A crucial aspect for any insurer/reinsurer is knowing, safely in advance, how the right of subrogation works in each jurisdiction, with a view to settling the claim. Without knowing how it works, a future recovery claim could be seriously jeopardized.
In general terms, the subrogation of rights consists in that every time someone fulfils its obligation, independently of the quality of the subjects and the obligation concerned, the credits are transferred in its favour by effect of that fulfilment.
Nevertheless, subrogation works differently in the Common Law and Roman Law jurisdictions.
In Common Law jurisdictions, in the context of insurance/reinsurance, the right of subrogation entitles an insurer/reinsurer, having paid/indemnified the loss to the insured, to "step into the shoes" and bring an action in the (re)insured´s name, against any third party who was responsible for causing the loss. The insurer acquires the right to use the insured's name to proceed against any third party liable for the loss and to claim from the insured any sums received by way of compensation from that third party.
We can say that the same happens in Roman Law jurisdictions, but with some important differences: unlike Common Law jurisdictions, Roman Law jurisdictions generally state that any subrogated claim be presented in the name of the insurer and not in the name of the insured, and insurers can only claim sums they have actually paid to the insured (the entity which in fact suffered the loss) at the date the proceedings are issued.
In both jurisdictions, generally, the insurer/reinsurer acquires the creditor’s/insured’s right to claim against any liable third parties, by two common ways:
- legal subrogation (through general laws, statutory or insurance laws) or
- conventional subrogation (through an isolated statement or a contract/insurance/reinsurance policy).
We should also note that some important aspects have to by complied with, in order to bring a successful recovery, namely, the following rule of 4:
- Existing subrogation title
Subrogation rights should be provided in absolution, by legal means, and a declaration should be issued by the creditor/insured or in accordance with the policy terms.
This should take place prior to any payment.
- A clear proof of damages
Any recovery claim should be duly sustained on documental or witness proof, according to each jurisdiction.
- Recovery deadline compliance
Common Law and Roman Law jurisdictions stipulate different deadlines to bring a recovery claim against the third party, and, therefore, insurers/reinsurers have to be cautious and know, in advance, each jurisdiction’s deadline to which they are subject.
- Correct and proof of payments
- A common situation in the insurance market is where payments are made by a subsidiary insurance company in the group (but the subsidiary does not hold the policy) or payments are made to entities belonging to the same group as the insured who suffered the loss (but the entities have not legally suffered the loss).
If one of these situations occurs - and they often occur - the recovery claim could be jeopardised.
Accordingly, insurers’ payments/indemnities should be made by the insurer who holds the policy and to the correct insured who in fact suffered the loss.
Finally, to succeed with a recovery claim, (re)insurers should be duly supplied with proof of payments (e.g. proof of bank accounts and confirmation of payments made).
By safeguarding these general assumptions, insurers/reinsurers should be able and equipped to settle claims, to conveniently prepare recovery claims, but must always take into consideration the specifics of each local jurisdiction.