In the field of insurance, adverse events such as fires, car accidents, or injuries on commercial premises often involve a party whose negligence has contributed to the loss. Insurance serves as a mechanism to provide financial relief in such situations, but what happens after a claim is paid is equally important. Once an insurer settles a claim on behalf of an insured, the law allows the insurer to recover that amount from the party responsible for the loss. This legal right is referred to as subrogation.
Subrogation allows an insurer to pursue recovery from the wrongdoer after compensating the policyholder. The principle is well-established in legal systems influenced by English common law and Roman-Dutch law. It was first developed in England during the late 19th century and was later confirmed in South African jurisprudence in cases such as Ackerman v Loubser (1918). In Lesotho, this principle was introduced through the General Law Proclamation of 1884 and remains applicable, having been consistently applied by local courts in line with evolving jurisprudence.
The primary advantage of subrogation lies in its ability to streamline the recovery process. The insured does not need to pursue legal action to recover damages from the party at fault. Once the insurer has honoured its obligation under the insurance policy, it steps into the shoes of the insured and enforces the claim against the wrongdoer. The insurer inherits all the legal rights and remedies that the insured would have had, no more and no less, and may call the insured as a witness in such proceedings. This process promotes fairness and economic efficiency by ensuring that the burden ultimately falls on the responsible party.
However, subrogation is only triggered under specific circumstances. There must be a valid indemnity insurance agreement, and the claim must be paid in terms of that contract. Upon payment, the insurer acquires the legal right to pursue the third party responsible for the damage. The critical distinction lies in the fact that the insurer’s liability to pay arises from the contractual agreement with the insured, while the third party’s liability arises from their own wrongful conduct. Payment by the insurer does not extinguish the third party’s obligation, it merely shifts the right to recover to the insurer.
Legal questions sometimes arise regarding who should institute the claim against the third party, the insurer or the insured. In Lesotho, this issue was addressed in the case of Boithatelo Ratsoane v Baphuthi Matona. The defendant argued that only the insurer had the standing to sue, having reimbursed the insured. However, the court clarified that under the doctrine of subrogation, the insurer acts in the name of the insured unless there has been a formal assignment of rights. The court endorsed the approach that the insurer, having compensated the insured, can institute proceedings using the insured’s name, as it does not acquire an independent claim but simply steps into the legal position of the insured.
An important distinction exists between subrogation and cession. Subrogation occurs automatically by operation of law when an insurer pays a claim. Cession, on the other hand, requires the insured to formally transfer their rights in writing to the insurer. Only once this cession has taken place may the insurer sue in its own name. The court in the Ratsoane case highlighted that unless such cession has occurred, any action by the insurer must be brought in the insured’s name.
Concerns may arise about the insured receiving double compensation, once from the insurer and again from the third party. This is not permitted under law. Where the insured receives funds from both sources, they are obligated to repay the insurer the amount recovered from the third party. If they fail to do so, they may be held liable for breaching the insurer’s right to subrogation. This legal safeguard ensures that the insured does not profit from the loss and that the party responsible ultimately bears the cost of the damage.
Subrogation plays a vital role in balancing the interests of insurers, insured parties, and those at fault. It provides a fair and effective mechanism for recovery while ensuring that justice is not compromised in the process. For legal guidance on insurance claims and subrogation matters, contact our team.