When Does An Insurer Have a Right to Subrogate?

Essentially, Subrogation Involves An Insurer Seeking to Recover Money Paid Out to a Client of the Insurer Due to Losses Resulting From the Wrongful Conduct of a Third Party Person.

A Helpful Guide For How to Determine and Understand the Rights and Duties of Insurers and Insureds Within Subrogation Claims

Insurance Claim Document After an insurance company, the "insurer", makes payment of a claim to, or on behalf of, a client, the "insured", for a claim that was made by the insured and involving a loss that arose due to wrongful conduct of another person, a "third party", generally, the insurer obtains rights to recover the monies paid out by litigating, in a process called subrogation, as against the third party.

Basis For Right
What Are the Legal Principles That Provide the Right to Subrogate?

When a loss occurs and a person is insured for the loss and chooses to make a claim to an insurance company rather than choosing to pursue legal rights to recover the loss directly from the wrongdoer who caused the loss, the insurer may then, generally with some exceptions, sue in the name of the insured and pursue the legal rights that were held by the insured as against the wrongdoer.  More simply said, when an insurance company incurs a loss by providing compensation to an insured, a loss that was caused by a wrongdoer, and a loss that the insured chose to recoup by making a claim upon the insurance coverage rather than pursuing an uncertain and expensive course of litigation against the wrongdoer, the insurer obtains a right to pursue the wrongdoer in the attempt to recover what was paid out to, or on behalf of, the insured.

In law, with only a few rare exceptions, the right to sue a wrongdoer for harm caused by the wrongdoer is held only by the victim.  This makes logical sense in that when a wrong is committed, and harm occurs as a result of the wrong, only the person, or persons, that were actually harmed by the wrong may sue the person that committed the wrong and caused the harm.  However, when a wrongdoer causes harm to a person who carries insurance coverage against such a harm, such as damage resulting from a fire caused by the negligence of the wrongdoer, the insurance company who suffers an indirect loss by making payment as per the insurance coverage carried by the person who was directly harmed, may then choose to sue the wrongdoer within a legal process known as subrogation.

The right to subrogate arises in common law as per the doctrine of subrogation as was explained well by the Court of Appeal within the case of Douglas v. Stan Fergusson Fuels Ltd., 2018 ONCA 192 as well as arising as per various statutory provisions provided within various sections of the Insurance Act, R.S.O. 1990, c. I.8 whereas the Douglas case and the Insurance Act respectively state:

(a) The Doctrine of Subrogation

[47]  The common law doctrine of subrogation is one of the cornerstones of insurance law. The objectives of the doctrine are to ensure that (i) the insured receives no more and no less than a full indemnity, and (ii) the loss falls on the person who is legally responsible for causing it: Somersall v. Friedman, 2002 SCC 59, [2002] 3 S.C.R. 109, at para. 50.

[48]  The doctrine of subrogation is related to the principle of indemnity. It mandates that, having indemnified the insured for a loss caused by a third party, the insurer may bring an action against the third party in the insured’s name. The insurer is said to be subrogated to the insured’s rights and is entitled to exercise those rights in the name of the insured: Zurich Insurance Co. v. Ison T.H. Auto Sales Inc., 2011 ONSC 1870, 333 D.L.R. (4th) 696, at paras. 27 and 32, affirmed 2011 ONCA 663, 342 D.L.R. (4th) 501.

[49]  Key principles of the doctrine of subrogation include the following.

(i)  At common law, the insurer’s right of subrogation arises upon “full indemnification” of the insured.

[50]  In the absence of statutory[1] or contractual terms to the contrary, the insurer’s right of subrogation does not arise until the insured has been fully indemnified. “Fully indemnified” means indemnified for both insured and uninsured losses, such as losses that exceed policy limits or losses that are not covered by the policy: Somersall, at paras. 34-36 and 53-54; Zurich (S.C.), at paras. 27 and 32.

[51]  Before the point of full indemnification, the insured is obligated to pursue any claim it has against the third party in good faith: Somersall, at para. 54; Zurich (S.C.), at para. 37.

[52]  In this case, State Farm does not rely solely on its common law right of subrogation. It relies on the subrogation clause in the Homeowners Policy which permits State Farm to subrogate before its insured is fully indemnified.[2]

(ii)  At common law, the insurer becomes the dominus litis upon “full indemnification” of the insured.

[53]  The insured is in control of the litigation, or the dominus litis, until it has been fully indemnified for its insured and uninsured losses: Zurich (S.C.), at para. 70.

[54]  An entitlement to control the litigation does not follow by necessary implication from an insurer’s contractual right to be subrogated to the rights of the insured and to bring action in the name of the insured before the insured is fully indemnified: Zurich (S.C.), at para. 72. Put another way, the right of subrogation and the right to control the litigation may not necessarily be coincident rights.

(iii)  Subrogated claims are “derivative” in nature.

[55]  Because the right of subrogation is derivative, the insurer can be in no better position as against the third party than the insured would be. Expressed otherwise, the insurer stands in the shoes of the insured. Any restriction or limit on the insured’s right of recovery against the third party applies equally to the insurer: Matt (Litigation Guardian of) v. Barber (2002), 2002 CanLII 45023 (ON CA), 216 D.L.R. (4th) 574 (Ont. C.A.), at para. 25.

[56]  Where an insurer is subrogated to the claim of its insured, the claim nonetheless remains that of the insured in whose name and with whose rights the claim must be advanced: Mason (Litigation Guardian of) v. Ontario (Ministry of Community & Social Services) (1998), 1998 CanLII 1316 (ON CA), 39 O.R. (3d) 225 (Ont. C.A.), at p. 231; Erickson & Partners v. Ontario (Ministry of Health and Long-Term Care), 2015 ONCA 285, 125 O.R. (3d) 762, at para. 24.

(iv)  Recoveries by the insurer beyond the indemnified losses are payable to the insured.

[57]  The right of subrogation gives the insurer the right to recover from the third party the amount that the insurer has paid out under the insurance contract to its insured. Any recovery in excess of the amount paid out by the insurer is payable to the insured: Craig Brown and Thomas Donnelly, Insurance Law in Canada, loose-leaf (2017-Rel. 4), (Toronto: Thomson Reuters Canada Ltd., 2002), vol. 2, at p. 13-2.

(v)  Recoveries by the insured for indemnified losses are held in trust for the insurer.

[58]  Where the insured commences an action against a third party and recovers in respect of an indemnified loss, the insurer is entitled to seek reimbursement from the insured: Craig Brown and Thomas Donnelly, Insurance Law in Canada, loose-leaf (2017-Rel. 4), (Toronto: Thomson Reuters Canada Ltd., 2002), vol. 2, at pp. 13-2 to 13-3. In such cases, money received by the insured (in excess of his or her cost of recovery) is subject to a trust in favour of the insurer: Ledingham v. Ontario (Hospital Services Commission), 1974 CanLII 9 (SCC), [1975] 1 S.C.R. 332, 46 D.L.R. (3d) 699 (S.C.C.), at p. 337Colonial Furniture Company (Ottawa) Limited v. Saul Tanner Realty Limited et al. (2001), 2001 CanLII 24148 (ON CA), 52 O.R. (3d) 539, 196 D.L.R. (4th) 1 (C.A.), at paras. 20-22, and Re Northward Airlines Limited (1981), 39 C.B.R. (N.S.) 153 (Alta. Q.B.), at para. 15.[3]

Subrogation

152 (1) The insurer, upon making a payment or assuming liability therefor under a contract to which this Part applies, is subrogated to all rights of recovery of the insured against any person, and may bring action in the name of the insured to enforce such rights.

Includes Public Health and Worker Injury Insurers
Do Subrogation Rights Also Apply to Public Insurance Programs?

It is highly notable that in addition to subrogation rights and duties applicable to the insurer and insured relationship that exists within the private insurance relations involving an insurer as an insurance company and an insured as an insurance purchasing consumer, subrogation rights and duties may apply to other forms of insurance such as, and including, public health care via the Ontario Hospital Insurance Plan (OHIP) as well as the public worker injury compensation program via the Worker Safety & Insurance Board (WSIB) and accordingly, subrogation for monies paid by OHIP or WSIB is common, and may be legally required.  The right of subrogation in respect of OHIP is prescribed within the Health Insurance Act, R.S.O. 1990, c. H.6 and the right of subrogation in respect of WSIB is prescribed with the Workplace Safety and Insurance Act, 1997, S.O. 1997, Chapter 16, Schedule A, wherein such statutes it is respectively stated:

Subrogation

30 (1) Where, as the result of the negligence or other wrongful act or omission of another, an insured person suffers personal injuries for which he or she receives insured services under this Act, the Plan is subrogated to any right of the insured person to recover the cost incurred for past insured services and the cost that will probably be incurred for future insured services, and the General Manager may bring action in the name of the Plan or in the name of that person for the recovery of such costs.

30 (10) If the worker or survivor elects to claim benefits under the insurance plan and if the worker is employed by a Schedule 1 employer or the deceased worker was so employed, the Board is subrogated to the rights of the worker or survivor in respect of the action. The Board is solely entitled to determine whether or not to commence, continue or abandon the action and whether to settle it and on what terms. 

Interestingly, in addition to the above shown right of OHIP to commence a subrogation action as prescribed by section 30 of the Health Insurance Act, the duty to subrogate on behalf of OHIP, where an injured person pursues a liability claim, is prescribed by section 31 of the Health Insurance Act which states:

Subrogated claim included in action

31 (1) Any person who commences an action to recover for loss or damages arising out of the negligence or other wrongful act of a third party, to which the injury or disability in respect of which insured services have been provided is related shall, unless otherwise advised in writing by the General Manager, include a claim on behalf of the Plan for the cost of the insured services.

Recovery paid to Ontario

(2) Where a person recovers a sum in respect of the cost of insured services, the person shall forthwith pay the sum recovered to the Minister of Finance.

In accordance to section 31 of the Health Insurance Act, legal claims seeking compensation for out-of-pocket expenses, pain and suffering, among other harms as damages claimable within litigation against a wrongdoer, such as the litigation that may be brought subsequent to a slip and fall, serious automobile accident, among other things, must include claims on behalf of the OHIP system.  Accordingly, the subrogation rights and duties in favour of OHIP are especially of interest and concern to legal practitioners providing personal injury litigation services.

Duties to Assist and Rights to Control
The Common Law

As above, as stated by the Court of Appeal in paragraph 50 through paragraph 58 of the Douglas case, within the common law the rights and duties regarding subrogation are such that until an insured is fully indemnified, for both any insured and uninsured losses, the insured is entitled to pursue legal action against the wrongdoer.  Included in any such action, the insured must seek to recover the portion of losses paid by the insurer and must do so in favour of the insurer; and accordingly, any portion of losses recovered through such litigation for which the insured was previously compensated by the insurer must be remitted to the insurer whereas it should be reasonably obvious that the insured is forbidden from double dipping.  During this process, the insured maintains control of the litigation; however, when the insured is fully indemnified, then insurer holds the right to subrogate against the wrongdoer and the insurer then also controls the course of the litigation.  Furthermore, the insured will be dutibound to assist the insurer by providing evidence, statements, witness testimony, among other things, as reasonably necessary to help the insurer in the effort to recover the amounts paid by the insurer.

Interestingly, whereas most insurance coverage contains a deductible or some other form of uninsured aspect, at common law insurers would be without the right to subrogate and would always be dependent on the insured to pursue recovery; and accordingly, statute law or contract law is often in place so to alter the common law rules in this regard.

The Statute and Contract Law

As suggested, the common law subrogation rights and duties are impractical in many circumstances; and accordingly, statutes and contracts are frequently used to alter the common law rules.  In particular, most private insurance policies will contain wording to the effect that the insurer is granted the right of subrogation regardless of whether the insured is fully indemnified and will also provide a duty upon the insured to assist, to co-operate with, and to permit, the insurer in any subrogated legal action despite that the insured is without full indemnification.  When doing so, the insurer is required to provide any excess monies to the insured.  Typically, an insurance policy will contain a subrogation clause, thereby superceding the common law, providing the insurer with all rights that the insured would be entitled to.

Contract DocumentSubrogation
We will be entitled to assume all your rights of recovery against others and bring action in your name to enforce these rights when we make payment or assume liability under this policy.

Source of Example:
Intact Insurance - Homeowner's Policy

Statutorily Barred Subrogation
Does An Insurer Always Have the Right to Subrogate?

In some circumstances, including as such applies within the no-fault automobile insurance system of Ontario, insurers are forbidden from subrogating against a wrongdoer in attempt to recover monies paid to, or on behalf of, an insured.

Direct Compensation - Property Damage

The basic principles of tort law, especially negligence, provides that, generally and in short, a person may sue the wrongdoer who negligently causes damage to belongings of the person.  As a simply stated example, if a neighbour negligently operates a barbeque resulting in a fire that damages your shed, you could sue the neighbour for the tort of negligence and recover the monetary value of the shed.  However, in Ontario, for the majority of situations, if a driver of an Ontario licensed and insured automobile negligently, or recklessly and perhaps even intentionally, causes an accident resulting in damage to your automobile, you are forbidden from suing and you must recover your loss from your own automobile insurance company.  This statutory mandate is prescribed at section 263 of the Insurance Act which states, among other things:

Accidents involving two or more insured automobiles

263 (1) This section applies if,

(a) an automobile or its contents, or both, suffers damage arising directly or indirectly from the use or operation in Ontario of one or more other automobiles;

(b) the automobile that suffers the damage or in respect of which the contents suffer damage is insured under a contract evidenced by a motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario or that has filed with the Chief Executive Officer, in the form provided by the Chief Executive Officer, an undertaking to be bound by this section; and

(c) at least one other automobile involved in the accident is insured under a contract evidenced by a motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario or that has filed with the Chief Executive Officer, in the form provided by the Chief Executive Officer, an undertaking to be bound by this section.

Exempt automobiles, undertaking to be bound

(1.1) This section applies, with necessary modifications, in respect of an automobile the owner, operator or lessee of which is exempt from the requirement to be insured under the Compulsory Automobile Insurance Act, if the organization that is financially responsible for the damages resulting from the accident involving the automobile files with the Chief Executive Officer an undertaking to be bound by this section.

Damage recovery from insured’s insurer

(2) If this section applies, an insured is entitled to recover for the damages to the insured’s automobile and its contents and for loss of use from the insured’s insurer under the coverage described in subsection 239 (1) as though the insured were a third party.

Fault-based recovery

(3) Recovery under subsection (2) shall be based on the degree of fault of the insurer’s insured as determined under the fault determination rules.

Dispute resolution

(4) An insured may bring an action against the insurer if the insured is not satisfied that the degree of fault established under the fault determination rules accurately reflects the actual degree of fault or the insured is not satisfied with a proposed settlement and the matters in issue shall be determined in accordance with the ordinary rules of law.

Restrictions on other recovery

(5) If this section applies,

(a) an insured has no right of action against any person involved in the incident other than the insured’s insurer for damages to the insured’s automobile or its contents or for loss of use;

(a.1) an insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss;

(b) an insurer, except as permitted by the regulations, has no right of indemnification from or subrogation against any person for payments made to its insured under this section.

As per section 263(5) which forbids litigation against the owner of, the driver of, or any other person involved with, an Ontario licensed and insured automobile wrongdoer as a means to recovery, the sole legal right to seek compensation for damage caused to an automobile as well as the contents of an automobile and loss of use of an automobile, when occuring as a result of an accident caused by the wrongful operation of another Ontario licensed and insured automobile, is by seeking compensation directly from the insurer of the insured rather than via tort law against a third party.  Accordingly, where section 263(5) bars an owner of an automobile from seeking compensation from another person, such as the driver at-fault for causing the accident, and whereas subrogation litigation is a derivative type of legal action, the insurer of the insured is barred from litigating for recovery against the third party.  In short, if the insured is barred from legally pursuing a third party, then the insurer of the insured is barred from legally pursuing a third party.

Summary Comment

The law regarding subrogation rights and duties can be very complex and is affected by statutes and contracts that may alter the common law principles that would otherwise apply; however, typically, subrogation involves an insurer, whether the insurer is a private insurance company or a public insurance scheme provided by the government, assuming the rights of the insured person who made claim against the insurance due to loss caused by the wrongdoing a of a third party person.  Essentially, subrogation involves an insurer legally pursuing the person who caused the client of the insurer to make a claim against the insurance.


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