IBA INSURANCE COMMITTEE SUBSTANTIVE PROJECT

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1 IBA INSURANCE COMMITTEE SUBSTANTIVE PROJECT 2016 INSURERS RIGHTS OF RECOVERY (SUBROGATION/RECOURSE) 2016 REPORT 1

2 Note from the IBA Insurance Committee The nature of insurance and reinsurance is to spread risk, often across jurisdictional borders. Accordingly, it is important that insurance lawyers and professionals are familiar with the basic legal principles applicable in different jurisdictions. Each year, the IBA Insurance Committee produces a substantive report on a topic that affects practitioners across the insurance industry. With each edition of the Insurance Committee s substantive project, the jurisdictional breadth of contributions has continued to grow. We are pleased to report that this year the trend has continued with 42 jurisdictions contributing to the 2016 report. This year s project addresses insurers rights of recovery (or subrogation/recourse) an area where jurisdictional differences could catch out the unwary. We hope that this report will be of use to its readers when handling such issues. We would like to thank all the authors and those who have contributed their time and expertise to successfully complete this project. Best regards, David M. Greenwald Chair IBA Insurance Committee dgreenwald@jenner.com Kari McCormick Special Projects Officer IBA Insurance Committee kari.mccormick@burges-salmon.com 2

3 Editorial One of the key benefits of insurance for policyholders is that when they suffer insured loss or damage at the hands of a third party, they do not need to concern themselves with proving that the third party is legally liable for the loss. Provided that the loss in question falls within the scope of cover, the insurer must indemnify the policyholder. However, where a third party is responsible for the loss, there is the potential for that party to effectively escape the legal consequences of their wrongful actions, simply because the policyholder has been prudent enough to obtain insurance. Most jurisdictions have addressed this potentially unjust state of affairs by affording an insurer a right of recovery against culpable third parties, sometimes known as subrogation. This report contains responses from law firms in 42 jurisdictions on key questions about the nature and scope of insurers rights of recovery against third parties. While there are some important differences between jurisdictions in the way in which the right of recovery by insurers may be exercised, there are also some striking similarities. All respondents reported that their jurisdiction recognises a right of recovery for insurers. In almost all jurisdictions, the insurer must indemnify the policyholder before it can exercise its right of recovery against third parties. In a signification majority of jurisdictions, rights of recovery are not permitted in respect of all insurances. In some jurisdictions, subrogation is not permitted where the insurance is not a contract of indemnity. In other jurisdictions, specific classes of insurance did not give rise to a right to subrogation. The greatest degree of variation between the jurisdictions is in the following areas: The third parties who an insurer can pursue using a right of recovery. In some jurisdictions there is no restriction. However, some participants reported that rights of recovery could only be used where, for example, the third party had been grossly negligent or acted criminally. Another common caveat was the inability of insurers to use rights of recovery against family members of the policyholder. In whose name the right of recovery is exercised. In many jurisdictions participants reported that the insurer is entitled to pursue rights of recovery against the third party in its own name. However, a significant minority reported that the insurer borrows the policyholder s name in order to pursue its rights against the third party. What happens when the policyholder has losses that are not fully compensated by the available insurance and the third-party recovery is insufficient to make the insurer and the insured whole? The responses were varied across the jurisdictions and included: (i) the policyholder has priority over the proceeds; (ii) the insurer has priority over the proceeds; (iii) in a small number of instances, the insurer and policyholder share the proceeds proportionally; (iv) some jurisdictions adopt the top down approach established by the English courts; or (v) there is no specific rule to address this issue. 3

4 We would like to thank all the law firm contributors who volunteered their time and effort to help put this survey together. We hope it is a useful resource for Insurance Committee members. Kari McCormick kari.mccormick@burges-salmon.com Matthew Walker matthew.walker@burges-salmon.com Burges Salmon DISCLAIMER This report is not intended to provide legal advice but to provide general information on legal matters. Transmission is not intended to create and receipt does not establish an attorney client relationship. This report is not intended to replace legal advice and no responsibility for claims, losses or damages arising out of any use of this work or any statement in it can be accepted by the contributors or editors. Readers should seek specific legal advice before taking any action with respect to the matters mentioned in this report. The content of this publication has been created by the individual contributors. The views expressed are theirs. If you would like further information on any aspect of this report, please contact the relevant contributor with whom you usually deal. 4

5 ARGENTINA Manzano, López Saavedra & Ramírez Calvo Martín Manzano & Ignacio Shaw 1. Does your jurisdiction grant insurers rights to pursue recoveries in respect of losses suffered by the insured which the insurer has indemnified ( rights of recovery )? 1.1. If the answer is yes, do such rights arise pursuant to statute or case law? Rights of recovery arise pursuant to statute. Section 80 of Argentine Insurance Act (Law 17,418) establishes that: [t]he rights corresponding to the insured party against a third party, on account of the loss, are transferred to the insurer up to the amount of the indemnification paid. The insured party is liable for any act which may impair this right of the insurer. The subrogation of rights is also contemplated in a general manner (not only to insurance cases) by Section 914 of the Civil and Commercial Code: Payment by subrogation transfers all rights and actions of the creditor to the third party that makes such payment. 2. What is the nature and scope of the rights of recovery? In particular: 2.1. Which types of rights or claims of the insured can the insurer pursue using its rights of recovery? In general all kind of claims that have been indemnified by the insurer may be pursued against liable third parties, except in connection with life or health & accident insurance contracts seguros sobre personas (pursuant to Section 80, third paragraph of the Argentine Insurance Act) Are there any types of rights or claims of the insured which the insurer may not pursue using its rights of recovery, if so, what are they (in general terms)? As mentioned above, Section 80, paragraph 3 of the Argentine Insurance Act establishes that the insurer shall have no right to pursue recoveries in connection with life or health & accident insurance claims Is there a prescribed time period (for example, a limitation period) within which the insurer must pursue its rights of recovery? The applicable time bar is the same that the insured would have against the liable third party. Pursuant to Section 80 of the Insurance Act, the insurer becomes subrogated in the insured s right against liable third parties to the extent of the sums paid as indemnification. The applicable time bar depends on the type of claim. For example, for a claim in tort the time bar is three years, for a contractual claim the time bar is five years. Some specific claims have shorter limitation periods. 3. What, if any, criteria must be fulfilled in order for the insurer to be entitled to exercise its rights of recovery? The insurer must have paid the indemnification to the insured. Once the payment is made the insurer becomes automatically subrogated in all the rights and actions of the insured. 4. To which types of insurance do the rights of recovery apply? Rights of recovery apply to all types of insurance except for life and health & accidents insurance (Section 80, paragraph 3 of the Argentine Insurance Act). 5. Against whom can the rights of recovery be exercised? The rights of recovery may be exercised against any third party liable for the damage that was indemnified by the insurer. 5

6 6. Where an insurer pursues a claim or right against a third party using its rights of recovery, does this alter the rights or defences of the third party? If so how? In particular: No, the third party may oppose to the insurer the same rights or defences that could have applied if the claim is pursued directly by the insured Are there any additional defences that the third party can raise against a claim brought by an insurer using its rights of recovery, which could not have been raised if the claim had been brought by the insured directly? The general principle is that the insurer becomes subrogated in the same rights and actions of the insured and the situation vis-à-vis the third party is the same as if the claim were pursued directly by the insured. The action that may be pursued by the insurer is up to the amount of the indemnification paid Are there any defences that the third party cannot raise against a claim brought by an insurer using its rights of recovery, which could have been raised if the claim had been brought by the insured directly? As mentioned above, the general principle is that the insurer becomes subrogated in the same rights and actions of the insured and the situation vis-à-vis the third party is the same as if the claim were pursued directly by the insured. 7. Does the insurer pursue the rights of recovery in its own name, in the name of the insured, or both? The general principle is that the insurer pursues the rights of recovery in its own name up to the amount paid to the insured. 8. Where an insurer pursues rights of recovery in the insured s name: 8.1. Who has control of the claim; and 8.2. Are there any procedural requirements (for example, court filings or execution of specific documents) that the insurer and/or insured must comply with if so what are they? As mentioned above, the insurer pursues the rights of recovery in its own name up to the amount paid to the insured. In civil liability cases, in which the insurer is summoned to the proceedings, the insurer has the control of the claim. Regarding the procedural aspects, the insurer must produce evidence of the payment of the indemnification, as such payment produces the subrogation by the insurer of the insured s rights and actions pursuant to Section 80 of the Insurance Act. Of course, depending on the circumstances of the case, it may be needed to produce further evidence regarding other matters. For example, the existence of the insurance contract, the correspondence between the amount paid and the damages suffered by the insured. 9. When exercising rights of recovery, does an insurer owe any obligations to the insured? If so, what are they? In principle, the insurer does not owe any obligation to the insured once the indemnification has been paid. 10. Does an insured have any duties towards its insurer requiring it to preserve or not prejudice the insurer s rights of recovery. If so, what are they? Yes. Section 80 of the Argentine Insurance Act establishes that the insured shall be liable for acts that may impair the recovery rights of the insurer. Also, Section 116 establishes that the insured shall not acknowledge liability or settle claims with third parties without the insurer s consent. Finally, Section 72 provides that the insured must prevent the aggravation of the damages and follow the insurer s instructions in this regard. 11. Where an insured has suffered a loss that is only partially insured: Does the insurer still have a right of recovery and if so to what extent; and 6

7 11.2. If the proceeds of any recovery action brought on behalf of both the insurer and insured are insufficient to reimburse both the insurer and the insured in full, how are the proceeds distributed? When an insured has suffered a loss which is partially insured the insurer shall have a right of recovery to the extent of the sums paid as indemnification. If the proceeds of a recovery action brought on behalf of both the insurer and the insured are insufficient to reimburse them both, in principle the proceeds should be reimbursed proportionally to the amount of each claim (that is, the insurer s and the insured s claim individually). Nonetheless, this of course shall depend on the circumstances of the case (for example, the insured may be found to be partially liable for the loss). In certain policies it is common to find clauses stating that when there is a loss partially covered, the insured and insurer will apportion the amount of the loss that is covered under the policy. 12. Can insurers and insureds agree that the insurer will have no rights of recovery? If so: In what circumstances might they do this; and Where would evidence of such agreement be found (for example, in the insurance policy or in separate contracts)? Section 80, second paragraph of the Argentine Insurance Act expressly states that the insurer cannot pursue its rights of recovery against the insured. The parties may agree that the insurer will have no rights of recovery. In fact, certain policies contain this kind of clauses according to which insurers are prevented to exercise recovery actions against other insureds or clients or associates companies. Such agreement may be included in the insurance policy or as an addendum to it, or even executed after the loss has occurred. 13. Can an insurer s rights of recovery be invalidated or restricted in any other way? If so, please describe how. As mentioned above, Section 80, paragraph 2 of the Argentine Insurance Act expressly establishes that the insurer cannot pursue its rights of recovery against the insured. 14. Please specify any important issues regarding rights of recovery in your jurisdiction, which are not covered by these questions. N/A. 7

8 AUSTRALIA and NEW ZEALAND MinterEllison Michael Wallin & Pamela Madafiglio 1. Does your jurisdiction grant insurers rights to pursue recoveries in respect of losses suffered by the insured which the insurer has indemnified ( rights of recovery )? 1.1. If the answer is yes, do such rights arise pursuant to statute or case law? Yes, an insurer has certain rights of recovery under Australian and New Zealand law, in relation to indemnity policies only. An insurer s rights of recovery are founded in case law, in the equitable principle of subrogation. Pursuant to this principle, the insurer has a right to bring a claim in an insured s name against a third party that is responsible for a loss suffered by the insured. The insurer s right of subrogation rests upon a contract of indemnity, and the terms of the contract must be construed in order to determine whether rights of recovery exist and how they operate. The insurer s right of subrogation may be modified by express contractual terms. In Australia the insurer s rights are also affected by Part VIII of the Insurance Contracts Act 1984 (Cth) (ICA). 2. What is the nature and scope of the rights of recovery? In particular: 2.1. Which types of rights or claims of the insured can the insurer pursue using its rights of recovery? 2.2. Are there any types of rights or claims of the insured which the insurer may not pursue using its rights of recovery, if so, what are they (in general terms)? 2.3. Is there a prescribed time period (for example, a limitation period) within which the insurer must pursue its rights of recovery? The scope of an insurer s potential rights of recovery is very broad. An insurer is entitled to the benefit of all potential rights its insured might have against a third party to be compensated for a loss, as long as that loss is at least partly insured by the contract. This encompasses all rights accrued by the insured, whether they are under common law, equity or statute. There are some restrictions on the insurer s rights of recovery based on the relationship of the insured with the third party, and these are discussed in paragraph 5 below. 3. What, if any, criteria must be fulfilled in order for the insurer to be entitled to exercise its rights of recovery? The insurer s rights of recovery must be exercised within the statutory limitation period applying to the insured s underlying right against the third party. This period depends on the nature of the claim and the jurisdiction. rights of recovery must also be exercised within the statutory limitation periods relating to the insurer s contractual and equitable claims against its insured. Subject to certain exceptions, in both New Zealand and Australia, the relevant limitation period for the contractual claim runs for six years from the confirmation or grant of indemnity under the contract, and no limitation period applies for equitable claims except for claims for an account or certain claims relating to land. The limitation periods for contractual and equitable claims are rarely relevant in claims against third parties, as the limitation period for the underlying claim is likely to be shorter, but are always relevant in cases where the insurer wishes to hold the insured to account for subsequent payments that diminish the insured s loss. 4. To which types of insurance do the rights of recovery apply? There are two preconditions to the exercise of an insurer s right of recovery (subject to the terms of the policy): the insurer must be liable for the relevant loss; and the insurer must have indemnified the insured to the full extent promised in the policy. However, once the preconditions are satisfied, the right may be exercised even if the extent of the indemnity is lower than the insured s total loss. 8

9 5. Against whom can the rights of recovery be exercised? An insurer s rights of recovery apply only to indemnity insurance and with respect to the indemnity provisions of contingency insurance contracts. 6. Where an insurer pursues a claim or right against a third party using its rights of recovery, does this alter the rights or defences of the third party? If so how? In particular: 6.1. Are there any additional defences that the third party can raise against a claim brought by an insurer using its rights of recovery, which could not have been raised if the claim had been brought by the insured directly? 6.2. Are there any defences that the third party cannot raise against a claim brought by an insurer using its rights of recovery, which could have been raised if the claim had been brought by the insured directly? An insurer s right of recovery may be exercised against all third parties against whom the insured has rights, subject to certain limitations at common law and in statute. At common law it is generally accepted that an insurer will not bring an action against a co-insured or an unidentified beneficiary (such as a tenant in a lease or a charterer of a vessel) who has a sufficient interest in the loss. In New Zealand, sections of Property Law Act 2007 limit the rights of recovery against tenants in response to specified perils, subject to some exceptions. This has recently been confirmed at the Court of Appeal in Holler & Rouse v Osake & Anor [2016] NZCA 130. In Australia, section 65 of the ICA provides that an insurer s rights of recovery against third parties that stand in a family or personal relationship with the insured, which the insured has not pursued, is limited to the extent that the third party has insurance. Under section 66 of the ICA, an insurer does not have a right of recovery against an insured s employee, provided that the conduct of the employee that gave rise to the loss occurred in the course of employment and was not serious or wilful misconduct. New Zealand has no such provisions. However, industry practice is that employees whose wrongful actions cause loss to their employers customarily are not pursued by subrogated insurers who have had to pay the loss. 7. Does the insurer pursue the rights of recovery in its own name, in the name of the insured, or both? A third party has all the same defences to a claim brought by the insurer, using its rights of recovery, that it has to a claim brought by the insured alone. In addition, the third party may challenge the insurer s right of recovery in its defence. A third party is not entitled to claim a reduction in liability for damages based on the extent of the indemnity in the policy or the insured s entitlements from other sources such as public gifts or donations. 8. Where an insurer pursues rights of recovery in the insured s name: 8.1. Who has control of the claim; and 8.2. Are there any procedural requirements (for example, court filings or execution of specific documents) that the insurer and/or insured must comply with if so what are they? With the insured s approval, an insurer will usually pursue its rights of recovery in the insured s name. In New Zealand, if an insured refuses to lend its name to a proceeding, it is usually joined as a co-defendant in the proceedings. An insurer may pursue a third party in its own name where the insured assigns its cause of action against the third party to the insurer. 9. When exercising rights of recovery, does an insurer owe any obligations to the insured? If so, what are they? In general, an insurer is entitled to control the claim against a third party as part of its right of recovery. Provided permission has been granted by the insured to bring the action in its name, there are no procedural requirements for the insurer, and the insurer will not be required to plead that its action in the insured s name is brought by way of right of recovery. 10. Does an insured have any duties towards its insurer requiring it to preserve or not prejudice the insurer s rights of recovery. If so, what are they? 9

10 In Australia, in exercising its rights of recovery, the insurer is obliged to comply with the terms of the insurance contract, uphold its duty of good faith and have due regard for the interests of the insured. A breach of these duties may give rise to a claim for damages by the insured. New Zealand does not impose an enforceable duty of good faith on insurers. The industry self regulates through the Fair Insurance Code, which sets the standards for insurers conduct. The Consumer Guarantees Act 1993 and the Fair Trading Act 1986 may also regulate an insurer s conduct. 11. Where an insured has suffered a loss that is only partially insured: Does the insurer still have a right of recovery and if so to what extent; and If the proceeds of any recovery action brought on behalf of both the insurer and insured are insufficient to reimburse both the insurer and the insured in full, how are the proceeds distributed? The insured has a general duty not to engage in any conduct that would prejudice the insurer s rights of recovery and may not compromise or settle a claim against a third party for an insured loss without obtaining the insurer s prior consent. 12. Can insurers and insureds agree that the insurer will have no rights of recovery? If so: In what circumstances might they do this; and Where would evidence of such agreement be found (for example, in the insurance policy or in separate contracts)? In Australia, the insurer may not exercise any right of recovery unless the insured has been fully indemnified for both insured and uninsured loss. In relation to the proceeds of any recovery action in Australia, section 67 of the ICA provides a detailed regime relating to the proceeds of recovery against a third party. In summary: First, the party taking the recovery action will be entitled to reimbursement of their administrative and legal costs, less any costs recovered. Secondly, if the insurer funds the recovery action pursuant to its rights of subrogation, it will be entitled to an amount equal to what it has paid to the insured under the policy. The insured will then be entitled any further amount necessary to recover the full amount of its loss. If the insured funds the recovery action, this order will be reversed. If the recovery action is funded jointly, the parties are entitled to these amounts on a pro rata basis if there are insufficient funds to reimburse them in full. Any surplus or windfall will be paid to the parties in proportion to their share of the contribution to the costs of the recovery action. Interest will be divided fairly between the parties, having regard to the amounts that each has recovered and the period of time for which each party lost the use of their funds. At common law, the first step is the same as under the ICA, but in respect of the second step the insured will recover before the insurer and will also have the benefit of any surplus or windfall. In New Zealand, an insurer may not exercise its right of subrogation until it has fully indemnified the insured under the policy. Until payment is made, the insured is entitled to sue the third party and to control the proceedings, subject to its contractual obligations under the policy. Where the insured suffers loss that exceeds the indemnity payable under the policy, the insured may sue the third party to gain compensation for the uninsured loss. In this situation, the insured has control of the proceedings and the court will not interfere with their conduct of the action if the insured undertakes that they will claim for the full amount of their loss. If the insured succeeds in recovering more than their uninsured loss (whether by judgment or by settlement), the insured must account to the insurer for the excess after reimbursing themselves for their loss, costs and expenses. Unless there is an express subrogation clause to the contrary, the duty to account to the insurer only arises once the insured has been fully compensated, not on full indemnification under the policy. 10

11 13. Can an insurer s rights of recovery be invalidated or restricted in any other way? If so, please describe how. Parties may agree to modify the insurer s right of recovery by including a waiver of subrogation clause in the insurance contract. These clauses are not true waivers, but they prevent an insurer from exercising its right of recovery against parties intended to benefit from the clause, and are sometimes extended to parties not insured by the contract. Such a clause does not prevent the insurer from holding the insured to account for funds received after the insurer has paid the claim that diminish its loss. 14. Please specify any important issues regarding rights of recovery in your jurisdiction, which are not covered by these questions. An insurer s rights of recovery may be modified by agreement between the parties to an insurance contract. Besides this, an insurer has no right to subrogate itself to its insured s right to claim under another insurance contract with a different insurer covering the same risk. In relation to contractual claims, an insurer s rights of recovery will depend on the terms of the relevant contract. For example, an insurer will have no right of recovery against its insured s counterparty if the contract specifically provides that the insured must recover loss from its insurer as opposed to the counterparty. In the decision of Johnston v Endeavour Energy [2015] NSWSC 1117, the New South Wales Supreme Court held that, unless there is an express contractual right to do so, an insurer who has only paid out part of the entire loss does not have authority to conduct and control the insured s right to recover both the insured and uninsured loss. What is not clear is whether this principle applies where the loss that is not insured is the excess payable by the insured. 11

12 BELGIUM Lydian Hugo Keulers & Anne Catteau 1. Does your jurisdiction grant insurers rights to pursue recoveries in respect of losses suffered by the insured which the insurer has indemnified ( rights of recovery )? 1.1. If the answer is yes, do such rights arise pursuant to statute or case law? The subrogation recovery action is provided for by article 95 of the Insurance Act of 4 April 2014 (the Insurance Act ), which states the following: In the event of any payment under the policy, the insurer shall be subrogated to the extent of such payment to all the insured s and/or insured affiliates rights of recovery. If, due to the insured or any insured affiliate, the subrogation cannot result into satisfactory consequences for the insurer, the insurer can reclaim indemnification to the amount of the disadvantages. The subrogation cannot detriment the insured or any insured affiliate who obtained only partial indemnification. In this case, they can exercise their rights to the amount of indemnification they are entitled to, prior to the insurer. The insurer has no claim neither on the relatives in direct ascending or descending line, spouse and direct in-laws of the insured, nor on his residents, his guests and domestic staff, save for malicious intent. The insurer nevertheless has a claim on these persons if their liability is effectively covered by an insurance agreement. 2. What is the nature and scope of the rights of recovery? In particular: 2.1. Which types of rights or claims of the insured can the insurer pursue using its rights of recovery? The subrogation action can be pursued as regards any insured s rights for compensation either on a contractual or on a tort basis Are there any types of rights or claims of the insured which the insurer may not pursue using its rights of recovery, if so, what are they (in general terms)? Article 99 paragraph 4 Insurance Act provides that the insurer is not allowed to exercise its subrogation right on the relatives in direct ascending or descending line of the insured, on the insured s spouse and direct in-laws, nor on their residents, guests and domestic staff, save for malicious intent Is there a prescribed time period (for example, a limitation period) within which the insurer must pursue its rights of recovery? As the insurer exercises the insured s right in its place, the limitation period corresponds to the limitation period of the action in which the insurer is subrogated by way of payment made. For contractual claims this amounts generally to a ten-year time limit, and for claims based on tort it is five years, unless the tortious behaviour would also constitute a criminal offence. 12

13 3. What, if any, criteria must be fulfilled in order for the insurer to be entitled to exercise its rights of recovery? There are two types of requirements to be fulfilled in order for the insurer to exercise its subrogation action namely: the common requirements applicable to any subrogation; and the particular requirements applicable to the legal subrogation based on article 95 of the Insurance Act. Common requirements Valid and actual payment The insurer must have made a voluntary, valid and actual payment and the subrogation must be concomitant with this payment. There are however a few exceptions provided by law regarding work accidents in which case the worker s compensation insurer is subrogated in the rights for the capital of the income which will be paid by the insurer to the victim in the future. The insurer must not pay its own debt but the third party s debt towards the subrogating creditor (the insured) This requirement explains the reason why there is no possible subrogation in favour of an insurer that pays an indemnity pursuant to a person s insurance or an insurance that does not have an indemnity character, as this insurer is legally considered to pay its own debt to the insured. The subrogation recovery action however may apply to a person s insurance contracts, other than life insurance contracts (subrogation in life insurance is null and void Article 161 Insurance Act), provided that the insurer and the policyholder (in an express or implied way) intended to give it an indemnity character (Article 103 Insurance Act). Existence of a prior debt In accordance with article 1235 of the Belgian Civil Code, any payment requires a debt. Subrogation requires therefore a debt between the subrogating creditor (the insurer) and the debtor (the liable third party). Particular requirements provided for by the insurance laws Subrogation only applies within the limits of the paid indemnity to the insured; The insurer must be subrogated in rights or actions of the insured or the beneficiary; and The subrogation action can be only exercised against the third party responsible for the damage. 4. To which types of insurance do the rights of recovery apply? The legal subrogation action applies to the insurances with an indemnity character, namely those for which the insurer undertakes to provide the necessary performance in order to indemnify all or part of the loss incurred by the insured, or for which this last is responsible (Article 55, 3 Insurance Act). As a consequence, the subrogation action applies to property insurance, liability insurances, expenses insurance (for example, legal expense insurance). The subrogation action also applies to a person s insurance contracts other than life insurance, provided that the parties (explicitly or implicitly) intended to give them an indemnity character (Article 103 Insurance Act). 13

14 5. Against whom can the rights of recovery be exercised? In accordance with article 95 of the Insurance Act, the subrogation action can be exercised only against the third party responsible for the damage. It may also be exercised against the liability insurer of the responsible party as Belgian insurance law knows the concept of a direct action against liability insurers (Article 150 Insurance Act). The subrogation action cannot be therefore exercised against the insured. Such action is however possible under Belgian law, but it is the so-called recourse action. This is the right of the insurer, who has been legally obliged to indemnify a victim, but who has legal grounds to recover the indemnification of its insured, because of a contract breach by the insured (for instance: a drunk driver). Such recourse action is however loss from a recovery action against a responsible third party. 6. Where an insurer pursues a claim or right against a third party using its rights of recovery, does this alter the rights or defences of the third party? If so how? In particular: 6.1. Are there any additional defences that the third party can raise against a claim brought by an insurer using its rights of recovery, which could not have been raised if the claim had been brought by the insured directly? There are no such defences. In a (rather surprising) judgment of 31 October 1991, the Belgian Supreme Court ruled that the insurer is subrogated in the rights of the insured when it has indemnified the injured person, whether or not it was obliged to do so. In this particular case, the insurer had indemnified the victim of a car accident and intended a subrogation claim against the driver of the car to whom the insured had entrusted their car. The driver was drunk, which was excluded by the insurance policy. In principle, there was no obligation for the insurer to indemnify the victim. According to the Supreme Court, the insurer had been subrogated by the indemnification of the victim, regardless of whether he was obliged to indemnify or not. This judgment has been severely criticised by legal authors but there has been no new relevant case law available on this issue since then Are there any defences that the third party cannot raise against a claim brought by an insurer using its rights of recovery, which could have been raised if the claim had been brought by the insured directly? According to the transfer effect of the subrogation (that is, all the insured s rights and actions are transferred to the insurer), the situation of the third party cannot be aggravated by the subrogation. Therefore the defences that the third party could invoke against the subrogating debtor (the insured) can also be raised against the subrogated insurer, as far as they have their origin prior to the indemnification of the insured by the insurer. 7. Does the insurer pursue the rights of recovery in its own name, in the name of the insured, or both? On the basis of the case law of the Belgian Supreme Court ( the Court of Cassation ), the insurer does not exercise its own rights but the insured s rights. In this context, the insurer pursues the right of recovery in the insured s name. In practice, when an insurer pursues a right of recovery via court proceedings, the insurer will make use of the name of the insured only in order to avoid procedural discussions and evidence requirements with respect to the rights of subrogation. Belgian law recognises the fact that the insurer can do so on the basis of the concept of a silent name lending, which is considered to be a part of any insurance contract. 14

15 8. Where an insurer pursues rights of recovery in the insured s name: 8.1. Who has control of the claim; and Once the indemnification is received, the disinterested insured cannot claim any rights against the third party. Any disposal of the debt (for example, liability waiver or settlement) that would occur after the subrogation would be unenforceable against the subrogated insurer. This means that by way of the subrogation, the insured loses any control of the claim and the insurer will have full control of the claim which includes taking the decision to pursue it in court or arbitration proceedings and the decision to enter into a settlement with the third party Are there any procedural requirements (for example, court filings or execution of specific documents) that the insurer and/or insured must comply with if so what are they? There are no specific procedural requirements, but the insurer in practice will have the insured sign a subrogation deed that confirms that the insurer has made an indemnification of a particular amount of money under the insurance policy; and the statement by the insured that up to this paid amount, the insurer is subrogated in all their rights and claims against third parties. This subrogation deed will be used as an exhibit by the insurer if it pursues its right of recovery in the court or arbitration proceedings in its own name. 9. When exercising rights of recovery, does an insurer owe any obligations to the insured? If so, what are they? Neither the Insurance Act, nor case law or legal doctrine provide for such obligations. 10. Does an insured have any duties towards its insurer requiring it to preserve or not prejudice the insurer s rights of recovery. If so, what are they? Article 95 of the Insurance Act provides a general provision which states that when by the fact of the insured or the beneficiary the subrogation cannot produce its effects in favour of the insurer, this latter can claim the restitution of the indemnity paid to the extent of the suffered loss. This includes for example the hypothesis that the insured would have entered into a favourable settlement with the third party, not informing its insurer. 11. Where an insured has suffered a loss that is only partially insured: Does the insurer still have a right of recovery and if so to what extent; and According to article 95 of the Insurance Act: the insurer which paid the indemnity is subrogated for the amount thereof in the rights and actions of the insured or the beneficiary against third parties responsible for the damage. The insurer cannot claim a higher amount than the insured could have claimed from the third party. In case of partial insurance, the recovery proceeds will first have to be used to pay to the insured the part that has not been compensated by the insurer (such as a deductible, the amounts of loss above the insured limit, excluded losses or expenses) If the proceeds of any recovery action brought on behalf of both the insurer and insured are insufficient to reimburse both the insurer and the insured in full, how are the proceeds distributed? The recovery proceeds will first be used to compensate the insured for their full loss, to the extent he has not received compensation from their subrogating insurer. This includes amounts of deductible, amounts above the insured limit, excluded losses or expenses. Any balance that will be left will then go to the insurer (Article 95 Insurance Act). 12. Can insurers and insureds agree that the insurer will have no rights of recovery? If so: In what circumstances might they do this; and 15

16 Such clauses are prohibited when aiming at enabling the insured to benefit from accumulated indemnities that are higher than their own loss. This would indeed lead to a situation in which an insured could profit from an insurance contract. The Insurance Act gives an example of one of the circumstances where the ruling out of the subrogation is permitted. According to Article 95 of the Insurance Act: Except in cases of malice, the insurer has no recourse against the descendants, ascendants, the spouse and lineal allies of the insured or against the people of his household, guests and members of his domestic staff. The legal doctrine considers that the subrogation ruling out clause can be extended to others persons than the ones mentioned in the article 95. In practice, ruling out of subrogation is also stipulated as regard visitors, suppliers, providers. However, in case of dispute, subrogation ruling out clauses will be strictly interpreted by the courts in a narrow fashion Where would evidence of such agreement be found (for example, in the insurance policy or in separate contracts)? The evidence usually can be found in the insurance contract itself, or in an addendum to it. It is uncommon to provide such clause in a side-letter. 13. Can an insurer s rights of recovery be invalidated or restricted in any other way? If so, please describe how. Except from what was mentioned in question 12.1, the subrogation cannot be restricted nor invalidated. 14. Please specify any important issues regarding rights of recovery in your jurisdiction, which are not covered by these questions. The case law and legal doctrine are divided on the definition of malicious intent, which, according to Article 95 paragraph 4 of the Insurance Act, allows the insurer to exercise its subrogation action in all cases. In accordance with the explanatory memorandum of the Insurance Act, the malicious intent refers to an intention to harm the insured, although a part of the legal doctrine regards it as wilful misconduct. The statutory regime for transport and marine insurance is set out by Article 246 of the Insurance Act. This article provides that the insurer which paid the damage is subrogated to all insured s rights against the third party for such damage. The scope of this provision is therefore broader than what is provided regarding the other insurance contracts, which limits the subrogation recovery action against the responsible of the damage. Therefore, contrary to the general provisions regarding other insurance contracts, it is not prohibited for the marine or transport insurer to bring an action against the relatives in direct ascending or descending line, spouse and direct in-laws of the insured, or against his residents, his guests and domestic staff, unless this was excluded for in the policy terms and condition. 16

17 BERMUDA Appleby John Wasty 1. Does your jurisdiction grant insurers rights to pursue recoveries in respect of losses suffered by the insured which the insurer has indemnified ( rights of recovery )? 1.1. If the answer is yes, do such rights arise pursuant to statute or case law? Yes. Rights of recovery arise pursuant to the doctrine of subrogation ( subrogated rights of recovery ) by the operation of common law (case law) in all contracts of indemnity insurance. Subrogated rights of recovery vest at the time the insurance policy is entered into (save for any express term to the contrary in the insurance policy). In some instances, an insurer s rights of recovery may arise by way of statute. For example, the Health Insurance Act 1970 provides that an insured s right to recover hospital expenses arising from a motor vehicle accident, in circumstances where the third party causing the accident has admitted liability or found to be liable by a competent court, vests in the insured s medical insurer. Further, an insurer may obtain rights of recovery by way of express assignment or cession of the insured s rights of recovery against third parties ( assigned rights of recovery ) in the policy of insurance or, less frequently, in separate agreements 2. What is the nature and scope of the rights of recovery? In particular: 2.1. Which types of rights or claims of the insured can the insurer pursue using its rights of recovery? 2.2. Are there any types of rights or claims of the insured which the insurer may not pursue using its rights of recovery, if so, what are they (in general terms)? 2.3. Is there a prescribed time period (for example, a limitation period) within which the insurer must pursue its rights of recovery? Subrogated rights of recovery include two distinct rights: The right of the insurer to step into the shoes of the insured by obliging the insured to pursue, for the ultimate benefit of the insurer, any claim of any nature (legal, equitable or statutory) against third parties to the extent that such claims diminish the insured s loss in respect of the insured risk; and The right to recover from the insured any benefits received by the insured to the extent that such benefits diminish the insured s loss in respect of the insured risk. Subrogated rights of recovery are limited to only those rights or benefits that diminish the insured s loss in respect of the insured risk. Subrogated rights of recovery do not extend to any claims that accrue to the insured that do not diminish the insured s loss pursuant to the insured risk. However, subrogated rights of recovery may, subject to the court s discretion, include awards of interest for any period following indemnification of the insured by the insurer and costs of suit. Assigned rights of recovery may extend to all claims accruing to the insured and are not by their nature automatically limited to those diminishing the insured s loss pursuant to the insured risk. Rights of recovery against a third party will be extinguished by virtue of the extinction of the insured s right against the third party pursuant to: a release or settlement agreement; a finding of a competent court; or any applicable statute of limitations (time bar), being in the ordinary course, six years from the date upon which the insured s claim against the third party arose. Subrogated rights of recovery against an insured arise only to the extent the insured receives indemnification from the insurer and 17

18 third parties in excess of the insured s actual loss, and will extinguish in the ordinary course 6 years from that date. 3. What, if any, criteria must be fulfilled in order for the insurer to be entitled to exercise its rights of recovery? Subject to any express term in the policy to the contrary, subrogated rights of recovery arise automatically upon indemnification (in part or full) of the insured by the insurer pursuant to a policy of indemnity insurance. Subrogated rights of recovery are not subject to election or perfection by an insurer. The Judicial Council of the Privy Council has held, in a judgment binding on the Bermuda court, that subrogated rights of recovery may arise even in instances where an insurer made a good faith payment believing it to be in discharge of its obligations under the insurance policy, when in fact the loss fell outside of the scope of the insured risk. However, when an insurance policy is void or otherwise a legal nullity, for whatever reason, subrogated rights of recovery will not accrue to the insurer, who may then seek assigned rights of recovery from the insured by agreement. An insurer may pursue or enforce any assigned rights of recovery pursuant to the applicable terms of the cession or assignment. 4. To which types of insurance do the rights of recovery apply? Subrogated rights of recovery arise automatically in all indemnity insurance policies, including, for example, marine, fire, motor insurance, solvency and securities insurance. Subrogated rights of recovery do not arise pursuant to non-indemnity insurance, such as life or third-party liability policies. There are no limitations as to the types of insurance in respect of which an insurer may obtain assigned rights of recovery. 5. Against whom can the rights of recovery be exercised? Subject to certain limitations, subrogated rights of recovery may be exercised against any third party who is liable to compensate the insured with respect to the insured risk, irrespective of whether the cause of action is legal, equitable or statutory. So, for example, subrogated rights of recovery may be exercised against an otherwise innocent third party who indemnified the insured against such loss. Further, rights of recovery may also be exercised against the insured to the extent that the insured has been indemnified by the insurer and received compensation from third parties in excess of the insured s actual loss. An insurer s right to pursue subrogated rights of recovery against an insured for moneys recovered in excess of the insured s actual loss was confirmed recently, albeit as obiter, by the Supreme Court of Bermuda in Allen v Gold Coast Company Limited [2015] SC (Bda) 79 Civ. 6. Where an insurer pursues a claim or right against a third party using its rights of recovery, does this alter the rights or defences of the third party? If so how? In particular: 6.1. Are there any additional defences that the third party can raise against a claim brought by an insurer using its rights of recovery, which could not have been raised if the claim had been brought by the insured directly? 6.2. Are there any defences that the third party cannot raise against a claim brought by an insurer using its rights of recovery, which could have been raised if the claim had been brought by the insured directly? Generally, a third-party defendant is not afforded any benefit nor placed in any disadvantage, by virtue of the fact that the claimant has insurance and has been or will be indemnified for the loss forming the subject matter of the claim. Subrogated rights of recovery include all claims that the insured may have against a third party, subject to any defences that the third party may have against the insured in the ordinary course. A third party may be able to raise additional defences pursuant to the exercise of assigned rights of recovery; the insured s rights of recovery may not have been properly ceded or assigned to the insurer creating a defence to a claim brought directly by the insurer. 18