Subrogation, Abandonment and Double Insurance

Brett, LJ:

‘In order to give my opinion upon this case, I feel obliged to revert to the very foundation of every rule which has been promulgated and acted on by the Courts with regard to insurance law. The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong…I have mentioned the doctrine of notice of abandonment for the purpose of coming to the doctrine of subrogation. That doctrine does not arise upon any of the terms of the contract of insurance, it is only another proposition which has been adopted for the purpose of carrying out the fundamental rule which I have mentioned, and it is a doctrine in favour of the underwriters or insurers in order to prevent the assured from recovering more than a full indemnity; it has been adopted solely for that reason. It is not, to my mind, a doctrine applied to insurance law on the ground that underwriters are sureties. Underwriters are not always sureties. They have rights which sometimes are similar to the rights of sureties, but that again is in order to prevent the assured from recovering from them more than a full indemnity. But it being admitted that the doctrine of subrogation is to be applied merely for the purpose of preventing the assured from obtaining more than a full indemnity, the question is, whether that doctrine as applied in insurance law can be in any way limited. Is it to be limited to this, that the underwriter is subrogated into the place of the assured so far as to enable the underwriter to enforce a contract, or to enforce a right of action? Why is it to be limited to that, if when it is limited to that, it will, in certain cases, enable the assured to recover more than a full indemnity? The moment it can be shewn that such a limitation of the doctrine would have that effect, then, as I said before, in my opinion, it is contrary to the foundation of the law as to insurance, and must be wrong. And, with the greatest deference to my Brother Chitty, it seems to me that that is the fault of his judgment. He has by his judgment limited this doctrine of subrogation to placing the insurer in the position of the assured only for the purpose of enforcing a right of action, to which the assured may be entitled. In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used, that is to say, the insurer must be placed in the position of the assured. Now it seems to me that in order to carry out the fundamental rule of insurance law, this doctrine of subrogation must be carried to the extent which I am now about to endeavour to express, namely, that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether such right consists in contract, fulfilled or unfulfilled, or in remedy for tort capable of being insisted on or already insisted on, or in any other right, whether by way of condition or otherwise, legal or equitable, which can be, or has been exercised or has accrued, and whether such right could or could not be enforced by the insurer in the name of the assured by the exercise or acquiring of which right or condition the loss against which the assured is insured, can be, or has been diminished. That seems to me to put this doctrine of subrogation in the largest possible form, and if in that form, large as it is, it is short of fulfilling that which is the fundamental condition, I must have omitted to state something which ought to have been stated. But it will be observed that I use the words “of every right of the assured.” I think that the rule does require that limit. In Burnand v Rodocanachi (7 App Cas 333) the foundation of the judgment to my mind was, that what was paid by the United States Government could not be considered as salvage, but must be deemed to have been only a gift. It was only a gift to which the assured had no right at any time until it was placed in their hands. I am aware that with regard to the case of reprisals, or that which a person whose vessel had been captured got from the English Government by a way of reprisal, the sum received has been stated to be, and perhaps in one sense was, a gift of his own Government to himself, but it was always deemed to be capable of being brought within the range of the law as to insurance, because the English Government invariably made the “gift,” so invariably, that as a matter of business it had come to be considered as a matter of right. This enlargement, or this explanation, of what I consider to be the real meaning of the doctrine of subrogation, shews that in my opinion it goes much further than a mere transfer of those rights which may at any time give a cause of action either in contract or in tort, because if upon the happening of the loss there is contract between the assured and a third person, and if that contract is immediately fulfilled by the third person, then there is no right of action of any kind into which the insurer can be subrogated. The right of action is gone; the contract is fulfilled. In like manner if upon the happening of a tort the tort is immediately made good by the tortfeasor, then the right of action is gone; there is no right of action existing into which the insurer can be subrogated. It will be said that there did for a moment exist a right of action in favour of the assured, into which the insurer could have been subrogated. But he cannot be subrogated into a right of action until he has paid the sum insured and made good the loss. Therefore innumerable cases would be taken out of the doctrine, if it were to be confined to existing rights of action. And I go further and hold that if a right of action in the assured has been satisfied, and the loss has been thereby diminished, then, although there ever was nor could be any right of action into which the insurer could be subrogated, it would be contrary to the doctrine of subrogation to say that the loss is not to be diminished as between the assured and the insurer by reason of the satisfaction of that right. I fail to see at present if the present defendants would have had a right of action at any time against the purchasers, upon which they could enforce a contract of sale of their property whether the building was standing or not, why the insurance company should not have been subrogated into that right of action. But I am not prepared to say that they could be, more particularly as I understand my learned Brother, who knows much more of the law as to specific performance than I do, is at all events not satisfied that they could. I pass by the question without solving it, because there was a right in the defendants to have the contract of sale fulfilled by the purchasers notwithstanding the loss, and it was fulfilled. The assured have had the advantage therefore of that right, and by that right, not by a gift which the purchasers could have declined to make, the assured have recovered, notwithstanding the loss, from the purchasers, the very sum of money which they were to obtain whether this building was burnt or not. In that sense I cannot conceive that a right, by virtue of which the assured has his loss diminished, is not a right which, as has been said, affects the loss. This right which was at one time merely in contract, but which was afterwards fulfilled, either when it was in contract only, or after it was fulfilled, does affect the loss; that is to say, it affects the loss by enabling the assured, the vendors, to get the same money which they would have got if the loss had not happened.’

Cotton LJ:

‘The policy is really a contract to indemnify the person insured for the loss which he has sustained in consequence of the peril insured against which has happened, and from that it follows, of course, that as it is only a contract of indemnity, it is only to pay that loss which the assured may have sustained by reason of the fire which has occurred. In order to ascertain what that loss is, everything must be taken into account which is received by and comes to the hand of the assured, and which diminishes that loss. It is only the amount of the loss, when it is considered as a contract of indemnity, which is to be paid after taking into account and estimating those benefits or sums of money which the assured may have received in diminution of the loss. If the proposition is stated in that manner, it is clear that the office would be entitled to the benefit of anything received by the assured before the time when the policy is paid, and it is established by the case of Darrell v Tibbitts (5 QBD 560) that the insurance company is entitled to that benefit, whether or not before they pay the money they insist upon a calculation being made of what can be recovered in diminution of the loss by the assured; if they do not insist upon that calculation being made, and if it afterwards turns out that in consequence of something which ought to have been taken into account in estimating the loss, a sum of money or even a benefit, not being a sum of money, is received, then the office, notwithstanding the payment made, is entitled to say that the assured is to hold that for its benefit, and although it was not taken into account in ascertaining the sum which was paid, yet when it has been received it must be brought into account, and if it is not a sum of money, but a benefit that has been received, its value must be estimated in money.’

Iacobucci J (McLachlin C.J. and L’Heureux-Dubé, Gonthier, and LeBel JJ concurring):

‘…it is important to keep in mind the underlying objectives of the doctrine of subrogation which are to ensure (i) that the insured receives no more and no less than a full indemnity, and (ii) that the loss falls on the person who is legally responsible for causing it…The doctrine of subrogation operates to ensure that the insured received only a just indemnity and does not profit from the insurance: see Castellain v Preston (1883), 11 QBD 380 (CA), at pp 386–87; AFG Insurances Ltd v City of Brighton (1972), 126 CLR 655 (HC Austrl)…Consequently, if there is no danger of the insured’s being over-compensated and the tortfeasor has exhausted his or her capacity to compensate the insured there is no reason to invoke subrogation. Similarly, if the insured enters into a limits agreement or otherwise abandons his or her claim against an impecunious tortfeasor the insurer has lost nothing by the inability to be subrogated.’

Hufstedler J:

‘The elements of an insurer’s cause of action based upon equitable subrogation are these: (1) The insured has suffered a loss for which the party to be charged is liable, either because the latter is a wrongdoer whose act or omission caused the loss or because he is legally responsible to the insured for the loss caused by the wrongdoer; (2) the insurer, in whole or in part, has compensated the insured for the same loss for which the party to be charged is liable; (3) the insured has an existing, assignable cause of action against the party to be charged, which action the insured could have asserted for his own benefit had he not been compensated for his loss by the insurer; (4) the insurer has suffered damages caused by the act or omission upon which the liability of the party to be charged depends; (5) justice requires that the loss should be entirely shifted from the insurer to the party to be charged, whose equitable position is inferior to that of the insurer; and (6) the insurer’s damages are in a stated sum, usually the amount it has paid to its insured, assuming the payment was not voluntary and was reasonable…

No express assignment of the insured’s cause of action is required; equitable subrogation is accomplished by operation of law. However, as in cases of assignment, the equitable subrogee is substituted only in respect of a subrogor’s causes of action which are not purely personal and, generally, any defenses or counterclaims which could have been asserted against the subrogor-insured can also be asserted against the subrogee-insurer.’

Lavenski R Smith, J:

‘Subrogation at its essence is the substitution of one party for another in the exercise of some legal right…Subrogation is routinely divided into two types. They are conventional subrogation and legal subrogation. The distinction relates to the facts giving rise to the substitution of rights. “Conventional subrogation, as the term implies, is founded upon some understanding or agreement, express or implied, and without which there is no ‘convention.’” Courtney v Birdsong 246 Ark 162, 437 SW2d 238 (1969). Legal or equitable subrogation, on the other hand, is a creature of equity, and not dependent upon contract, but rather dependent upon the equities of the parties. It arises by operation of law. [ibid at 166]

Whether by agreement or by operation of law, the very concept of subrogation is of equitable origin…This equity arises when one not primarily bound to pay a debt, or remove an incumbrance, nevertheless does so; either from his legal obligation, as in the case of a surety, or to protect his own secondary right; or upon the request of the original debtor, and upon the faith that, as against the debtor, the person paying will have the same sureties for reimbursement as the creditor had for payment. Subrogation is a doctrine steeped in equity and generally governed by equitable principles.’

‘When an insured who has suffered an insured loss is entitled not only to recover in respect of the loss from his insurer, but also to receive some benefit from a third party in reduction or extinction of the insured loss, the principle of indemnity is potentially threatened if the combined total of the amounts which the insured is entitled to receive from the insurer and the third party exceeds the amount of his loss. To prevent the insured from being more than fully indemnified for his loss in such circumstances, the courts have developed three different remedies which are variously available to the insurer according to the relationship which exists between the three parties at the time of the court’s intervention. It is common to find statements in the case law and in academic works to the effect that all of these remedies are awarded in order to enforce the insurer’s right of subrogation, or as incidents of the doctrine of subrogation. However, this usage of the word ‘subrogation’ is misleading. It derives from the Court of Appeal’s judgments in two nineteenth century cases, Darrell v Tibbitts [(1880) 5 QBD 560] and Castellain v Preston [see [1201]], which are discussed at (1) below. The remedies in question are awarded in order to enforce the principle of indemnity for the insurer’s benefit. One of them is the remedy of simple subrogation. The other two are not. They are distinct remedies, used in response to different situations, and they work in different ways. To conflate them with simple subrogation leads to confusion and misunderstanding of the way in which they and the remedy of simple subrogation actually work.

The three remedies developed by the courts to enforce the principle of indemnity arise in the following three situations:

(a)   An insured suffers an insured loss. The insurer pays the insured for his loss. The insured has a subsisting right of action against a third party in respect of the insured loss. In these circumstances, provided that it has fully indemnified the insured for his loss, the insurer is entitled to take over the insured’s right of action via simple subrogation; that is, the insurer can pursue the insured’s subsisting right of action against the third party in the insured’s name for its own benefit.

(b)   An insured suffers an insured loss. Unknown to the insurer he then receives a payment in respect of that loss from a third party. The insurer then pays the insured for his loss. In these circumstances, the insurer is entitled to recover back from the insured so rnuch of its payment as brought the total of the amounts received by the insured from the third party and the insurer above the amount of the insured loss, as money had and received, paid by mistake of fact. The insurer’s mistake was to think that the insured had suffered a greater loss than was in fact the case, once the insured had received the third party’s payment in respect of the loss.

(c)   An insured suffers an insured loss. The insurer pays him on the policy. The insured then receives a payment in respect of the same loss from a third party, which brings the total of the amounts that the insured has received in respect of his loss above the amount of his loss. In these circumstances, the insurer is entitled to bring a claim against the insured for so much of the money paid by the third party to the insured as more than fully indemnifies the insured for his loss. It has recently been held by the House of Lords in Lord Napier and Ettrick v Hunter [[1993] AC 713] that the money received by the insured from the third party is subject to an equitable lien in the insurer’s favour…

In the following discussion, the two cases which lie at the heart of much of the terminological confusion in this area, Darrell v Tibbitts and Castellain v Preston, will be considered…

(1) Darrell v Tibbitts and Castellain v Preston

The significance of these two cases is that they were decided by the Court of Appeal on the basis of flawed reasoning which has been tacitly or expressly adopted in the case law ever since, with evil consequences for the clarity of the law in this area.

In Darrell v Tibbitts [(1880) 5QBD 560], the earlier of the two, the defendant was the owner of a house let to a tenant. Under the terms of the lease the tenant was obliged to repair the house in the event that it was damaged. The defendant insured the house with the plaintiff insurers against damage caused, inter alia, by gas explosions. An employee of the local authority negligently caused a gas explosion which damaged the house. The local authority paid compensation in respect of this damage to the tenant, who used the money to repair the house as he was bound to do by the terms of the lease. The plaintiff insurers, unaware that the tenant had effected these repairs, then paid the defendant insured for the loss.

When all the facts subsequently came to light, the insurers brought an action against the defendant seeking to recover their payment. The grounds upon which the insurers should have been entitled to recover were that they had made the insured a payment to which he was not entitled under a mistake of fact, which payment they should have been able to recover as money had and received to the defendant’s use. This emerges quite clearly in Thesiger LJ’s judgment, where he stated that [at 567–8]:

Brett and Cotton LJJ [at 563, 564–5], however, sought to put more emphasis upon the first ground referred to in the passage quoted above: in their view, the insurers were entitled to be subrogated to the defendant insured’s rights against the tenant, and hence to claim from the insured the value of the reinstatement of the property effected by the tenant. Brett and Cotton LJJ were guilty of a confusion here: on the facts of the case, subrogation was an inappropriate technique to give effect to the insurers’ right of recovery against the insured. The tenant had performed his obligations to the insured, leaving nothing to which the insurers could have claimed to be simply subrogated. And it would have been equally inappropriate to award the insurers reviving subrogation in the case: reviving subrogation is a remedy which should be awarded to a claimant S [the insurer] only where RH’s [the right holder, here the insured] rights have been extinguished by S’s payment, with the result that PL [the person with primary liability] is enriched at S’s expense. In Darrell v Tibbitts the position was fundamentally different: the insurer paid the insured, it is true, but it was not the insurer’s payment that operated to extinguish the insured’s rights against his tenant. Rather, the insured’s rights were extinguished because the tenant had himself performed his obligations to the insured. No questions therefore arose in the case of the tenant being enriched at the insurer’s expense and reviving subrogation could not have been an appropriate remedy to use.

Three years after Darrell v Tibbitts, Castellain v Preston came before the Court of Appeal, and Brett and Cotton LJJ had the chance to elaborate their views on subrogation…In retrospect, it can be seen that the insurers [in Castellain] should have brought a claim…alleging that the defendant insured owed a duty to account to them for sums received from a third party in respect of the insured loss. And indeed, it appears that this was one of the two alternative ways in which counsel for the insurers framed their claim (the insurers’ claim was framed in the alternative as an action for money had and received, a form of action that was inappropriate on the facts of the case because the insurers’ payment was made before rather than after the defendants’ receipt of money from the purchasers). It must be said therefore that the insurer’s case was presented to the courts in a distinctly confused manner. However, counsel for the insurers at least did not frame their claim as one of simple subrogation, to which the insurers could clearly not have been entitled either, since at the time the insurers’ action was brought, the defendants had already exercised their rights against the purchasers of the house; as in Darrell v Tibbitts, there were therefore no subsisting rights of action to which the insurers could have claimed to be simply subrogated.

Chitty J, who heard the case at first instance, made this point very clearly during the course of his judgment. The main ratio of his decision in favour of the defendant insureds concerned the nature of the contract of sale, which he did not consider to be a contract relating to the subject-matter of the insurance in such a way that the insurers should be entitled to take the benefit of it. [(1882) 8 QBD 613 at 621] On this particular point, Chitty J was mistaken in principle, since the effect of the defendants’ receipt of payments from both purchasers and insurers was undeniably to enrich the defendants twice over in respect of the same loss. More pertinent to the present discussion, though, is the fact that Chitty J took the principle of subrogation to be that “on payment the insurers are entitled to enforce all the remedies whether in contract or in tort, which the insured has against third parties, whereby the insured can compel such third parties to make good the loss insured against” [at 617]. And he went on to hold that a prerequisite of the award of “subrogation” to an insured’s rights against a third party under a contract should be that “the contract [is] one which subsists at the time when the claim under the policy of insurance has been matured” [at 625].

In other words, Chitty J took the view that “subrogation” could only be used to transfer subsisting rights of action from the insured to the insurer: he assumed that the term “subrogation” used in the context of insurance law denotes the remedy of simple subrogation described in this book. His judgment on this point seems absolutely sound. He was wrong not to allow the insurers to recover the money received by the defendants in respect of the insured loss from the purchasers, but he was quite correct to hold that the insurers could not use the remedy of simple subrogation to effect their recovery. It was a technique inappropriate to the facts of the case.

The Court of Appeal reversed Chitty J’s judgment, and found in favour of the insurers. In doing so, it reached the right result, but the reasoning it used to get there was fundamentally flawed. The main judgment in the Court of Appeal was delivered by Brett U, who took as his starting point the following statement [(1883) 11 QBD 380 at 386]:

In a well-known passage, he then went on to say that the doctrine of subrogation, “another proposition which has been adopted for the purpose of carrying out the fundamental rule which I have mentioned”, should be expressed in the following way [at 388, emphasis added]:

And he expanded upon this statement [at 389–90]:

It may be seen in this last passage that Brett LJ used the term “doctrine of subrogation” to describe something much wider than the remedy of simple subrogation, by which an insurer is substituted to the position of the insured in order to take over the insured’s subsisting rights of action. He used it in fact to denote the principle of indemnity, which underlies the award not only of the remedy of simple subrogation, but also of the other two remedies…[(b) and (c) above]. Brett LJ’s conflation in this passage of the remedy of (simple) subrogation with the principle underlying the remedy’s award has been aptly described by James [(1971) 34 MLR 149 at 154]:

It is unfortunate that Brett LJ should have misused the term “subrogation” in this way. Following Castellain v Preston, his misuse of the term has been echoed in many of the cases and in much of the academic commentary of this area of the law. Thus, its long-term effect has been to introduce a confusion into the heart of the law in this area which has rendered its workings obscure and which must be stripped away before the remedies made available by the courts to an insurer with a view to enforcing the principle of indemnity can properly be understood.’

McCardie J:

‘…the principle of subrogation is ever a latent and inherent ingredient of the contract of indemnity, but that it does not become operative or enforceable until actual payment be made by the insurer. It derives its life from the original contract. It gains its operative force from payment under that contract. Not till payment is made does the equity, hitherto held in suspense, grasp and operate upon the assured’s choses in action. In my view the essence of the matter is that subrogation springs not from payment only but from actual payment conjointly with the fact that it is made pursuant to the basic and original contract of indemnity. If then the right of subrogation rests upon payment under a contract of indemnity, how does the matter stand when the policy of insurance is an honour policy only? In my opinion such a policy is not a contract of indemnity at all. It is the negation of such a contract…’

section 79

(1)   ‘Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, he thereupon becomes entitled to take over the interest of the assured 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 of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject-matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.’

Scrutton LJ:

‘Now as to liability. Subrogation has to be carefully distinguished from abandonment of the property insured. On abandonment the property and all its incidents pass to the underwriter to whom it is abandoned; and it is quite possible — I have known cases myself in my own practice where underwriters have made an extremely good thing by accepting abandonment because they have got something more than the amount they have had to pay. On abandonment they acquire a title and they sue in their own name. Subrogation is quite a different thing. It is a kind of equitable right of underwriters who have indemnified the assured, diminishing their loss by using for their own benefit any legal rights which the assured could have enforced in respect of the subject-matter insured. But in the case of subrogation the underwriter cannot sue in his own name. His rights are the rights of the assured. In the well- known case of Simpson v Thomson, 3 App Cas 279 [1211], where there was a collision between ships, both owned by the assured, and each was negligent, the underwriter was unable to get the benefit of the owner’s claim against money paid into Court by the second ship in limitation of liability proceedings because he could only get it out by saying the first ship had a right against the second ship, and as the owner could not sue himself there was no money that the underwriter could get the benefit of. But I always understood that the underwriter had no right to subrogation until he had fully indemnified the assured under the policy. When he had fully indemnified the assured he then had the equitable right to diminish his loss by using in his own favour and in the name of the assured any rights the assured could use against a third party in respect of the subject-matter of the loss.

…It is said that at the time the writ was issued the underwriter had paid all that was due in respect of the particular claim for which the writ was issued and that it does not matter that there was some other claim under the same policy and in respect of some expenditure which the underwriter had not paid. That is said to be the position in this case. The insurer says: “True, I was disputing the amount you claimed in respect of third-party liability, but I had by reinstatement made good to you so that you suffered no loss by the damage to your own car. Consequently, I was entitled to be subrogated to that part of your claim under the policy irrespective of the fact that there was a claim which I had not paid.” I think that that is an erroneous view of the doctrine of subrogation. I think the right to be subrogated to the rights of the assured does not pass to the underwriter until he has satisfied all the claims under the policy in respect of the particular subject-matter, and that if you get one car, one accident, one policy and one premium, I do not think that the underwriter can claim to be subrogated until he has satisfied all the claims arising out of that policy and paid for by that one premium in respect of that one accident and that one car.’

‘where the risk of a servant’s negligence is covered by insurance, his employer should not seek to make that servant liable for it. At any rate, the courts should not compel him to allow his name to be used to do it.’

Lloyd J:

‘Lord Justice James [in Morris v Ford Motor Co] regarded the point as being finely balanced. He came down in favour of implied term because of the industrial setting; but there is nothing equivalent to that in the present case. It is an ordinary commercial contract; and, applying the ordinary rules of implication in commercial contracts, I can see no necessity for implying any term excluding the right of subrogation against the defendants. Indeed, as Mr Reynolds forcibly pointed out, any such implied term would be contrary to the express term in clause 9 of the Institute Cargo Clauses, which provides:

As to the ground on which Lord Denning, MR, decided Morris v Ford Motor Co, namely that it would have been unjust to allow the right of subrogation to be exercised against the servant in that case, I can see no injustice in the present case.’

‘section 65

(1)   Subject to subsection (2), this section applies where:

(a)   an insurer is liable under a contract of general insurance in respect of a loss;

(b)   but for this section, the insurer would be entitled to be subrogated to the rights of the insured against some other person (in this section called the “third party”); and

(c)   the insured has not exercised those rights and might reasonably be expected not to exercise those rights by reason of:

(i)    a family or other personal relationship between the insured and the third party; or

(ii)   the insured having expressly or impliedly consented to the use, by the third party, of a road motor vehicle that is the subject-matter of the contract.

(2)   This section does not apply where the conduct of the third party that gave rise to the loss:

(a)   occurred in the course of or arose out of the third party’s employment by the insured; or

(b)   was serious or wilful misconduct.

(3)   Where the third party is not insured in respect of the third party’s liability to the insured, the insurer does not have the right to be subrogated to the rights of the insured against the third party in respect of the loss.

(4)   Where the third party is so insured, the insurer may not, in the exercise of the insurer’s rights of subrogation, recover from the third party an amount that exceeds the amount that the third party may recover under his contract of insurance in respect of the loss.

(5)   An insured need not comply with a condition requiring the insured to assign those rights to the insurer in order to be entitled to payment in respect of the loss and an insurer shall not purport to impose such a condition on the making of such a payment or, before making such a payment, invite the insured so to assign those rights, or suggest that the insured so assign them.

…

(6)   An assignment made in compliance with such a condition or in pursuance of such an invitation or suggestion is void.

(7)   In subsection (1), “road motor vehicle” means a motor vehicle that is so constructed as to be capable of carrying by road at least one person other than the driver.

section 66

Where:

(a)   the rights of an insured under a contract of general insurance in respect of a loss are exercisable against a person who is the insured’s employee; and

(b)   the conduct of the employee that gave rise to the loss occurred in the course of or arose out of the employment and was not serious or wilful misconduct;

the insurer does not have the right to be subrogated to the rights of the insured against the employee.’

Lord Cairns LC:

‘I know of no foundation for the right of underwriters, except the well-known principle of law, that where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss. It is on this principle that the underwriters of a ship that has been lost are entitled to the ship in specie if they can find and recover it; and it is on the same principle that they can assert any right which the owner of the ship might have asserted against a wrongdoer for damage for the act which has caused the loss. But this right of action for damages they must assert, not in their own name but in the name of the person insured, and if the person insured be the person who has caused the damage, I am unable to see how the right can be asserted at all.’

Colman J:

‘In determining whether and, if so, to what extent, the benefit of the waiver clause is available to NOW, it is important to bear in mind the nature of the contract of insurance to which, having regard to the issue which I have already decided, NOW was a party. That contract insured NOW in respect of all risks for loss and damage to the equipment to be delivered under the agreement up to the time of delivery to DOL and the period of the policy extended to the moment of time when the last item of equipment was indeed delivered. The scope of the risk insured was, however, loss of or damage to such equipment up to delivery. Thus the underwriters were off risk in respect of any item of equipment once it had been delivered to DOL, albeit the policy continued to protect NOW in respect of items of equipment not yet delivered. If there were no waiver clause and, subsequent to delivery of item X, DOL sustained loss and damage caused by that item of equipment, there would be nothing to stop DOL’s insurers by way of subrogation claiming from NOW the amount in which they had indemnified DOL. It would be nothing to the point that not all the equipment had yet been delivered under the contract. NOW would simply not have been insured by the policy in respect of that loss.

It follows that if the effect of the waiver clause would be to preclude DOL’s insurers from pursuing by subrogation post-delivery claims which but for the waiver clause would not arise out of losses insured for the benefit of NOW under the policy, this would place NOW in exactly the same position vis-à-vis insurers as regards such claims as if those losses had been fully insured under the policy. In effect the waiver clause would extend the scope of the insurance to cover losses which were never actually insured for the benefit of NOW. This gives rise to the question whether, as a matter of construction of the policy, if the provisions to the contrary clause limit the cover available to a sub- contractor to a scope less than the full scope provided by the policy to DOL, the waiver clause has the effect of protecting the sub-contractor against subrogated claims for losses which, so far as that sub-contractor is concerned, were uninsured by that policy. Such a consequence would indeed be remarkable. The policy would limit the cover with one hand and indirectly by waiver of subrogation remove the limit by another hand.

confines the effect of the waiver to claims for losses which are insured for the benefit of the party claimed against under the policy. In other words one does not qualify for the benefit of the waiver clause merely by being a party to the contract of insurance. The benefit is only available for insured losses. Thus where the “provisions to the contrary” clause limits the interests insured, it is only in respect of losses that fall within that party’s insured interest that the waiver clause operates. It may be objected that if that is the only effect of the clause it is doing no more than giving effect to what has been held in Petrofina (UK) Ltd v Magnaload Ltd [1984] QB 127 and Stone Vickers Ltd v Appledore Ferguson Shipbuilders Ltd [1991] 2 Lloyd’s Rep 288 to be the automatic consequence of the sub-contractor being co-assured in respect of losses on the basis of which underwriters attempt a subrogated claim, namely to preclude the bringing by underwriters of such a claim by reason of circuity of action or of an implied term to that effect. Such an argument is not compelling. I adhere to the view which I expressed in my judgment in the Stone Vickers case at p 302 where I sought to explain the basis of a subrogation defence in the following way:

Given that, if the parties had not inserted an express waiver of subrogation, such a term would have been implied and such a term would have had the effect of a waiver of subrogation only in respect of losses insured for the benefit of the sub-contractor, it is, in my view, entirely unsurprising that the parties should have inserted a waiver clause in their policy and that its proper construction should give it an effect exactly equivalent to the term which business efficacy would otherwise require to be implied.

The argument advanced by Mr Falconer that the waiver clause should be construed to give effect to the commercial purpose of the policy and that it should therefore span the whole scope of cover expressly provided by the policy to DOL, as distinct from NOW, is, in my view, misconceived. Given that on the proper construction of the provisions to the contrary clause the scope of cover provided by underwriters to NOW is limited to the extent which I have held, the commercial purpose of this contract of insurance has to be defined by reference to that limited cover and not by reference to the purpose which other policies of the kind considered by Mr Wannell or the Supreme Court of Canada [in Commonwealth Construction Co Ltd v Imperial Oil Ltd (1970) 69 DLR (3rd) 558] could be said to have. The meaning of the waiver of subrogation clause cannot therefore be stretched to accommodate a commercial purpose which this particular contract on its proper construction simply does not have. The waiver clause operates consistently with the commercial purpose of the contract if its meaning is confined to the waiver of claims based on losses insured for the benefit of NOW, that is to say, pre-delivery losses, and that is how, in my judgment, it must be construed.

It follows that in as much as the subrogated claims advanced against NOW are based on losses arising in relation to particular items of equipment after delivery to DOL of that equipment, the wavier clause does not preclude or provide a defence in respect of such claims. As to Mr Aikens’ point about the absence of authority to DOL to include in the policy a waiver of the width contended for by NOW, this does not arise. In my view, no such waiver was included in the policy for the benefit of NOW. Once the scope of cover procured for NOW was limited by the authority given to DOL or by the provisions to the contrary clause, the effect of the waiver clause in the contract between NOW and the underwriters was as a matter of construction limited in the manner I have described.

[His lordship next considered whether insurers could pursue a subrogated claim against a co-assured.] The explanation for the insurers’ inability to cause one co-assured to sue another co-assured is that in as much as the policy on goods covers all the assureds on an all risks basis for loss and damage, even if caused by their own negligence, any attempt by an insurer after paying the claim of one assured to exercise rights of subrogation against another would in effect involve the insurer seeking to reimburse a loss caused by a peril (loss or damage even if caused by the assured’s negligence) against which he had insured for the benefit of the very party against whom he now sought to exercise rights of subrogation. That party could stand in the same position as the principal assured as regards a loss caused by his own breach of contract or negligence. For the insurers who had paid the principal assured to assert that they were now free to exercise rights of subrogation and thereby sue the party at fault would be to subject the co-assured to a liability for loss and damage caused by a peril insured for his benefit. As I said in Stone Vickers, it is necessary to imply a term into the policy of insurance to avoid this unsatisfactory possibility. The implication of such a term is needed to give effect to what must have been the mutual intention (on this hypothesis) of the principal assured and the insurers, as to the risks covered by the policy. On this basis the purported exercise by insurers of rights of subrogation against the co-assured would be in breach of such a term and would accordingly provide the co-assured with a defence to the subrogated claim…I am firmly of the view that the conclusion arrived at by Mr Justice Lloyd in Petrofina was right: an insurer cannot exercise rights of subrogation against a co-assured under an insurance on property in which the co-assured has the benefit of cover which protects him against the very loss or damage to the insured property which forms the basis of the claim which underwriters seek to pursue by way of subrogation. The reason why the insurer cannot pursue such a claim is that to do so would be in breach of an implied term in the policy and to that extent the principles of circuity of action operate to exclude the claim.’

‘In my judgment, the reason why an insurer cannot normally exercise a right of subrogation against a co-assured rests not on any fundmental principle relating to insurance, but on ordinary rules about circuitry.’

Kerr LJ:

‘Provided that a person with a limited interest has an insurable interest in the subject-matter of the insurance — an issue to which I turn in a moment in relation to the circumstances of the present case — there is no principle of law which precludes him from asserting that an insurance effected by another person was intended to enure for his benefit to the extent of his interest in the subject matter, whether the insurable interest of the person effecting the insurance be upon the whole of the subject-matter or also only to the extent of a limited interest in it. Illustrations of relationships which may give rise to this consequence are those of bailee and bailor and mortgagee and mortgagor. I do not see why the relationship between landlord and tenant should not be capable of giving rise to the same consequence…’

Brightmire J:

‘Basic equity and fundamental justice upon which the equitable doctrine of subrogation is established requires that when fire insurance is provided for a dwelling it protects the insurable interests of all joint owners including the possessory interests of a tenant absent an express agreement by the latter to the contrary. The company affording such coverage should not be allowed to shift a fire loss to an occupying tenant even if the latter negligently caused it.’

Torres CJ:

‘There are several reasons why the decisions rejecting Sutton represent the “better reasoned authorities” on the subject.

First, an insurance policy is a contract between an insurer and its insured. Bush v Mutual Insur Co 448 A2d 784 (RI 1982) Like any other contract its terms are governed by the provisions of the policy itself. Textron Inc v Casualty and Surety Co 638 A2d 537, 539 (RI 1994), If those terms are clear and unambiguous, they must be applied as written. Malo v Aetna Casualty Surety Co 459 A2d 954, 956 (RI 1983). Thus, a court is not free to rewrite a policy or read provisions into it in order achieve what the court subjectively may believe to be a desirable result.

Although a fire insurance policy may name, as insureds, persons other than the policy owner, courts have no authority to insert the names of additional insureds.

Nor, as Sutton suggests, does the mere fact that an individual may have an insurable interest in property make that individual an insured under a policy of insurance covering the property. That individual also must be a named insured or must purchase insurance covering his interest. See generally Neubauer v Hostetter, 485 NW2d 87, 89–90 (Iowa 1992) (“To the extent that defendant and her husband also had a property interest in the dwelling, it was not automatically insured under the landlord’s policy.”).

Since an insurance policy is a contract between the insurer and its insured, the tenant cannot become an insured unless the insurer agrees and the policy so provides. Accordingly, a landlord’s use of part of the rent collected from a tenant in order to pay premiums does not make the tenant an insured under the policy. Similarly, notwithstanding Sutton and its progeny (eg, Peterson v Silva 428 Mass 751, 704 NE2d 1163, 1166 (1999)) (“The reasonable expectation of the defendants, and all tenants, is that their rent includes the landlord’s cost for fire insurance, and that any damage to the property from fire is covered by that insurance.”); Cascade Trailer 749 P2d at 766 (“[T]he issue concerns the parties’ reasonable expectations. Where the landlord has secured fire insurance covering the leased premises, the tenant can reasonably expect the insurance to cover him as well, unless the parties have specifically agreed otherwise.”), a tenant’s expectation that the landlord will obtain insurance covering the tenant also is insufficient to make the tenant an insured. In such cases, the landlord’s failure to obtain the insurance might render it liable to the tenant for losses that would have been covered by the policy; or, it might bar the landlord from suing the tenant for what would have been Insured losses incurred by the landlord. However, neither the tenant’s expectations nor the unilateral action of the landlord giving rise to those expectations can make a, tenant an insured under a policy issued by the landlord’s insurer.

Furthermore, if one accepts Sutton’s proposition that a tenant becomes a coinsured under a landlord’s policy, the tenant would be entitled to a portion of any proceeds payable under the policy. However, it is difficult to envision how those proceeds would be apportioned, especially since the amount payable is determined by the repair or replacement cost of the building itself rather than any occupancy interest of tenants who are not even named in the policy. The solution suggested by one court is to treat the tenant as a co-insured for the purpose of determining amenability to a subrogation suit, but not for the purpose of determining entitlement to the policy proceeds. Capri 705 P2d at 661 (“[T]he tenant is, for the limited purpose of defeating an insurer’s subrogation claim, an implied coinsured of the landlord.”) (emphasis added). However, there does not appear to be any principled basis for such inconsistent treatment. The wish to achieve a desired result cannot justify arbitrary distinctions or override well established principles of contract law.

In short the “Sutton doctrine” is inconsistent with the better reasoned cases that reject the notion that a tenant automatically becomes a co-insured under a landlord’s insurance policy.

The “Sutton doctrine” also would be a radical departure from well-established principles of Rhode Island law. Under Rhode Island law, an insurance policy is construed like any other contract…If the terms of the policy are unambiguous, a court must apply them as written and may not read into the policy provisions that are not there. See Malo, 459 A2d at 956.

Moreover, Rhode Island law recognises the right of an insurer that pays a loss incurred by its insured to bring a subrogation action against a third party responsible for the loss. Lombardi v Merchants Mutual Insur Co 429 A2d 1290, 1291 (RI 1981).

Finally, under Rhode Island law, tenants, like any other persons, generally may be held responsible for the consequences of their negligence [he cited various legislative provisions in support for this proposition].’

Borden J:

‘On appeal, the plaintiff claims that the trial court improperly rendered summary judgment for the defendant because: (1) contrary to the trial court’s conclusion, a tenant is not an implied co-insured of a landlord in the absence of an express agreement to the contrary; (2) whether such a relationship exists between a landlord and tenant must be determined by examining the parties’ intent, as gleaned on a case-by-case basis from their lease, if any, and their insurance policies; (3) the court improperly declined to consider the evidence presented to it regarding the parties’ intent in determining whether they were co-insureds; and (4) the court should have inquired into the fact of the parties’ intent regarding whether such a relationship existed between them. We agree with the trial court that, in the absence of an express agreement between the parties covering the question, there is no right of subrogation on the part of a landlord’s fire insurer against a tenant of the landlord’s premises. We reach this conclusion, however, by way of a different route from that of the trial court.