Section 67 of the Insurance Contracts Act 1984 (ICA) governs rights with respect to monies recovered under subrogation rights and provides as follows:
67(1) Where an insurer, in exercising a right of subrogation in respect of a loss, recovers an amount, the insured may recover that amount from the insurer.
(2) Unless the contract expressly provides otherwise, the insured may not recover under subsection (1) –
(a) an amount greater than the amount (if any) by which the amount recovered by the insurer exceeds the amount paid to the insured by the insurer in relation to the loss; or
(b) an amount that, together with the amount paid to the insured under the contract, is greater than the amount of the insured’s loss.
These rights can be adjusted by insured and insurer after the loss by contract subject to full disclosure (see section 68 ICA).
These provisions are reasonably well understood by insurance lawyers.
The counterparts under the Marine Insurance Act 1907 are sections 85 and 87 which provide:
85(1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of an apportionable part, of the subject matter insured, he thereupon becomes entitled to take over the interest of the insured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.
(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject-matter insured, or such part as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subjectmatter insured as from the time of the casualty causing the loss, insofar as the assured has been indemnified, according to this act, by such payment for the loss.
87 Where the insured is insured for an amount less than the insurable value, or, in the case of a valued policy, for an amount less than the policy valuation, he is deemed to be his own insurer in respect of the uninsured balance.
The Marine Insurance Act 1909 was designed to codify the common law at the time of enactment. Although the state of the law in Australia at that time was, and indeed still is, unsettled, the better view seems to be that, if an amount recovered in a subrogated claim is less than the full amount of the loss and the insured had been indemnified by the insurer as to part, then the recovery is first for the benefit of the insured and then for the benefit of the insurer. In other words, the insured has first claim.
Accordingly, at common law, if the insurer indemnified 75% of the loss of value of the property and an additional amount for business interruption but recovered in its action against a third party 100% of the loss of value of the property and nothing for consequential loss or business interruption, the additional amounts recovered would go first to the insured until it was fully compensated.
Likewise, where consequential losses are recovered in a subrogated claim by an insurer when no cover was provided by the insurer for those consequential losses, those amounts recovered are for the benefit of the insured until the insured has been completely compensated for all its losses and only then to the benefit of the insurer. However, this does not depend on the statutory provisions above because there are no rights subrogated to the insured in those circumstances to recover consequential losses. The insurer can only include such a claim with express authority from and (subject to agreement to the contrary after the loss) entirely for the benefit of the insured.
These quirks of the operation of the law in relation to subrogation have significant impact on the legal rights of insured and insurer in decisions concerning whether the insurer in a subrogated claim can or should include the uninsured or partially insured claims of the insured and what arrangements can and ought be made in respect of the proceeds recovered by such claims.
If the insurer is unwilling to include an uninsured component, (e.g. consequential losses) in its subrogated claim, then the claim (for consequential losses) cannot be the subject of a separate action by the insured having regard to Anshun style estoppel. Accordingly there is considerable motivation for both insured and insurer to reach agreement on these issues including an allocation of costs before a subrogated claim is initiated.
A failure to consider these implications may have significant impact on the rights of insureds and insurers and the liability of their lawyers.