Subrogation in Insurance Law--A Critical Evaluation

Author(s): Reuben Hasson

Source: Oxford Journal of Legal Studies, Vol. 5, No. 3 (Winter, 1985), pp. 416-438
Published by: Oxford University Press
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 SUBROGATION IN INSURANCE LAW-
A CRITICAL EVALUATION
REUBEN HASSON*

I. INTRODUCTION

Therecan be few,ifany,legalsubjects,thathavereceivedlesscriticalattention in
Commonwealth countriesthanthelaw ofinsurance.The doctrineofsubrogation,
forexample,is setoutin mostCommonwealth insurancelaw textbooks withouta
whisper of criticism.'To be sure, the periodicalliterature is a littlemore
promising. There one finds criticismsof specificincidents of subrogation;for
example in its application to the vendor-purchaser situation,2 to employer's
liabilityinsurance'or to the rightof health authoritiesto bringclaims for
subrogation.4
It is worthconsidering whythe doctrineof subrogation has attractedso little
criticalattention fromlegalwriters.In thefirstplace,mostwritingin thelaw of
insurancehas beenaimedat practitioners and thereis a feeling(perhapsjustified)
that practitioners are not interestedin policydebates.Second,the doctrineof
subrogationis at least two centuriesold' and it is associatedwiththename of
Lord Mansfieldwho has achievedthe statusof legal sainthood-at least in the
area ofinsurancelaw evenifhe is creditedwithhavingformulated ruleswhichhe
did not.6Aftera doctrinehas been in existencefortwo centuries,it becomes
naturalto thinkof thatdoctrineas beingan indispensable partofinsurancelaw.

*OsgoodeHall Law School,York University,Toronto.I wouldliketo thankJohnBirds,Ben Geva,

HarryGlasbeek,Douglas Hay, TerryIson, Derek Morganand David Vaverforreadingan earlier
draftofthispaper.Theyare,ofcourse,notresponsible
foranyofmyerrorsor opinions.

I See e.g. McGillivrayand Parkinstonon Insurance Law (London, Sweet & Maxwell I98i)
471-512; Colinvaux, The Law of Insurance (London, Sweet & Maxwell i979) 135-41; Ivamy,
General Principlesof InsuranceLaw (London, Butterworths 1979) 496-520; Sutton,Insurance
Law in Australia and New Zealand (Sydney,The Law Book Co 1980) 552-69; Brown and
Menezes,InsuranceLaw in Canada (Toronto,Carswell1982) 313-41. The one exceptionis Birds,
ModernInsuranceLaw (London,Sweet & Maxwell198I) whosechapteron subrogation includes
a briefcriticaldiscussionofthesubject;see 274-5 ('The FutureofSubrogation').
2 See e.g. Thompson,Must a PurchaserBuy a CharredRuin? (1984) Cony43.
3 See e.g. GlanvilleWilliams,'VicariousLiabilityand theMaster'sIndemnity' 20 Mod L Rev 200,
437 (957).
4 See e.g. Rendall,'Subrogationin Medical and Hospital InsuranceSchemes:JudicialPhilosophy
VersusLegislativePragmatism'6 Ottawa L Rev 291 (1974)-
5 For an attemptto tracethedoctrineof subrogation to its origins,see Marasinghe,'An Historical
Introduction to theDoctrineofSubrogation(PartsI & II) io ValparaisoUL Rev 45, 275
(I975).
6 See Hasson, 'The Doctrineof "UberrimaFides" in InsuranceLaw-A CriticalEvaluation'32
Mod L Rev 6 5 (1969) and Hasson,'The "Basis oftheContract"Clause' 34 Mod L Rev 29 (1971).

416
OxfordJournal of Legal Studies Vol. 5, No. 3

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 SUBROGATION IN INSURANCE LAW 417

Thus, manylawyerscannotenvisagethe law of insurancefunctioning without

say,the doctrines of and
subrogation uberrimafides.
The mostimportant factoris theverystrongattachment bylawyersandjudges7
to the conceptof faultthat subrogationembodies.8To manylawyers,nothing
couldbe morebeneficial thanthatan insurershouldpenalizethewrongdoer and
holdtherecoveries in trustforthebenefit of'innocent'policyholders.
I willtryto demonstrate thatthe allegedgoals of subrogation do not achieve
theirpurpose.I will argue,instead,thatthe resultsachievedby subrogation are
wastefuland harmful. I willthenshowhow courtsin theUnitedStatesand the
Commonwealth have limitedtheoperationof subrogation in certainareas. I will
demonstrate theseverelimitations of thiskindofjudgemadelaw reform. Finally,
I willoutlinea statutedesignedto abolishsubrogation inmostareasofinsurance.

(a) Whatis subrogation?

Whena loss occurs,it is opento thelegalsystemto adoptoneofthreealternatives
(i) to allowtheinsuredpartyto keepboththeinsuranceproceedsand to allowfull
recoveryagainstthe tortfeasor (or otherpartyagainstwhomthe insuredcould
enforcecontractual rights);(ii) allowtheinsuredpartyto recoverhis/her
to own
loss while the insureris deniedthe rightto proceedagainstthe tortfeasor or
contractbreaker;or (iii) to allowtheinsuredto recoverfromhis/her own insurer
but also to allowtheinsurerto use theinsured'snameto recoversuchpayoutfrom
thetortfeasor orcontractbreaker.
It is thisthirdoptionthatthelegalsystemhas chosento dealwithmostinsured
lossesand whichis calledsubrogation. This doctrine
operatesthroughout thefield
ofproperty andliability
insurance-toall so-calledcontracts ofindemnity.
This principledoes notholdswaythroughout thelaw ofinsurance.In thefield
ofpersonalinjurybecauselifeinsuranceand accidentinsuranceare(strangely) not
thought to be of
contracts indemnity,9 theinsuredpersonis allowedto accumulate
recoveries.
7 See e.g. theviewsexpressedby thePearsonCommission(The ReportoftheRoyal Commission on
Civil Liabilityand Compensation for PersonalInjury(1978) Cmnd 7054), whichincludedsuch
statementsas thefollowing:'There is elementary justicein theprincipleofthetortactionthathe
who has by his faultinjuredhis neighbourshouldmakereparation'(Vol i, para 262). 'In broad
terms,however,thereremainsan important potentialimpacton thetortfeasor's reputationas, say,
a professionalor businessman.This is the more significant in that the cases attractingmost
publicitywilltendto be thosein whicha tortfeasor contestshis liability,and in whichliabilityis
therefore theleastclearcut' (Vol I, para 256).
8 It is truethat in some cases (e.g. vendor-purchaser) negligenceseems to play no part.In these
cases, theEnglishcourtsand thosein theCommonwealth, have adopteda dogmaofinsuranceas a
personalcontract, howeverharshtheconsequencesofthatview.
9 As earlyas 1918, ProfessorPattersonarguedthattherewas a considerableindemnity elementin
lifeinsurance;see his article,'InsurableInterestin Life' 18 Col L Rev 381(1918).
In 1957,thesame authorwrotethat:'The EnglishCourts,obedientto a statuteenactedin 1774
have ratherhalfheartedly treatedthe lifepolicyas an indemnity contract';see his Essentialsof
Insurance Law (New York, McGraw-Hill Book Co 1957) 155-

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418 REUBEN HASSON

The secondoption,thatofallowingtheinsuredto recoverhis/her loss fromthe

insurerwhiledenyingsubrogationrightsto the insurerdoes not applyto any
particularbranch of insurancebut courts in the United States and the
Commonwealth areadoptingthisresultbya varietyofdevices."'
Each optionis said to suffer
froma drawback.Optionone allowstheinsuredto
be overcompensated. The second option is said to be inconsistentwith the
conceptof theinsurancecontractas a personalcontractbetweentheinsurerand
theinsured.The objectionto thethirdoptionis thatinsurers aregivena windfall
by thedeviceof subrogation, sinceinsuranceratesare notfixedin anticipation
of
sucha recovery."
The objectionsto optionsone and threewouldappearto be extremely powerful
sincethelaw is supposedto set its face againstwindfalls.
The secondobjection
turnsout to be insubstantial. The reasonwhyinsuranceis a personalcontract
betweeninsurerand insuredis simplybecausein Englandthecourtssaid itwas in
Raynerv Preston.12The courtsmightjust as easilyhaveheldas didtheAmerican
courtsin vendor-purchaser cases,'" thatinsurancewas not a personalcontract.
The social resultsof the Americanapproachare farmorejust thanthe English
approach.
Despite the factthatthe secondoptionhas themostto commendit, it plays
onlya smallpartin thelaw ofinsurance.Optionsthreeandone dominatethefield.

(b) To whichinsurancecontracts doesthedoctrine ofsubrogationapply?

The doctrineof subrogationappliesonlyto contractsof indemnity and in the
Alice-in-Wonderland worldof insurance,life insurancecontractsand accident
insurancecontractswereheldnotto be contractsofindemnity,14 despitethefact
thatit is clearlytheintentionofpurchasersof thesecontractsto indemnifyeither
theirfamilies(in theeventofdeath)or,in theeventofan accident,to compensate
themselvesfortheirlost earnings.Why the loss of propertyshouldbe treated
differently froma loss of an arm,when both resultin economiclosses to the
person who sustainsthemhas neverbeenexplained.
In anyevent,as a resultofnotclassifying lifeinsuranceand accidentinsurance
as contractsof indemnity, an insuredvictimis allowedto accumulaterecoveries
fromas manysourcesas s/hecan. As FlemingJames,"5 Fleming,'6and Atiyah'7
10 See PartIV JudicialAttempts
to CurbSubrogation,
infra.
11 See PartII (b) Subrogationis a costsaver,infra.
I2 (1881) I8 Ch D I (CA) (JamesLJ dissenting).

13 See PartIV (a) Vendor-purchaser, infra.

14 See Dalby v India and LondonLifeAssuranceCo (1854) 15 CB 365 (lifeinsurance);Bradburnv
Great Western Railway Co (1874) LR o0Ex i (accidentinsurance).
I5 See his article,'Social Insuranceand Tort Liability:The Problemof AlternativeRemedies'27
New YorkUL Rev 537 (1952). (ProfessorJamesuses a verywidenotionof'socialinsurance').
16 See his article,'The CollateralSource Rule and Loss Allocationin Tort Law' 54 Calif L Rev
1478(1966).
Again'32 Mod L Rev 397 (1969).
17 See his article,'CollateralBenefits

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 SUBROGATION IN INSURANCE LAW 419

have arguedit is difficultto justifyaccidentvictims'beingable to end up with

enormously highrecoveries,whenotherswho are injuredreceivea pittanceor
haveto dependon welfarepayments.
Canadiancourts(or at leastsomeofthem)seempreparedto nibbleawayat part
of the collateralbenefitsprinciple.The area of battleis in the fieldof disability
insurance.Whilethecourtshave acceptedthattheycannotcall lifeinsuranceor
accidentinsurancecontracts contractsofidemnity, somehave startedto describe
disabilityinsurancecontractsas contractsofindemnity. In OrionInsuranceCo v
Hicks,'8 a Manitobacourtheld that disabilitybenefitsof $35 a week paid for
forty-one weekswereindemnity benefits sincetheywereintendedto compensate
forloss of income.This decisionwas followedby the New BrunswickCourtof
Appealin Levesquev Co-operative Fire & CasualtyCo'9 andbytheOntarioHigh
Courtin Gibsonv Sun LifeAssuranceCo ofCanada.20
On theotherhand,in Mandas v Thomaschke,21Mr JusticeBouckoftheBritish
ColumbiaSupremeCourtrefusedto deductdisability benefits
because'Negligent
conductshouldnot be forgivensimplybecause the injuredpartytook stepsto
provideforhis future security'.22
Finally,in Greenwoodv SparkelJanitorService,23 Mr JusticeTaylorsaid he
would deductbenefitswhichwere meantto replacewages, but he would not
deductsumsthatwere'properly characterized as insurance'.How thisdistinction
is to be operatedwhenvirtually all disability
benefits are meantto replaceloss of
wagesorearningsis quitebeyondme.
If we ignorethe confusionin doctrine,the trendin Canada seems to be to
regarddisabilityinsuranceas beinga contractofindemnity. Fromone anglethis
makesa lot of sense.Disabilityinsuranceis indemnity insurancejust as muchas
life and accidentinsurance.What the courts are doing,however,by calling
disabilityinsurancea contractof indemnity is to draw arbitrary linesbetween
different kinds of insurancebenefits.The problemof rationalizingcollateral
benefits, whetherprovidedby privateor socialinsurance, can onlybe dealtwith
by legislation.The taskofrationalizing thesebenefits is beyondthepowersofthe
SupremeCourtof Canada, let alone the courtsof firstinstancewho have heard
mostofthesecases.

v FictitiousDefendants
(c) FictitiousPlaintiffs
We tendtodayto lookuponlegalfictions as theproductof a primitiveage24and
twentieth century are
lawyers normally quick to attackfictions
as beinga blotch
on thelegalsystem.
18 (1972) 32 DLR (3d) 256.
19 (1976) 68 DLR (3d) 553.
20 (1984) 6 DLR (4th) 746.
21 (1983) 145 DLR (3d) 530.
22 Ibid,536.
23 (1983) I45 DLR (3d) 71I.
24 Thus, ProfessorFuller'sLegal Fictions(StanfordUniversity
Press 1967) makes no mentionof
or anyothermodemlegalfiction.
subrogation

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420 REUBEN HASSON

Yet in thefieldof subrogation,

thepresenceoffictionsseemsto escapenoticeas
well as criticism.In subrogationnot only do we invariablyhave a fictitious
plaintiff who is suingin thenameof theinsuredbut veryoften-perhapsin the
vast majorityof cases-a fictitious defendant.Sometimesthe courtsare aware
that the contestis betweentwo insurancecompanies.25 In othercases, judges
speculate that the is
contest between twoinsurancecompanies.26
Insurancecompaniesuse thedeviceofthefictitious plaintiffbecausetheythink
it will increasetheirchancesof successin litigation.27
Whethertheydo in fact
increasetheirchancesofrecovery is notsomething thatcan be proved.
It maybe thatin at leastsomecases,insurersgainan advantagebysuingas the
XYZ companyinsteadof suingas theXYZ insurancecompany.A courtmaybe
morelikelyto findforprivateuninsured individualsthanforan insurer.
In the UnitedStates some defendants have successfullymovedto dismissan
actionon thegroundthattheinsurerand nottheinsured,was the'real partyin
interest'.In Ellis CanningCo v InternationalHarvester,28theSupremeCourtof
Kansas overruleda numberof previous decisions and held that: '. . . the insurer
may,indeed,mustbringthe actionif one is to be maintained'.29 Similarly,in
Shambleyv JobeBlackleyPlumbing,30 homeowners broughtan actionto recover
damagesto theirhomeresulting fromtheexplosionof a defectivewaterheater
whichthe defendants had warrantedto be safe and suitableforhomeuse. The
defendantbroughtsuit to have the insurerdeclaredthe real partyin interest.
HigginsJ,givingthejudgmentoftheNorthCarolinaSupremeCourtstatedthat:
'Defendantshave the rightto demandthat theybe sued by the real partyin
interest
andnoneother.'31
In orderto counterthisdevelopment, insurancecompaniesbeganto developa
devicecalled the 'loan receipt'.Underthisdevice,theinsurermakesa payment
whichis technically a loan to be repaidout of proceedsof theclaimagainstthe
thirdparty,whichclaimis pledgedto theinsureras security forthe'loan'.32The
receiptcontainsa of
power attorney appointingthe insureragentto collectthis
claimbylegalaction,ifnecessary, in theinsured'sname.

25 See the judgmentof Laskin CJC, for the majority,in Ross SouthwardTire Ltd v Pyrotech
Products(i975) 57 DLR (3d) 248. In thatcase, his Lordshipstatedthat: 'The existenceof the
policy means only that litigationwhich in formis betweena landlordand its tenantis in
substancea contestbetweentwoinsurancecompanies';ibid,253-
26 See the dissentingjudgmentof Cooke J in MarlboroughPropertiesv MarlboroughFibreglass
[1981] I NZLR 464. In thecourseofhisjudgment,his Lordshipsaid: 'It maybe thattheaction
betweentwoinsurancecompanies,butthatis irrelevant';
is in effect ibid,465.
27 See Keeton,InsuranceLaw (St Paul,Minn,West 1971) 156-8.
28 255 P 2d 658 (1953).
29 Ibid,659-'
30 142 SE 2d I8 (1965).
31 Ibid,20.
32 See the excellentcomment,'The Loan Receiptand Insurers'Subrogation:How to Becomethe
Real Partyin InterestWithoutReallyLying'5o TulaneL Rev I 15 (1975).

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 SUBROGATION IN INSURANCE LAW 421

Deplorablethoughthisdeviceis, it is important to realizetheseverelimitations

ofthe'real partyin interest'rule.This deviceenablesthedefendant to showthat
is an insurancecompany.However,thisshowsonlyone side of the
the plaintiff
picturebecause 'the real defendantin mostof thesecases is also an insurance
companywhichcannotbe sueddirectly underprevailing practiceand so also hides
behindthe skirtsof an insuredindividualor businesscorporation'.33 Jamesand
Hazard have aptlycommented that'the effectof thispair ofrulesis a spectacle
even moreunedifying than the classic action in ejectmentwherethe fictitious
natureofthenominalpartieswas at leastso palpablethatitcouldfoolnobody'.34
So long as we have a doctrineof subrogation, therecan be no justification for
concealing the true of in
identity parties litigation. The idea of lettinginsurance
companiesuse disguisesso as to influence theoutcomeof a case is an obscenity
whichshouldnotbe tolerated in a civilizedlegalsystem.
Unfortunately, there is no signthatlegal scholarsin theCommonwealth have
begun to address thisproblem.

II. THE ALLEGED GOALS OF SUBROGATION

It is difficult
to writeaboutthegoals of subrogation
sinceto mostcommentators
the doctrineappears to be so just as not to need anyjustification.
However,
various rationaleshave been advancedby insurancecompanyrepresentatives,
academicsandjudges.

(a) Subrogationis necessary

forthesurvivaloftheinsuranceindustry
According to one insuranceexecutive:'Effectivesubrogation practicesbyinsurers
can mean thedifference betweenan underwriting or a
profit loss.'3"Thereis no
descriptionof what is meantby 'effective'.
Does it meanthesame as aggressive?
The statisticsthat are providedmake it extremely unlikelythat the amounts
recoveredthroughsubrogation are likelyto provethedifference betweena profit
andloss.
Thus, in 1972 fire insurancecompanies in the United States paid out
Subrogation recoveries amounted to $6,621,000 a net recoveryof
$973,636,ooo000.
0.68 per cent of paid losses.36Again, considerthe figuresfor homeowners'
insuranceprovidedby thesame author.In 1972,homeowners' claimspaid by the
insurance industry came to $1,636,147,000. Subrogation recoveries totalled
$13,089,000 a netrecovery
ofo.8o percentofpaidloss.37These sumsappeartobe
too trivialto makemuchdifference
to anything.
In theabsenceofmorecompelling

33 See James& Hazard,Civil Procedure(Boston,Little,Brown& Co 1977) 400.

34 Ibid,400oo--o.
35 See Meyers,'SubrogationRightsand RecoveriesArisingOut ofFirstPartyContracts',9 Forum
83 (1973). The authoris SeniorVice PresidentofCrumand ForsterInsurancecompanies.
36 Ibid,84-5.
37 Ibid,85.

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422 REUBEN HASSON

evidenceit is impossibleto arguethatsubrogation

is necessaryto keepinsurance
companiessolvent.

(b) Subrogationis a costsaver

The notion that insurancecompanies might after taking 'net subrogation
recoveries'intoaccountbe able to offertheircustomers lowerpremiums has been
advancedby two authors.This argument is statedwithoutanydoubtsby R. C.
Horn in this book,Subrogationin InsuranceTheoryand Practice38and, more
tentatively,by ProfessorMcCoid in his articleon the Allocationof Loss and
Property Insurance.39
The difficultywiththistheoryis thatit fliesin thefaceof theinformation we
haveabouttheworkings ofsubrogation.
In the firstplace as ProfessorPattersonpointedout in 1957,'[Subrogation]
plays no part in rate schedules'.40 This statementis unchallengedby Horn,
McCoidor anyotherauthority.
Patterson'sstatementis supportedby evidencethatinsurersdo not seemto
take subrogation recoveriesinto accountwhenfixingpremiumsfortheirpolicy
holders.Thus, Pattersonfoundthat insurersmade 'no reductionin insuring
interestssuch as thatof the securedcreditor, wherethe subrogation rightswill
obviouslybe worthsomething'.41'Anotherresearcher foundthatin issuingfire
insurancepolicies,insurerschargedthe samerateswhetheror nottherewas the
possibilityof subrogation recoveries.42
Finally,Professor Keetondiscoveredthat
fromthe 1950's 'it becamepossibleto obtainan endorsement on a lessor'sfire
policyby whichtheinsurerwaivesanyrightofrecovery againsta tenantforloss
to insuredproperty. also,no additionalpremium
Ordinarily, is chargedforsuchan
endorsement.'3
Second,if subrogation recoverieshelpedreducepremiums, one would expect
insurancecompaniesto pursuesubrogation recoveriesaggressively.But this is
preciselywhattheydo not do. In Englandand Canada, motorinsurerspursuea
'knock-for-knock' agreementwith othermotorvehicleinsurers.44 In England,
38 (Homewood,Illinois,R. D. Irwin,1964)25.
39 39 Indiana LJ 647 (1964).
40 See his,EssentialsofInsuranceLaw, (New York,McGraw-HillBook Co 1957) 151-2.
41 Ibid, 152.
42 See notein 72 Harv L Rev 1380,1382
(1959)-
43 See Keeton,supra,n 28, 209.
44 In England'knock-for-knock' agreements werefirstmade soon aftertheformation oftheearliest
motor insurancecompanies at the beginningof this century;see Richard Lewis, Insurers'
Agreements Not to EnforceStrictLegal Rights:BargainingwithGovernment and in theShadow
ofthelaw 48 Mod L Rev 275 (1985).
In Canada, mostautomobileinsurersare partyto a multilateral
agreement wherebytheyagree
in appropriatecases to apportionloss. The agreementonlyapplieswherethe vehiclesinvolved
carryvalid thirdpartyliabilityand collisioninsurance.The damage to any vehiclemust not
exceed$Io,ooo. If theinsurersdisagreeon thefacts,theymayhaverecourseto arbitration under
the 'Inter-Company ArbitrationAgreement'. This agreementappliesto collisionlosses of up to
$2,500in anyone accident;see Brown& Menezes,supran I, 334-

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 SUBROGATION IN INSURANCE LAW 423

thereis also an agreement betweenmembersoftheFireOffices Associationnotto

pursue subrogationrecoveries,45and an agreementby the BIA not to pursue
subrogation in
rights employers' liability
policies.46
The reasonwhysubrogation recoveriescannotplayan important partin fixing
insurancepremiumsis because most subrogatedclaims are, in effect, contests
betweentwo insurers.In this stateof affairs, it willnotbe enoughto compute
subrogationrecoveries.One would also have to take into accountsubrogation
liabilities.Since one would expect subrogationrecoveriesand subrogation
liabilitiesto cancel each otherout on a 'swings and roundaboutsbasis', it is
difficultto see howsubrogationcouldhelplowerrates.
In sum,it seemsmostunlikely thatsubrogation can haveanyappreciableeffect
on thecost of premiums.On theotherhand,by requiring overlappingpremiums
and especiallythe occasionalexpensivelawsuit,it would seemthatsubrogation
mightwellhavetheeffect ofmakinginsurance moreexpensive.47

(c) Subrogationis a deterrent

againstnegligentbehaviour48
It is clearthatsubrogation is justifiedby some as a deterrent
againstnegligent
behaviour.It is truethatfewjudgeswouldbe as outspokenas ViscountSimonds
in Lister v RomfordIce and Cold Storage,49when he wrote: '. . . to grant the
servantimmunityfrom such an action would tend to create a feelingof
in a class of personsfromwhom,perhapsmorethananyother,
irresponsibility
but I expectthatveryfewjudges
constantvigilanceis owed to thecommunity',"5
in theUnitedStatesand theCommonwealth woulddissentfromLord Diplock's
statementin Doughtyv TurnerManufacturing Co51whenhe said that:'Thereis
no roomtodayformystiquein thelaw ofnegligence. It represents
theapplication
ofcommonmorality andcommonsenseto theactivitiesofthecommonman.'52

45 'Knock-for-knock'agreements limiting bothcontribution andsubrogation infireinsurancecases

followed thedecisionoftheEnglishCourtofAppealinNorthBritish& Mercantile Ins Co v
Liverpool, London& GlobeInsCo (1877) 5 ChD 569.TheFireOffices Committee (representing
mostofthefireinsurers) haverevisedtheiragreement on severaloccasions;see Lewis,supra
n 44.
46 The first oftheseagreements was entered intoafterthedecision in Listerv Romford Ice and
Cold StorageCo [i957] AC 555.Therehavebeensubsequent revisions oftheagreement; see
Lewis,supran 45.
47 See e.g. Kimballand Davis,'The Extension of Insurance Subrogation' 6o MichL Rev 841
(1962).The learnedauthors write:'. . . repeatedtransferoflossesis an expensivematter, and
sociallyitis muchmoreefficient tohandlethemoney onlyonce,especiallyiflitigation
costscan
thereby be avoided';ibid,871.
48 I havedrawnhere,andatotherpartsofthisarticle onmycasenote,'Blindfolding theCourts: A
Further Comment onPhotoProduction v Securicor'5 CanadianBusiness LJ498(198i).
49 [I957]AC555-
50 Ibid,579-
51 [1964]1 QB 518(CA).
52 Ibid,531.

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424 REUBEN HASSON

There are, however,formidabledifficulties in using subrogationto deter

negligent behaviour. In the firstplace, as ProfessorLangmaidarguedin a famous
articlein theHarvardLaw Reviewfifty yearsago, most negligent behaviouris of
sucha trivialkindthatdeterrence makesno sense.53 To be sure,twoof thecases
Langmaidoffered as examples,Mason v Sainsbury54 and Clark v Inhabitantsof
Blything,"s are now only of historic In
interest. those cases, an insurerwas
subrogated to the insured'scause ofaction againstthe hundred undertheRiotAct
1720.56 But some of Langmaid's examples are apt; he queried the utilityof
bringingsubrogated claims against employers respect of minor acts of
in
negligence committed by their employees."5 He also queriedthe justice of a
decisionin whichan innocent converter was heldliablein a subrogated claim."
Second, if we trulybelieved that subrogationclaims deterrednegligent
behaviourby corporationsand individuals,the sensiblestep would be to ban
liabilityinsurance.The argumentthatsubrogation claimspromotesafetynot in
theindividualcase butbyincreasing for
premiums delinquent companieswithbad
accidentrecords,"is mostunlikely to be truebecause insurancecompaniesvery
infrequently bringsubrogated claims.60
Next,ifwe tookthedeterrence argument seriouslywe wouldnotallowinsurers
to insureboth the insuredand the potentialtortfeasor. We knowfromvarious
sources61 thatthisis a frequentoccurrence. A law makingsurethatthe insurer
could not insureboth sides of the bargainwouldnot be easy to draft.But one
couldat leastprovidethatthesameinsurercouldnotsay,insurebothvendorand
purchaser, landlordandtenant,contractors andsubcontractors.
The real deterrent againstnegligent behaviour on thepartofcorporations is not
thepossibility of subrogated claims,against which are
they insured, anyin event.
The realdeterrent againstnegligent behaviourin thecase ofa corporation is the
fear of the loss of businesswhich may followan accident.So far as using

53 'Some RecentSubrogationProblemsin the Law of Suretyshipand Insurance'47 Harv L Rev

976 (I934). The same themewas expressedin an influentialarticlebyKing,'Subrogationunder
ContractsInsuringProperty'30 Texas L Rev 62
(i95,).
54 (1782) 3 Doug. 61.
55 (1823)2 B & C 254
56 For a briefdescriptionof remediesagainstthe hundredunderthe Riot Act 1720, see 5 Law
Magazine 132(1831). (I am indebtedto mycolleagueDouglas Hay forthisreference.)
57 See supran 55, 988.
58 See PotomacIns Co v Nickson(1924) 231 P 445-
59 See e.g. Fleming,'The Role ofNegligencein Modem Tort Law' 53 Va L Rev 815, 825 (1967).
6o See textat ns 37-8 and 45-7, supra.
61 See e.g. A. V. Alexander,'The Law of Tort and Non-PhysicalLoss' 12 JSPTL (NS) I19 (1972)
122 wherethe author,ManagingDirector,SedgwickCollins& Co Ltd writes:'Not infrequently
one sees the ratherabsurd spectacleof a fireinsurerseekingto exerciserightsof subrogation
againsta thirdpartywho is insuredby theliabilitydepartment ofthe sameinsurancecompany';
see also to the same effectthe Financial Times for 25 February1980 quoted by Nicol and
Rawlingsin theirnote,'SubstantiveFundamentalBreachBurntOut' 43 Mod L R 567, 571, n 34
(1980).

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 SUBROGATION IN INSURANCE LAW 425

subrogatedclaimsto deterindividualbehaviouris concerned, I can do no better

thanto quotethereportoftheNew YorkStateInsuranceDepartment as a means
of achievingsafetyon the roads: 'Individual,last-moment, drivermistakes-
undeterred by fearofdeath,injury,imprisonment, fineor loss oflicence-surely
cannotbe deterred byfearof civil which
liabilityagainst one is insured.'62
It is perhapssignificant
thatno representative oftheinsuranceindustry has,to
thebestofmyknowledge, madetheclaimthatsubrogated claimsdeternegligent
behaviour.It wouldappearthatjudges accepttheefficacy offaultnotionsmuch
morereadilythando representatives oftheinsuranceindustry.
III. THE REAL FUNCTIONS OF SUBROGATION
(a) Subrogation and overlapping coverage
The main functionof the subrogationdoctrineis that it requiresoverlapping
insurancecoverage.Thus,in a sale boththevendorand thepurchaser willhaveto
insurethesamepieceofproperty, unlessthepurchaser wishesto paya substantial
sum of money for 'a charredruin'.63Again, in the mortgagee-mortgagor
relationship,it will be prudentforthe mortgagor to protecthis/herinterestby
taking out insurance.64 In both thesecases, two policiesare beingtakenout to
coverone risk.This is therealattractionofsubrogation forinsurers.
The situationbecomeseven morepromisingforinsurersif we considerthe
situationofa landlordanda commercial tenant.In thiscase,boththelandlordand
tenant will carryinsuranceon the same building.In addition,the tenant's
employeeswould be well advisedto carryliabilityinsurance.Similarly, people
who supplythe tenantwithgoods would be well advisedto take out liability
insurance,as wouldpeoplewhocometo effect repairs.Thus, in thissituationfive
of
groups peoplemay wellbe payinginsurance premiums in respectofonerisk.
If the insurancecompanies'interestlies in being able to recoverseveral
premiumsin respectof one risk,it mightbe askedwhytheybotherto sue at all.
One answermustbe that,theoccasionalactionis necessaryto makesurethatall
potentialtortfeasorsand potentialcontract-breakers maintaintheir liability
insurance.If insurersdid not bringany subrogatedclaims,thensome potential
tortfeasorsmightcease to procureoverlapping coverage.
Anotheranswermustbe that individualinsurerssee theirinterestas being
different fromthe aggregateinterestand pursue theirindividualinterestby
bringing subrogated claims.
(b) Subrogationand wastefullitigation
Threeexamplesofwastefulsubrogated cases appearedin Englishcourtsrecently.
In Harbutt'sPlasticineLtd v WayneTank and PumpCo Ltd65thedefendants
agreedwiththeplaintiffsto designand installequipmentforstoringstearinein a
62 See theirreport,Automobile Insurance... for WhoseBenefit?(New York,1970) 12.
63 See Thompson,supran 2.
64 The parties,in thisarea,can avoidoverlappingcoveragebyusingtheStandardMortgageClause.
65 [1970] I QB 447 (CA).

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426 REUBEN HASSON

moltenstate. For this purpose,the defendantsspecifieddurapipewhich was

whollyunsuitablebecauseit was liableto distortat temperatures above I870F. A
firewas causedwhenthedurapipedistorted underheatcausingmoltenstearineto
escape and ignite.Despitethepresenceof a broadexemption clause,theCourtof
Appeal, in a decision that attracted a great deal of criticism,66held that the
defendant had beenguiltyofa fundamental breachandwas liableto pay?172,966.
Despite thefactthatit had drafteda verywide exemptionclause,thedefendant
had takenout liabilityinsurance.In a secondaction,arisingout ofthissaga,the
defendantsued one of its insurersin a case whichwas heardby the Courtof
Appeal.67No one knowsthecostof shifting theloss of?172,966fromone insurer
to anotherbut one can be certainthat the cost was veryhigh. It is in this
connectionthat ProfessorAtiyahhas pertinently asked 'would the decision[in
Harbutt'sPlasticine]have been muchmoresensiblein policyeven if therehad
beenno exclusionat all?'68
Next,in Home Officev Dorset Yacht,69sevenBorstalboys escapedfromthe
supervisionof threeofficers and damagedthe plaintiff's yacht.The cost of the
damage to the yachtwas ?D3I5 13s. 8d.70 The insurer havingmade good the
damage, now a
brought subrogated claim against the Crown. In this case, it is
clear that the cost of shiftingthe loss fromthe insurerto the Crownvastly
exceededthe smallamountof moneypaid out by theinsurer.One mightseekto
justifythisfiascoby arguingthattheirLordshipsreviewedfullythe systemof
supervision ofborstalboysbut as Lord Dilhornepointedout severaltimesin his
dissent,the courts are not a suitable institutionfor determining rules for
compensating property claims and, at the same time, trying to determine good
penalpolicy.7'

66 See e.g. Legh-Jonesand Pickering,'Harbutt'sPlasticineLtd v Wayne Tank and Pump Co:

FundamentalBreachand ExemptionClauses,Damages and Interest'86 Law Q Rev 513 (1970);
Coote,'The Effectof Dischargeby Breachon ExceptionClauses' 28 CLJ 221 [197o] and notes
byWeir28 CLJ 189 and Baker,33 Mod L Rev 441 (1970).
67 See WayneTank and Pump Co Ltd v Employers'LiabilityAssuranceCorp Ltd [I974] QB 57.
WayneTank wereunsuccessful is to be givento thisfact.
in thisactionbut no greatsignificance
The policycouldeasilyhave beenreadso as to giveWayneTank protection.
68 See his reviewof Waddams,'ProductsLiability'26 U TorontoLJ ii8, 120 (1976). For a fuller
critique of the doctrine of subrogation see Atiyah, 'Property Damage and Personal
Injury-DifferentDuties of Care?' In T. Simos (ed), Negligenceand EconomicTorts:Selected
Aspects(Sydney,theLaw Book Co i980) 37 esp 41-50.
69 [i970] AC 1oo4.
70 Ibid, Ioo8.
71 Ibid, o1045,1048, 1051. The same idea was expressedmoreconciselyby Lord DenningMR:
'Many,manya timehas a prisonerescaped-or been let out on parole-and done damage.But
thereis nevera case in our law books whenthe prisonauthoritieshave been liable forit. No
householderwho has been burgled,no personwho has been woundedby a criminal,has ever
recovereddamages fromthe prison authoritiessuch as to finda place in the reports.The
householderhas claimedon his insurancecompany.The injuredman can now claim on the
compensationfund.None has claimedagainstthe prisonauthorities. Shouldwe alterall this?I

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 SUBROGATION IN INSURANCE LAW 427

A thirdcase whichshowsthecostsof trying to shiftan insuredloss fromone

insurerto anotheris PhotoProduction Ltd v SecuricorTransportLtd.72In that
case it willbe remembered that the
Musgrove, patrolman employedby Securicor
caused a loss by startinga smallfirewhichgot out ofcontroland destroyed the
insuredfactory belongingto PhotoProduction.Photo Production's
insurers failed
intheirsubrogated claimbecausetheexclusionclauseprovided:
shallthecompany
underno circumstances foranyinjurious
be responsible actordefault
byany employeeofthe company such
unless actor could
default havebeen foreseen
and
avoided onthepartofthecompany
ofduediligence
bytheexercise andhisemployer.

Althoughthe attemptby Photo Production'sinsurersto shiftthe loss to

Securicor'sinsurers failed,"thecostofattempting to shiftthelosswas enormous.
It is important to notethatslightly differentfactsin PhotoProductionmight
haveproduceda different result.Thus, supposethat:(i) theemployeewhocaused
the firehad been dismissedforrecklessness fromhis previousemployment ten
yearsago or; (2) that the employee who set the firehad been sentby Securicor
despiteSecuricor'sknowledgethatthisemployeehad beenundergreatemotional
strainbecausehis wifeandchildren had beenkilleda weekearlier.
In either(or both)of thesecases, Securicormightwellbe heldto have acted
without'due diligence'.74 In this case, Photo Production'sinsurerswouldhave
been able to shifttheloss to Securicor'sinsurers. Moreover,Securiormighthave
had to sue its insurersas did WayneTank in orderto be indemnified.75 However
beneficial all thisactivity
might be to insurance companies,lawyers, textbookand
note writers,it can be seen as an activitythat is scandalouslywasteful.It is
difficultto believethatthiskindofwastewouldbe tolerated in thepublicsector.

(c) Subrogationas thedestroyeroftheutilityofinsurancecontracts

Although the most seriouschargesagainstthedoctrineofsubrogation arethatit
promotesoverlappingcoverage and wasteful the
litigation, doctrinecan also

shouldbe reluctantto do so if,by so doing,we shouldhamperall thegood workbeingdoneby

our prisonauthorities' [1969 2 QB 412,426.
72 [1980] AC 827. It is that this case like Harbutt'sPlasticine(see textsupra n 65),
interesting
shouldbe dealtwithin contracttextbooks, whileDorset Yacht(see textsupran 69) findsitsway
intotortstextbooks.None of thesecases is discussedin an insurancetext,althoughthecentral
problemin all threecases is one ofinsurance.
73 Photo Productionwere insuredexcept for a deductibleof ?25,ooo, while Securicorcarried
liabilityinsuranceexceptfora deductibleof ?Io,ooo; see thejudgmentof Lord DenningMR
[1978] WLR 856,866.
74 There is a considerablebodyof case law on thequestionofwhethertheinsuredactedwith'due
diligence';see e.g. Woolfalland RimmerLtd v Moyle [1942] I KB 66 (CA); Fraser v B. N.
Furman (Productions)Ltd, Miller Smith & PartnersThird Party [1967] I WLR 898 (CA);
Hartley v Provincial InsuranceCo Ltd [I9573 I Lloyd's Rep 121. How much assistancethe
courtswillderivefromthisbodyofcase law is, indeed,problemantic.
75 See supran 67.

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428 REUBEN HASSON

renderworthless(or, at least,substantiallyundermine) thevalue of an insurance

contract.
For example,in an employer'sliabilityinsurancesituation,subrogationmay
substantiallydestroytheutility oftheinsurancecontract bothfromtheemployer's
pointof view and that of its employees.In thefirstplace,iftheinsurerbringsa
subrogatedclaim,theemployer maywellbe facedwitha strike,76 whichwillend
onlyafterit has the a
compensated employeeagainstwhom subrogated claimhas
beenbrought.Even ifno strikeoccurs,theemployer maywellfeelthatit should
compensatea valued employeeit does not want to lose. Here, the utilityof
employers'liabilityinsuranceis undermined bythedoctrineofsubrogation.

IV. JUDICIAL ATTEMPTS TO CURB SUBROGATION

Judicialattemptsto curb the doctrineof subrogationin variousspheresare of

considerable antiquitybutit is onlyin thelasttwoorthreedecadesthatthecourts
have begunto curbtheoperationof subrogation withanydegreeof enthusiasm.
Courtsin theUnitedStateshave,fromthebeginning, beenfarmoreenergetic in
curbingsubrogationthanhave courtsin the Commonwealth."7 But even in the
UnitedStates,thestateoflegaldoctrinein thisarea is highlyproblematic. In the
to knowwhatthelaw in manystatesis. Second,many
firstplace,it is difficult
decisionscurbingsubrogation stillleave it open fortheinsurerto outflankthese
decisionsbychangingthelanguageofthepolicy.

(a) Vendorandpurchaser
In 1853, the SupremeCourt of Pennsylvaniaheld in State Farm Mutual v
thatthedoctrineof subrogation
Updegraff,78 wouldworksuch'hardship'on the
vendee,thatthedoctrine ofsubrogation couldnotbe allowedto operate.In Reedv
Lukens79 decidedin 1863,thesamecourtdecidedthataftera contractforthesale
ofrealestatehad beenexecuted,thepurchaser becametheequitableownerofthe
property In 188o,the
and was 'entitledto all the advantagesof the contract'.s0
a
SupremeCourtofNew Hampshireheldthat subrogated claimby insurerwas
an
of
defeatedbythedefence frustration.8'
In any event,by 1925 most US jurisdictionshad adoptedthe rule that the
vendorreceivedinsuranceproceedsforthebenefitof the purchaser.82 But some
continued
jurisdictions to follow the prevailingEnglishrule. in
Thus, 1925 the
76 Lord Denning MR expresslyreferredto the possibilityof a strikeif an insurerbroughta
subrogatedclaim; see Morrisv Ford[1973] QB 792,798.
77 It is possible that the writingsof scholarssuch as Patterson,Langmaid,King, Keeton and
Kimballhave had a considerableeffect on thecourts.
78 (1853)21 Pa 513.
79 (1863) 44 Pa 200.
80 Ibid.
81 (188o) 60 NH 352.
82 See e.g. notes in 34 Yale LJ 87 (1924) and 25 Col L Rev 477 (1925)-

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 SUBROGATION IN INSURANCE LAW 429

New York Courtof Appealsheld in Brownellv Board of Education,83 thatit

wouldnotfollowthemajority US rule.The decisionin Brownellwas modified by
the subsequentdecisionof the same courtin Raplee v Piper.84In thatcase, the
Courtdecidedby a majority of4-3 thattheBrownellruledidnotapplywherethe
contractofpurchaserequiredthepurchaser to paythefireinsurancepremiums. It
is difficultto see whyany importance shouldbe givento whetherthepurchaser
paid the premiums.This seemsto be no morethanan accountingdevice.The
viewofLloydJin 'The Yasin'"5thatit cannotmatterwhopaysthepremiums has
muchto commendit.86
But whateverthe uncertainties of theAmericandoctrine, the positionin that
is
country preferable to the situation in the United KingdomwheretheEnglish
Court of Appeal held in Raynerv Preston,87 thatthe vendordid not hold the
insuranceproceedsforthepurchaser. In Castellainv Preston,88 theinsurers added
insultto injuryby successfully arguing that as thevendor had not suffereda loss,
theinsurerscouldrecovertheproceeds.The effect ofall thisis, as Mr Thompson
pointsout 'theinsurers receivethebenefit ofa premium withouthavingto payon
theoccurrence ofa specifiedevent'.89
The provisionsintroduced by section47 ofthe1925 Law ofProperty Actareso
obscureand uncertain,90 thatit is thoughtto be prudentforthepurchaser to take
outhis/her owninsurance.
The AustralianInsuranceContractsAct 1984,91section50 providesthesimple
solutionto thisproblem.The sectionprovidesthatwherethepurchaser agreesto
'the
purchaseproperty, purchaser shall be deemed to be an insured under the
contractof insuranceso faras thecontractprovidesinsurancecoverin respectof
loss or damageto theproperty.'92

(b) Thepurchaserofpersonalproperty
In at least one case, an Americancourthas refusedto apply subrogationto
contractsof personalproperty. In theMatterofFutureManufacturing Co-op93
concerneda conditional salescontract thebuyerofequipment
requiring to procure
insuranceforthebenefitof the seller.The buyerfailedto procureinsurancebut
the sellerdid so. Whenthe property was destroyedby fire,the insurerpaid the
sellerand soughtto be subrogatedagainstthebuyer.ChiefJudgeGoodmanofthe
83 (1925) 146 NE 330.
84 (1957) 143 NE 2d 919.
85 [1979] 2 Lloyd's Rep 41.
86 Ibid,56.
87 (188I) Ch D I (CA).
88 (1883) 11 QBD 380 (CA).
89 See his article, supra n 2, 51.
90 See Thompson, supra n 2.
91 Law 80 of 1984.
92 S 50 () F(c).
93 (0958) 165 F Supp (ND Cal).
ii1

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430 REUBEN HASSON

Northern CaliforniaDistrictCourtheldthatthesubrograted claimmustfail.The

judge was greatlyimpressedby the factthat: '[subrogation] givesthe insurera
windfall,if as appears to be normallythe case, its rates are not fixedin
anticipationof such a collateralrecovery'.94The judge thenappliedthecases on
real propertyin which the courtshad denied subrogationrightsagainstthe
purchaser."The weaknessof thejudgmentis thatthejudgeexpressly statedthat
theresultofhis decisioncan be reversedbytheinsurerwritingintothecontracta
powerto claimsubrogation againstthepurchaser.96
There are two seriousproblemswiththiscase. In the firstplace,thereis no
indicationof how manyjurisdictionswill followits lead. In the one case that
appearsto have consideredit, the New JerseySupremeCourtin Flint Frozen
Foods Inc v Firemen'sIns Co97rejectedthe reasoningin FutureManufacturing
Co.
The secondproblemwithFutureManufacturing Co is thatthedecisioncan be
nullifiedby the insurermerelywritinginto the policy an express rightof
subrogation.

(c) Mortgagorand mortgagee

The Americancourts seem to have done nothingto curb the operationof
subrogationin thefieldof mortgages."9Fortunately,the problemnow seemsto
have been solvedby the nearlyuniversaladoptionof the standard(or union)
mortgageclause." Underthisdeviceboththe mortgagee are
and themortgagor
named as insuredsand the principlethat an insurercannotclaim subrogation
againstitsown insured, eliminates
virtually subrogation fromthisareaofthelaw.
Subrogationwillbe possibleifsome on
neglect the of
part themortgagor prevents
his/herrecovery themortgagor
againsttheinsureron thepolicy.In thissituation,
will not be consideredan insuredand the insurerwill be able to enforce
subrogationrightsagainstthemortgagor.

(d) Landlordand tenant

Probablythe mostdrasticcurtailmentof subrogationrightsbothin the United
StatesandintheCommonwealth has comein thefieldoflandlordandtenant.

94 Ibid,13.
i
The learnedjudgecitedin supportof thisproposition, under
King,'Subrogation
Contractsinsuring 30 TexasL Rev62(195i) anda note,'Subrogation
Property' to
oftheInsurer
Collateral
RightsoftheInsured'28 ColL Rev202 (1928).
95 Seetextsupran 78-82.
96 See supran 93,Ii6.
97 (1952)86 A 2d673-
98 Seee.g.CityofNewYorkInsCo vAbraham (1944)2o So 2d t83-
99 For an excellent of theStandardMortgage
briefdescription clausesee Keeton,supran 27,
I87-9.

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 SUBROGATION IN INSURANCE LAW 431

The insurer'srightto claim subrogationrightsagainsta tenantwho caused

damagenegligently to the landlord'sproperty
seemsto have been unquestioned
until1950.100
In thatyearGeneralMillsv Goldman'o'was decidedbytheEighthCircuitCourt
ofAppeals.In thatcase,thetenantnegligently causeddamagebyfire.The clausein
thelease exemptedthetenantfrom'loss byfire'.By a majority, theEighthCircuit
CourtofAppealsheldthatitwas clearlythelandlordandtenant'sintention tocover
fireswhichwerenegligently begun. There are two with
difficulties thisargument; in
the firstplace,the courtshad previously held thatif a tortfeasoris to be given
exemptionfromnegligence, thismustbe done by clearwords.'o2Secondly,the
intention ofthelandlordand tenantcan haveno bearingon theinsurer'srightsof
subrogation.To take an extremeexample: suppose that a landlordexpressly
exemptsthetenantfromliabilityfromharmnegligently caused.In thiscase, it is
clearthatthelandlordwillbe liabletotheinsurer forinterfering
withitssubrogation
rights.'03
Whateverthetechnical shortcomings oftheGoldmandecision,itwasfollowed by
theSupremeCourtofIllinoisin Cerny-Pickas & Co v C. R. Jahn& Co'04andby
theSupremeCourtof Ohio in US Fire InsuranceCo v Phil Mar Corp.t05 On the
otherhand,in Poloskyv FirestoneTire and RubberCo'06theMissouriSupreme
Courtalloweda subrogated claimagainsta tenantincircumstances verysimilarto
thethreecasesexempting thetenantfromliability a
against subrogated claim.
The difficultywiththeAmerican cases is thatno oneknowswhether theywillbe
followedinotherUS jurisdictions. Moreover, sincetheydependontheconstruction
of the exemptionclause in thelease, theycan be construedin different waysby
differentcourts.
The assaulton subrogation in theareaoflandlordand tenanttookplacealso in
Canada. In three decisions decided by the Supreme Court of Canada,
Cummer- Yonge InvestmentsLtd v Agnew-SurpassShoe Stores,'07 Ross
SouthwoodTirev Pyrotech ProductsLtd0osandin T. Smithv EatonCo'09thecourt
held thatthe insurercould not be subrogatedagainsta negligenttenantwhere
either;(i) thelandlordhad covenanted to insure;and/or(2) thetenanthad agreed
to paythepremiums. I havecriticized
thedecisionsat somelengthelsewhere."To

Soo See Keeton, supra n 27, 209.

F 2d 359 (8th Cir).
1oI (1950) 184
I02 See 32 Am Jur 669 (194I); 'Landlordand Tenant' 51 Corpus Juris Secundum, 1162 (1947).
103 See e.g. CityofNew YorkIns Co v Abrahamsupran 103.
104 (I955) 131 NE 2d ioo.
105 (1956) 139 NE 2d 330.
io6 (1961) 349 SW 2d 847.
107 [1976] 2 SCR 221; (1975) 55 DLR (3d) 676.
2 SCR 35; (1975) 55 DLR 3d 248.
Io8 [1976]
109 [1978] SCR 749; (1977) 92 DLR (3d) 425.
Io See Hasson, 'The SupremeCourtof Canada and the Law of Insurance'14 OsgoodeHall LJ
769, 779-82 (1976).

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432 REUBEN HASSON

maketheinsurer'srightof subrogation dependon formalfactorssuchas whether

the landlordcovenantedto insurethe premisesor whetherthe tenantpaid the
premiums,seemedto me to makethe insurer'srightof subrogation dependon
arbitraryfactors.A decisionwhichheldthatsubrogation had no applicationin the
fieldoflandlordandtenantbecauseitwas wastefulandbecauseitgavetheinsurer
an unjustified
windfallwouldhavemade sensebutthecourtchosenotto takethis
route.In thesethreecases,theemployees ofthelesseewerealso suedbut,in each
case,theywereeitherimplicitly or explicitly
exonerated."'
Those peoplewho thought theyhad heardthelastofsubrogation in thefieldof
landlordand tenantreceiveda rudeawakeningwith thedecision theSupreme
of
Courtof Canada in GreenwoodShoppingPlaza Beattie.112In thatcase, the
v
landlordhad covenantedto insurethe premises.A fireoccurredas a resultof
negligenceon thepartofthetenant'semployees.Underthecase law formulated
by theSupremeCourt,"3theinsurercouldnotsue thetenantand,byimplication,
thetenant'semployees. The insurer, however,soughtto bringa subrogated claim
the
against negligent employees who had caused thefire.This claim was rejected
with some vigour by the Nova Scotia Court of Appeal."14 Speakingfor a
unanimouscourt,McKeiganCJNS saidthatto allowsuchan action:
. . wouldflyin thefaceof commonsense,modemcommercial practiceand labour
I wouldthink
relations. thatan employer ina casesuchas this,anditsemployees,would
takeforgranted theintentto protecttheemployees fromliabilityandnotmerely the
the
entity, employer."'
corporate
The SupremeCourtof Canada reversedthe Nova Scotia Courtof Appealin a
unanimousdecision.Mr JusticeMcIntyre,givingthe judgmentof the court,
seemedunconcerned by its assault on commonsense,commercialpracticeand
labourrelations.Instead,he reliedon Tweddlev Atkinson"6to makeshortwork
of thecase."7 The Court'sopinionis devoidof anyanalysis.Further,it failsto
wereheld liable by the trial
xix In Pyrotechv Ross Southward(197i) ILR I-I59, the employees
court but the Supreme Court, by implication,exoneratedthem. In Cummer- Yonge v
Agnew-Surpass(1970) ILR 1-380, Hartt J foundthe tenantliable in negligencebut not its
employees.The SupremeCourtof Canada dismissedthe claimagainstthe tenantand did not
imposeliabilityon theemployees.Finally,in Greenv T. Eaton (1972) ILR 1-485 (laterEaton v
Smith),theemployeeswereheldliablefordamagenegligently caused.However,thedecisionby
the Supreme Court of Canada that subrogationdid not lie against the tenantmust have
implicitly exoneratedtheemployeesas well.
112 [1980] 2 SCR 228; (1980) III DLR 3d 257. For criticismsof the decisionsee Armyowicz,
'Comment'6o Canadian Bar Rev 467 (1982) and an articleby the same author,'Greenwood
ShoppingPlaza v Beattie and Pettipas:Life Masqueradingas a Contractcase' 8 Dalhousie LJ
216 (1984).
113 See textsupran 107-o9.
114 GreenwoodShoppingPlaza v Buchananet al(I979) 99 DLR 3d 289.
115 Ibid, 295.
I16 (86i) I B & S 393-
117 The Courtdid notconsidertrustor agencyarguments becausethesehad notbeen arguedin the
courtsbelow.

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 SUBROGATION IN INSURANCE LAW 433
evenmentionthefactthatin threepreviousdecisionsoftheCourt,actionsagainst
employeeshad failed."'
The decisionin Greenwoodis a disaster.Unlikethe situationafterListerv
Romford Ice,"9 Canadianinsurershavenotenteredintoa 'gentlemen's agreement'
not to sue negligentemployees.The situationcreatedby thisdecisionmakesa
farce of the court's earlierdecisionson the subject.'20If they had allowed
subrogatedclaims againstthe tenantsin the firstthreecases, thenonly two
policieswouldhavebeenneeded.As a resultoftheGreenwood case,threepolicies
will be required(landlord,tenantand employees).This must be a sourceof
satisfaction butto no oneelse.
to insurers
The threeearlierCanadianSupremeCourtdecisionswerereliedon bytheNew
ZealandCourtofAppealin Marlborough v Marlborough
Properties Fibreglass.121
In thatcase, thelandlordowneda factory whichit had leasedto thetenantwho
manufactured productsthere.In accordancewithits lease, thetenant
fibreglass
insuredthepremisesagainstfire,in thenameofthelandlord.The tenantalso paid
the premiums.A firewhichwas begunby the tenant'snegligencecaused great
damage to the factory.Afterthe damageto the factoryhad been repaired,the
insurerclaimedsubrogation rightsagainstthe tenant.By a majorityof 2-I, the
New Zealand Court of Appeal held that the insurerwas not entitledto be
subrogated.As ProfessorYates has argued,'22 thereis no effectivereplyto the
dissentingjudgment ofCooke Jwho pointed out:
Thereis nothing intheleasetoindicate
positive thattheparties intendedtonegativethe
lessee'sliabilityfor negligence.
I doubtwhetherit wouldeven have crossedthe
draftsman'smindthatthecovenant to insureinthelessor'snamemight havethateffect.
Norcan I see thatan implication to thateffectis necessaryto givetheleasebusiness
On thecontrary,
efficacy. if thelesseeremained liablefornegligenceit had an added
inducement tobe morecareful incarryingonitsbusiness-apointofsomeimportance in
thecaseofa hazardous businesssuchas this.'23
One may admirethejudicial sleightof hand whichhas curbedsubrogationin
somelandlord-tenant cases,but thatsleightofhandhas produceda bodyofcase
law whichis poorlyreasonedandhopelessly confused.

and subcontractors
(e) Contractors
In a few US cases, the courtshave held thatwherethe contractor insuresall
propertyon theconstruction wouldnotbe permitted
site,subrogation againstthe
subcontractor.
The leadingdecisionin thisfieldis thedecisionof theLouisiana

I18 See supra n IiI.

S19 See supra n 49.
120 See text supra n 107-09.
121 [1981] I NZLR 464. But see nowLeisureCentreLtd v BabytownLtd [I984] I NZLR 318 (CA).
122 See his note,Ensuringexemptionbyinsurance3 OxfordJLegal Stud 431, 436 (1983).
123 See n 124, 468.

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434 REUBEN HASSON

CourtofAppealsin LouisianaFire InsuranceCo v Royal Indemnity Co.124 That

decision was followedby the Court of Appeals for the Tenth Circuit in
TransamericaInsuranceCo v Gage Plumbing& Heating Co'25 and by the
LouisianaCourtofAppealin UnitedStatesFire InsuranceCo v Beach,126which
in 1973refusedto overrulethedecisionin theLouisiana Fire InsuranceCo case
decidedin1949.127
Once again,two seriousproblemsarisewiththesecases. In thefirstplace,no
one knowswhether theywillbe followedin otherjurisdictions. Second,in allthree
cases, the courts have held that the insurer can write a policyexpressly preserving
itsrightsofsubrogation againstthesubcontractor.
There is a Canadian analogue to these US decisions;the decisionof the
SupremeCourtof Canada in Commonwealth Construction Ltd v ImperialOil
Ltd.'28 The insurer (suing in the name of thegeneralcontractor) soughtto enforce
subrogation rightsagainst the subcontractor which had negligentlydamagedthe
general contractor's The
property. Supreme Court refused to allow thesubrogated
claimto proceedon twogrounds.The firstis straightforward andneednotdetain
us long; the courtheldthatsubrogatedclaimcouldnot be broughtbecausethe
generalcontractor andthesubcontractor wereco-insureds on thesamepolicy.
The SupremeCourtthenadded a secondgroundforitsdecision.Mr Justicede-
Grandpre, givingtheunanimous judgmentofthecourt,pointedoutthatthevalue
of 'builders'risk policies' would be underminedif therecould be 'resortto
in case ofnegligence 29
litigation byanyoneconnected withtheconstruction'.
To allow subrogation wouldbe to fail'to recognizetherealitiesof industrial
life'.'30Welcomethoughthislanguageis, it is notclearthatthecourtwas saying
that an action against a subcontractor was againstpublic policy.Ratherthe
language of the court suggests that it is relyingon thedeviceoftheimpliedterm.
If thisis so, thenan expresstermreserving therightof subrogation againstthe
subcontractor its
(or employees)"'3 could be maintained.

LiabilityInsurance
(f) Employers'
The atavisticdecisionof the House of Lords in Listerv Romford Ice,132which
gave fullrecognitionin theinsurer's of
right subrogation has now been qualified
by thedecisionoftheEnglishCourtofAppealin Morrisv FordMotorCo Ltd.'33
In thatcase, Cameronhad agreedto perform certaincleaningservicesforFord

124 (1949) 38 So 2d 807-

125 (1970) 433 F 2d 1051 (ioth Cir).
126 (1973) 275 S 2d 473-
127 See supra n 127.
128 [1978] I SCR 317, 328; (1976) 69 DLR (3d) 558.
129 [1978] i SCR 317,328; (1976) 69 DLR (3d) 558,566.
130 Ibid.
131 See GreenwoodShoppingPlaza v Beattie(see textsupran III).
132 See supra n 51.
133 See supra n 76.

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 SUBROGATION IN INSURANCE LAW 435

and to indemnify it against loss or injurytherefrom, whethercaused by the

negligenceof Ford or Cameron. The was
plaintiff an employeeofCameroninjured
by the admitted negligent act of Ford's employee. Ford settledthe plaintiff's
action and broughtthirdpartyproceedingsagainstCameronon the indemnity
clause. Cameronindemnified Ford, thenbroughtin Ford's negligentemployee,
claimingto be subrogatedto Ford's rightto recoverfromits negligent employee
thedamagesandcostsforwhichitwas liable.
The CourtofAppealby a majority of 2-1 heldthatthesubrogated claimcould
not proceed.Lord Denningheld that it was not 'just and equitable'forthe
subrogated claimto proceed.'34His Lordshipadmitted thatthisdefencehad never
beforebeenrecognizedin a case involving a subrogated claim.'35If sucha defence
were to be recognizedwho wouldbe able to use it? Employees,'36 membersof
visitorsto one's home,pedestrians,
one's family,1"' residentialtenants?Perhaps
even an ailinguninsuredcompanycould arguethat it would not be 'just and
equitable'to be on the receivingend of a subrogatedclaim.The standardis an
unworkable one.
The same criticismmustbe made of the 'impliedterm'theoryformulated by
JamesLJ.38 The questionthatimmediately arisesis, in whatothercases is the
'impliedterm'to be used to defeata subrogated claim?The answermustbe-in
thosecases in whichthejudge dislikesthe operationof subrogation. This is no
standardat all. There is anotherdifficulty with the impliedterm theory;
presumably,it can be trumpedby an express term givingthe insureran
unambiguously framedrightof subrogation. If thisis all the protection thatthe
impliedtermgives,it is veryslender.Not onlywould insurershave no qualms
about writingin expressterms.In England,as Mr Birdshas shown,1"' insurers
havegoneto theextentofproviding fortherightto bringsubrogated claimseven
beforetheyhaveindemnified theinsured.

(g) Evaluation
It is clear that subrogationhas falleninto some disfavouramongsome courts
particularly in theUnitedStatesand (to a lesserdegree)theCommonwealth.
But

I34 See supran 76, 80oo-o.

135 Ibid, 80o1.
136 The AustralianInsuranceContractsAct(see supran 91) in s 66 abolishestheinsurer'srightof
subrogation, unlesstheemployeewas guiltyof'seriousand wilfulmisconduct'(s 66(b)).
137 The AustralianInsuranceContractsAct,s 65(cXi) preventsthe exerciseof subrogationrights
againsta memberofthe'familyorotherpersonalrelationship betweentheinsuredand thethird
party'.Again, the tortfeasormust not have been guiltyof 'serious and wilfulmisconduct'
(s 65(2)(b)).
138 See supran 76, 802.
139 See his article,'ContractualSubrogationin Insurance'JBusinessL 12z4(I979). Unders 65(5) of
the AustralianInsuranceContractsAct, a conditionrequiringthe insuredto assignrightsof
recoveryto the insurerbeforethe insuredhas been paid, is a criminaloffencewitha fineof
$5,000.

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436 REUBEN HASSON

judicialefforts
have producedan enormousamountofconfusion. The continued
existenceof thatconfusion has meantthattheevilsof subrogation-overlapping
coverage'40 and wastefullitigation'41
will continueas before.Once again, the
limitsofjudicialchangewhenone is trying to eradicatea wellestablished
doctrine
havebeenpowerfully demonstrated.'42

V. THE SHAPE OF A REFORMING STATUTE

Althoughsomecourtshavebeenchippingaway at thedoctrineof subrogation, it

mustbe clear to even the passionatedevoteesof the commonlaw methodof
reform, thatthedoctrinewillnotbe abolishedby attrition.In fact,theonlything
likelyto be achievedby common law snipingis to reducethisbranchofthelaw to
a stateofcompleteconfusion.
I shall not attemptto drafta model statutebut I shall outlinea proposed
statute.
Firsttwogeneralproblems mustbe faced.

i. The needforcomprehensive reform

If a statuteis to be passedreforming subrogation, it seemsclearthatthereforms
mustbe comprehensive. Ifthisis notdone,thenarbitrary willremain.
distinctions
A good exampleof piecemealreform is to be foundin the AustralianInsurance
ContractsAct I984.143 In that statute,subrogationis abolishedin the case of
vendorandpurchaser inthecontextofreal144butnotpersonalproperty.
Subrogation is abolishedin respectof an employer's subrogatedclaimbutonly
wherethe employeeis employedby the insured.145Thus, claims againstother
employeeswould still be possible.146Finally,subrogatedclaims may not be
broughtagainstmembersoftheinsured'sfamily.147 But subrogated claimsagainst
theinsured'sbusinessvisitorswouldseemto be maintainable.'48

2.Theroleoffaultin therevisedlaw ofsubrogation

Sweden has abrogatedsubrogation insurancein cases of ordinary
in indemnity
tortsand grossnegligence.'49This
butretainsit in cases ofintentional
negligence

140 See suprasection3(a).

141 Supra section3(b).
142 See e.g. theattemptsto getridofthedoctrineofcommonemployment.
143 See supran 96.
144 Ibid, s 50.
145 Ibid, s 66.
146 See GreenwoodShoppingPlaza v Beattiesupran I16.
147 See supran 91, s 65.
I48 See supran 91, s 65 whichspeaks'offamilyor otherpersonalrelationships'.
149 See Hellner,Forsakringsgivarens Regressratt(The Insurer'sRight of Subrogation)260-1
(Englishsummary).

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 SUBROGATION IN INSURANCE LAW 437
solutioncommendsitselfto Mr Birdsinhis treatiseon insurance law.5""I fearthat
thisapproachwouldstillleavethecourtswithan enormousamountofdiscretion.
For example,one can argueendlessly(and at greatcost) as to whetherWayne
Tank'5' wereguiltyof'gross'negligence or ordinary negligence.This uncertainty
wouldnecessitatethecontinuance ofoverlapping coverage--probably thegreatest
oftheevilsofsubrogation.
It seemspreferable tolimitsubrogation to a fewcasesofintentional wrongdoing.
Thus, in a case where a bank has insured againstlossesbyforgery, therewouldbe
no objectionto a bankbringing a subrogated claimagainsttheforger.152 Again,in a
fidelityinsurance policy,there would seem to be little to
objection allowingthe
insurerto proceedagainstan employeewho had been convictedof dishonesty.
These claimswouldnotusuallybe worthpursuing buttherecan be no objectionto
them.In thefirst the of
place, difficultyoverlapping coveragedoesnotarisesincethe
wrongdoer cannot obtain liability insurance againstwrongdoingof this kind.
Secondly, lossesofthiskind are difficultto distinguish fromtheft fromaninsurer.
I have greatdifficulty in decidingwhetherto allow subrogatedclaimsagainst
arsonists. Myhesitation derivesfromthefactthatinmanycasesitis eithersomeone
who is mentallydisturbed153 or else is a childwho sets fireto someoneelse's
An
property. enquiry into the arsonist's sanityor an infant'sabilityto understand
his/her actsdoesnotappeartobe anedifying prospect.

The following changesinthelawofsubrogation seemtobe desirable.

I. It should be made clearwhetherdisabilityinsurancebenefits
fallwithinthe
definitionof indemnityor not.The presentsituationin Canada ofdistinguishing
betweendisability ononehandandlifeandaccidentbenefits
benefits ontheother,is
intolerable.154
2. Boththeassignment ofclaims,as wellas subrogated claimsaretobe abolished
withtheveryminorexceptions forforgeryinsurance andfidelity
insurance.
3. It is to
important make sure thatafter the actionfor has been
subrogation
abolished,the insuredcannotbringan action to recoverthe deductible.The

150 See his ModernInsuranceLaw, supran 1,274-5.

t5 See textsupran 65.
152 See e.g. Farnsworth,'InsuranceagainstCheckForgery'60 Col L Rev 284 (1960).
153 See e.g. Gosselinv State Farm Fire & CasualtyCo (1983) 147 DLR (3d) 226,affirmed (1984) 8
DLR (4th) 318. In this case, the plaintiff's
wifeset fireto the house of whichshe was joint
tenantwhen she was seriouslyintoxicated.She was founddead in the house; Keith J of the
OntarioHigh Courtrefusedto findthattheplaintiff's wifewas guiltyof a 'wilfuland criminal
act'.
154 See textsuprans I8-23.

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438 REUBEN HASSON

deductiblemay be large"15in whichcase the problemof overlappingcoverage

remains.Even wherethedeductibleis small,thewastecausedby theseactionsis
indefensible.
4. It is essentialthatthosepeoplewho have underinsured shouldhave to bear
theirown losses. Unless this is done, everyonewho presently carriesliability
insurancewillcontinueto do so.
5. The problemofthosewhocannotobtaininsuranceeitherbecauseofpoverty
or becauseof'redlining'156willhaveto be tackled.To allowthesegroupsto sue in
tortfordamageto theirproperty is undesirable.First,manyof the peoplewho
wouldwishto sue couldnotafford to do so. Second,and moreimportant, once a
certaingroupis allowedto sue,theadvantagesofabolishingsubrogation wouldbe
lost.The questionthenbecomeswhetherone assignsuninsurable risksto private
insurersor to the government. It seems clearthatthereare greatdifficulties in
devisingand operatingan assignedriskscheme.157 Moreover,a government run
schemecan be morecheaplyrunthana privateinsurancescheme.
6. There is a verygood case fordealingwiththe vendor-purchaser problem
separately.The sectionsshould be draftedso as to cover real and personal
property. They shouldprovidethatwhetherit is the vendoror purchaserwho
insures,thatpersonholdstheinsuranceproceedsto protecthis/her owninterests.
Anysurpluswillbe heldin trustforthevendororpurchaser, as thecase maybe.

VI. CONCLUSION

It is tempting,
whenone is permitted
to findoutso littleabouttheworkingsofthe
to leavethingsunchanged.But thedefectsof somepartsof
insuranceindustry,"58
thelaw ofinsurancesuchas subrogation
are so striking
thatit wouldbe theheight
ofirresponsibility
notto pointthemoutandto advocateradicalchange.

155 Even whenthe deductibleis small,the insuredmaybe tempted,forotherreasons,to sue; see

e.g. Hobbs v Marlowe,[1977] 2 All ER 241 (HL) notedby Birds,MotorInsuranceand the
KnockforKnockAgreements 41 MLR 201 (1978).
156 No one knowshow seriousa problem'redlining'is in the Commonwealth. The problemis a
seriousone in the United States; see e.g. Badain,InsuranceRedliningand The Futureof the
UrbanCore,16 ColumJLaw & Social ProblemsI (1980).
in operatingassignedriskplansin thefieldof motorvehicleinsuranceare fully
157 The difficulties
canvassedin US Dept of Transportation, AutomobileInsuranceand CompensationStudy,A
StudyofAssignedRiskPlans (Washington, US Government PrintOffice1970).
158 This is certainlytrueof the situationin theCommonwealth. The situationis moresatisfactory
in the UnitedStatesbecause of theinformation obtainedby variousCongressionaland Senate
Committeesand byvariousSuperintendents ofInsurance.

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