One of the purposes of subrogation is to prevent one person being unjustly enriched at the expense of another. Right of subrogation allows an insurer who has indemnified the insured against loss to step into the insured’s shoes and pursue recovery of the loss in the name of the insured.
In insurance recoveries, the doctrine of subrogation intervenes to prevent the insured from recovering double indemnity. Having indemnified the insured against the loss, the insurer has an equitable charge over the insured’s cause of action. Though, the insurer’s rights to the cause of action is as good as those of the insured. If the insured has somehow bargained away their rights against a third party, the insurer would not be in any better position.
Where an insured has suffered a loss and then gives a release to the third party without the knowledge of the insurer, the insured himself may face liability from their insurer. The insured has a general duty to behave fairly with regard to the rights of their insurer. Accordingly, the insured is under an obligation to do nothing which would prejudice the insurer’s right of subrogation.
In State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd, it was indicated that in the absence of an express clause in a policy, a term might be implied into the policy forbidding the insured from entering into any arrangement which would prevent the rights from arising.
The position of a third party is a bit more complex. If a third party, is unaware of the insurer’s equitable interest, and enters into a settlement with the insured in good faith, the release may be binding. However, if the third party is aware of the insurer’s interest and ignorantly settles with the insured by a release given by the insured, then it can be argued that the right of subrogation of the insurer is not defeated by such a release.
In Morganite Ceramic Fibres Pty Ltd v Sola Basic Australia Ltd (1987), the plaintiff’s insurer brought an action against the defendant for loss. The defendant relied on a release of rights provided by the plaintiff releasing the defendant of liability after the cause of action. Smart J’s general finding was that no general release of the insured’s rights against the defendant was given. However, he went on to discuss what the position would have been had a purported release been effected by the insured. His Honour’s conclusion was that where a defendant knows that an insurer is involved and where there is bad faith on the part of the third party in submitting to a judgment in favour of an insured, to the prejudice of subrogation rights, that judgment may be set aside.
Although the position is not 100% clear, the rule appears to be that if the release is given in bad faith, then it may not be effective against the subrogated insurer.
The duty of utmost good faith is active at all times. Both the insured and the insurer must act reasonably with respect to any recovery and settlement of the claim.
Note: This is a general guide only. Circumstances may vary and advice should be sought about your specific circumstances.
