time of the loss.
- There is a perception by insurer's claims teams that there is a lack of certainty and consistency in the local courts' judgments.
- Poor knowledge within the insurer's claims teams regarding the local legal systems, the law and how subrogation in the region works.
- Lower retention rates, particularly on large risks (i.e. payments are in effect made by reinsurers). Insurers consequently don't actively chase recoveries.
- Entrenched commercial relationships and insurers not wanting to be seen as "rocking the boat" with large counterparties and clients.
- The fact that even if successful in court action, insurers are unlikely to be awarded any meaningful contribution to the legal and investigation costs.
A recent closed file review in respect of a number of UAE insurers involved manually checking files that had been closed by the insurer and checking to see if they have or had subrogation potential. The review identified many claims that had not been identified and pursued across all classes of business. As a result of such review, Gulf Recoveries are now attempting recoveries for a number of insurers on previously closed files, which should result in a significant increase in the insurer’s bottom line if successful.
What can GCC insurers do?
Subrogation recoveries are a specialized process that requires strong legal insurance knowledge and negotiation skills. As such, a global trend is appearing in the more developed markets whereby insurers are taking the view that internal subrogation / recoveries are not core business and they are appointing specialised subrogation suppliers who fund and manage the entire recovery process and retain a percentage of the claim on a contingency basis.
Insurers can of course manage the process internally. To determine whether to pursue subrogation an insurer needs to consider:
- Whether the third party is liable for the loss either contractually or by a tortious act and, perhaps most importantly, is there evidence available to prove the claim.
- That there is no conflict of interest, for example, the third party is not also insured with them.
- That the size of the claim warrants the time, cost and effort to pursue the recovery.
- That the third party has the financial capacity to pay the claim either by their own financial means or through their liability insurers.
- The financial cost of the process by which the recovery will be made, e.g. internally or by the appointment of legal providers (including local advocates) or a specialist recovery company who manages and funds the whole process.
In the past subrogated recoveries may not have been actively pursued in the GCC. However, due to the ongoing soft market, insurers are looking closely at claims leakage and alternative revenue streams. Subrogated recoveries are therefore likely to see a renewed focus. Insurers will however be well advised to consider the matters noted in this article when considering subrogated recoveries.
In order to provide services and advice to the industry, Clyde & Co have collaborated with Gulf Recoveries Limited which is a newly established specialist subrogation service focused on non-marine subrogated recoveries in the region. They carry out subrogation reviews to the industry providing 'no-win no-fee' recovery solutions.