FACULTY OF LAW & INTERNATIONAL RELATIONS

BACHELOR OF LAW WITH HONOURS

SEM II SESSION 20/21
INSURANCE LAW (LLB 00803)
“SUBROGATION CLAIM: FIGHT IN THE MIDDLE”
ASSIGNED BY:
SIR FUAD BIN HUSAINI
PREPARED BY:
NO. NAMES MATRIC NO.
1. AUNI NABILA BINTI RAZALI BLAL19055283
2. FARISYA NAJWA BINTI KASIM BLAL19054943
3. BIRR ZAMIER BIN ABU BAKAR BLAL19055066
4. NURUL FARHANA BINTI ZAIRI BLAL19055093
5. NURUL FATIHAH BINTI ROSLAN BLAL19056814
6. AQILAH NADHIRAH BINTI BAKIR BLAL19054942
7. NURFARAHIN BINTI TAJUL ARIFF BLAL19054991
8. FARHAH NAJIHA BINTI MUHAMMAD FAIRUZ BLAL19054997
9. PUTRI SYAZA SABIHAH BINTI PUTERA NUR SHAH BLAL19054967
ALAM
 TABLE OF CONTENTS
1.0 ORIGIN OF NATURE SUBROGATION 2
2.0 PRINCIPLE OF SUBROGATION 6
4.0 INVALID SUBROGATION CLAUSES 17
5.0 EFFECT OF SUBROGATION 22
6.0 IMPORTANCE OF SUBROGATION 25
7.0 LIMITATIONS OF RIGHTS AND LIABILITY IN SUBROGATION. 29
7.1 THE EXTENT OF RIGHT. 30
7.2 RECOVERY IN SUBROGATION. 32
8.0 JURIDICAL BASIS IN SUBROGATION 33
8.1 ADMINISTRATION LAW OF RIGHT OF SUBROGATION 33
8.1.1 HOW DOES THE RIGHT OF SUBROGATION TO BE ASSERTED. 34
9.0 JUDICIAL BASIS OF SUBROGATION 37
9.1 AUTHORITIES FOR THE RIGHT OF SUBROGATION UNDER INSURANCE
CONTRACT ACT 1948 37
9.2 JUSTIFICATION OF SUBROGATION ISSUES IN CASES. 38
10.0 SUBROGATION VS CONTRIBUTION 40
10.1 PRINCIPLE OF CONTRIBUTION 40
10.2 SUBROGATION VS CONTRIBUTION. 42
10.3 THE PURPOSE OF THE PRINCIPLE. 43
10.4 THE GENERAL PRINCIPLE. 43
10.4.1 THE CONFLICT BETWEEN SUBROGATION AND CONTRIBUTION. 44
11.0 CONCLUSION 46
12.0 BIBLIOGHRAPHY 48

1
1.0 ORIGIN OF NATURE SUBROGATION

According to Merriam Webster's dictionary, it defines the word ‘subrogation’ is the

assumption by a third party (such as a second creditor or an insurance company) of
another's legal right to collect a debt or damages. At the same time, the Cambridge
dictionary defined subrogation as the right of an insurance company to get back
the money that it pays to someone with an insurance contract from the person who
has caused the loss, injury, or damage.1 In other words, subrogation is a transference of
right from a person to a third party in which insurance is usually used as a common
legal application. Subrogation can be applied to both marine and non-marine insurance.
In the application of non-marine insurance, the insurance must be one of the contracts
of indemnity, such as fire insurance or motor insurance.2 The subrogation is used in
order to put the insurers in the assured shoes, which involves the transference of the
assured’s right to the insured. For example, if A, whose vehicle was covered with a
motor insurance policy, collided with another vehicle due to another’s negligence, A was
then entitled to a sum of damages. It is easier for A to claim against its insurer to pay for
damages. This is in accordance with the case of Liberty Mut. Fire Ins. Co. v. Auto
Spring Supply Co., which cited the meaning of subrogation in the case of Yolo Port
Dist. v. Cargill of California as "A subrogation as applied to an insurer is its right to be
put in the position of its insured against third parties legally responsible to its insured for
the loss which the insurer has both insured and paid.”3 Then, after indemnified by the
insurer, A transferred all of his rights and remedies to the insurer, a third party, to
recover from the negligent tortfeasor by way of subrogation. The primary purpose of this
particular doctrine is to avoid a situation where the assured might get recover more than
a full indemnity or unjust enrichment.4

1
'Subrogation' (Dictionary.cambridge.org, 2021)
<https://dictionary.cambridge.org/dictionary/english/subrogation> accessed 28 May 2021.
2
Halsbury's Laws Of Malaysia (Lexis Nexis Malaysia 2010).
3
'Liberty Mut. Fire Ins. Co. V. Auto Spring Supply Co.' (Justia Law, 2021)
<https://law.justia.com/cases/california/court-of-appeal/3d/59/860.html> accessed 28 May 2021.
4
Imtithal Babiker Ahmed, 'Injunctive Relief For Wrongful Termination Of Employment' (Degree, University of
Khartoum 2006).

2
 The right of subrogation is a right derived from natural justice, initially found in
Roman law. It is proven by the statement made by MC Cardine J in John Edwards &
Co. v. Motor Union Insurance Co. Ltd., who believes that the doctrine of subrogation
originally comes from Roman law and finds its way in the English courts.5 The original
footing of subrogation has been a question of whether it is one of equitable doctrine or a
common law principle. The first evolution of subrogation started in the courts of equity
when Lord Hardwicke marked its application on the decision in the case of Randal v
Cockran. In this particular case, it was recognized that an insurer is entitled to enforce
any right available to the insurer if the assured has been fully indemnified by the insurer,
depending on the contracts of insurance covered.6 However, the word ‘subrogation’ had
never been used, although the equity and common law courts had used the doctrine
until the middle of the nineteenth century. However, the doctrine had been commonly
used in the English legal system. Despite the acknowledgment of the doctrine in the
equity back in 1748, common law courts also had claimed the application of subrogation
since it has always been a part of common law practice, as stated by Lord Chief Justice
Mansfield in Mason v Sainsbury, “every day the insurer is put in the place of the
insured. The insurer uses the name of the insured”.7

While the origin of subrogation has been on debate since there is no actual
evidence that proves the concrete answer, most agree that this principle is almost
similar to the application of the Roman doctrine of cession actionum. Nevertheless,
there is a view that although there are some similarities, there are also distinct features
between both principles in terms of their application. Roman law has used the
well-known term of subrogation in constitutional law, which denotes the replacement of
an official by some other official or replacing their actions.8 Besides that, the similarities
of cession actioniumm and doctrine of subrogation in English law are undeniable
because it also refers to the assignment of an obligation by a third party, as allowed, to

5
ibid.
6
'Randal V Cockran: 17 Jun 1948 - Swarb.Co.Uk' (swarb.co.uk, 2021)
<https://swarb.co.uk/randal-v-cockran-17-jun-1948/> accessed 27 May 2021.
7
M.L. Marasinghe, 'An Historical Introduction to the Doctrine of Subrogation: The Early History of the Doctrine I'
(1975) 10 Valparaiso University Law Review <https://scholar.valpo.edu/vulr/vol10/iss1/3> accessed 27 May 2021.
8
ibid.

3
sue in the name of the party entitled to or retaining the proceedings.9 Nonetheless,
cession actionnum requires some actions of expressing the transference, which means
it is not a subrogation by law which makes it a doctrine that does not apply subrogation
by law which means no right shall be acquired by a party unless there are actions of the
actual transfer. This is different from the English doctrine of subrogation that expressing
any transference of right is non-necessary because it was deemed to be ipso jure. In
other words, the insurer would acquire immediate rights as the result of an automatic
transfer he had against the tortfeasor. This difference in terms of application is the one
that separates the doctrine of subrogation in English law and Roman law. However,
since the application of the same technique had been applied in Roman law from a long
time ago, therefore it is said that Roman law is the precursor of the doctrine of
subrogation in English law.

The first step of subrogation in English law was uncertain because the
techniques have been used in both common law court and equity. However, the starting
point of the application in both courts remained unknown. However, several cases have
been proven prior to the existence of the word ‘subrogation’ that the principles of
transference of right have been applied in multiple cases of the contract of suretyship
and contribution in equity. Thus, in these circumstances, it is confirmed that equity
recognized the idea of transference right before the time Lord Hardwicke became the
Lord High Chancellor in 1737. As provided before this, the first acknowledgment of the
doctrine of transference of right was marked by a statement made by Lord Mansfield. It
is also provided several cases in common law courts which also implement the
principle, such as London Assurance Co. v Sainsbury, where the insurer had
indemnified the assured due to a loss he suffered in a civil riot. The insurer then sues
the municipality out of the right given to them in the statute to recover the payment they
have made to the assured. The assured claimed that he acquires the right to the
recovery that the insurer had received from the municipality, but it was rejected by the
judges.10 Nevertheless, it was confirmed that both equity and common law courts had
9
'What Is The Legal Definition Of CESSIO ACTIONUM? | Legallingo Termbase' (Legal-lingo.net, 2021)
<https://www.legal-lingo.net/cessio-actionum/> accessed 27 May 2021.
10
M.L. Marasinghe, 'An Historical Introduction to the Doctrine of Subrogation: The Early History of the Doctrine II’
(1976) 10 Valparaiso University Law Review <https://scholar.valpo.edu/vulr/vol10/iss2/4> accessed 27 May 2021.

4
applied this particular equitable doctrine for quite a while by the end of the eighteenth
century.11 At the beginning of the nineteenth century, despite the acknowledgment of
equitable doctrine in both courts, the post-Hardwicke cases still did not refer it as a
principle laid down by Lord Hardwicke until a statement made by Chief Justice Tindal
and Justice Park in Yates v. Whyte,

“This point has been decided ever since the time of Lord Hardwicke; so much so that it
has been laid down in text-writers, that where the assured, who had been indemnified
for a wrong, recovers from the wrongdoer, the insurers may recover the amount from the
assured. In Randal v. Cockran, it was said they had the clearest equity to use the name
of the assured, in order to reimburse themselves,”12

After the reference made by the judges in Yates v. Whyte, several other cases also
refer to Lord Hardwicke’s principles in Randal v. Cockran. This shows that most cases
had recognized this particular doctrine as Hardwicke’s doctrine in equity and common
law courts. Nevertheless, this acknowledgment of principle is still not recognized
universally for it to be given a name.13 In French law, the particular equitable remedy
was referred to the Roman doctrine of cession actionnum which the term ‘cession’
refers to various meanings, including subrogation.14 However, the first case of
‘subrogation’ in French, Quebec Fire Insurance Company v. Augustin St. Louis and
John Molson was more similar to cession actionnum than English law. In this case, the
expression act of the cession is considered vital before the transference of right since it
requires specific legislation.15 Such expression is not required in the concept of
subrogation in English law. After the case of Quebec, English courts had begun to refer
to the doctrine laid down by Lord Hardwicke in the case of Randal with the term of
‘subrogation', where it roots more from the French law.

11
ibid.
12
Yates v Whyte and Others, [1838] 132 ER 793 [283]
13
M.L. Marasinghe, 'An Historical Introduction To The Doctrine Of Subrogation: The Early History Of The Doctrine II’
(1976) 10 Valparaiso University Law Review <https://scholar.valpo.edu/vulr/vol10/iss2/4> accessed 27 May 2021.
14
ibid.
15
'Quebec Court Of Appeal Orders An Insurer To Pay Damages For Poor Management Of An Insured’S Claim'
(Nortonrosefulbright.com, 2021)
<https://www.nortonrosefulbright.com/en/knowledge/publications/f6933e5e/quebec-court-of-appeal-orders-an-i
nsurer-to-pay-damages-for-poor-management-of-an-insureds-claim#autofootnote19> accessed 27 May 2021.

5
 The first case that applies the word ‘subrogation’ in English court was Stringer v.
The English and Scotch Marine Insurance Co., where the plaintiffs insured the
assured ship cargo for “taking at sea, arrests, restraints, and detainment of all Kings,
princes and people”. Subsequently, the ship was captured for condemnation and the
plaintiffs contested on the captor’s claim and succeed. After the case was appealed by
the captors and the plaintiffs could not afford such an order by the court, which causes
the abandonment of the ship. Therefore, the plaintiff requested the insurers to pay for
their loss. It was held that the plaintiff is entitled to the payment by the insurers.
However, by having that, the insurers would be entitled to the right of subrogation.16

Based on the pieces of information given, it is undoubtedly that doctrine of

subrogation is not a modern principle applied in the current insurance law. The
principles have been in existence for decades or centuries ago. Most are on the view
that the principles were initially created and recognized in equity rather than common
law. However, by the end of the eighteenth century, both courts had confirmed the
implementation of this technique in their decision of the cases relating to it. Besides
that, there are also views that the doctrine of subrogation is quite similar to the Roman
law of cession actionnum and French law of subrogation in terms of the main idea.
Despite the similarities, there is also a distinguishable difference between it: the
implementation of subrogation, which requires prerequisite action of transference in
Roman law and the non-necessary of it in England.

2.0 PRINCIPLE OF SUBROGATION

The fundamental or main principle of subrogation refers to the principle of

indemnity as mentioned by Brett Lj in the case of Castellain v Preston where in the
case of loss, the insured will be indemnified fully or partially depends on the situation
and the loss that can be indemnified must refer to the policy that was made.17 Under
subrogation, it ensures the insured to not gain profit from the insurance as in the
situation, the insured may choose either to recover the loss by taking action against the
third party or have the insurance company recover the loss due to the accident. The

16
Stringer and Others v. The English and Scottish Marine Insurance Company., [1870] L.R. 5 Q.B. 599
17
Castellain v. Preston (1883) 11 Q.B. 380

6
principle of indemnity was applied in subrogation to prevent unjust profitability where the
insured received more than they should.18 In which the principle applied to a certain
situation to assure the insurer that the insured will not be able to recover the full amount
of indemnity. Mainly, there are two situations where the principle of subrogation can be
applied. That is the first situation where the insured has recovered the same loss twice
and the second situation is when the insured has been indemnified by the insurance
company and the insurer brings an action to the third party. Under the principle of
subrogation, it also discusses the general principle of subrogation that is in the case of
distribution of monies recovered, policies subjects to average, and valued policies and
underinsured and uninsured losses.

In the first situation where the insured was indemnified twice. The insured had
received payment or recovery money from the insurer but also receive recovery money
from the third party or the negligent party, the insured may be sued for unfaithful
conduct as an insured. As referred in the case of Teo Kim Kien & Ors v Lai Sen &
Anor where it was mentioned that even though the insured does not have the right to
recover for damages or losses as he had been indemnified, by applying the principle of
subrogation where the first respondent had paid for the damage caused by the second
respondent who is the appellant’s worker.19 The appellant is considered liable to repay
the first respondent as the second respondent is under the appellant's responsibility.
Meaning that he is entitled to pay the first respondent the money used to pay for the
motorist and the car damage. When the insurer is not indemnified by the insurer, the
insured could take action against the third party to claim the recovery money upon the
insurer's advice. If, he can only accept the recovery money from either the insurance
company or the third party. If the insured had received more than what he should
receive, he might be sued on the ground of unfaithful conduct as an insured. As
applying the principle of subrogation, after the insurer had indemnified the insured, the
right to claim for the recovery money from the third party goes to the insurer which
means that the insured does not have the right to claim the recovery money from the

18
‘Subrogation Principle in Insurance’ (iEduNote.com, 21 June 2018)
<https://www.iedunote.com/subrogation-principle> accessed 29 May 2021
19
Teo Kim Kien & Ors v Lai Sen & Anor [1980] 2 MLJ 125.

7
third party as he had already been indemnified by the insurer. In the case where the
insured has been indemnified by the insurer but the third party had also paid the
recovery money to the insured. The insured has to pay the insurer the same amount
that was used to indemnify the insured. This is to avoid the insured from having to gain
profit from his loss. As illustrated in the case of AXA Affin General Insurance Bhd v K
Thanarajah A/l Kanagaratnam where the defendant had received recovery money
from the plaintiff who is the defendant's insurer and later receives reimbursement
money from the developer.20 The defendant had received recovery money for the same
loss twice. Thus, the plaintiff had requested that the defendant repay the plaintiff the
same amount used to indemnify the defendant. It was held that in accordance with the
subrogation clause, the defendant is entitled to recover the amount that was given by
the plaintiff to him as, by the principle of subrogation, the insured are not allowed to
benefit from the loss meaning that they are not allowed to receive the recovery money
twice.21 If the insured receives the recovery money twice, he is entitled to repay the
insurer the same amount that was given to him.

The second situation is when the insured has been indemnified by the insurer
and the insurer may take action against the third party to recover the money that was
used to indemnify the insured. In this situation, it puts the insurer in the insured situation
where instead of having the insured take action against the negligent party, the insurer
may use the insured name to claim for the recovery money. As soon after the insured
has already been indemnified by the insurer, the insurer has the right to claim the
recovery money from the third party. As referred to the common law principle, the
insurer first needs to indemnify the insurer to give them the right to take action against
the third party. Looking into the case of Scottish Union and National Insurance v Davies,
the insurer does not have the right to recover the losses as the insurer does not
indemnify the insured beforehand.22 The insured had already been indemnified by the
third party but not by the insurer. Thus, the insurer does not have the right to recover the
loss from the third party.

20
AXA Affin General Insurance Bhd v K Thanarajah A/l Kanagaratnam [2017] 10 MLJ 243.
21
Robinson, Allens Arthur. SUBROGATION.2006.
22
cottish Union and National Insurance Co v Davis 1970 1 Lloyd's Law Report 1 CA

8
 In the case where the insurer had already indemnified the insured, the insurer
has the right to take action against the third party by using the name of the insured.23 By
having the insured indemnified by the insurer, it will transfer the right to recover the loss
to the insurer at the discretion of the insured. Since the party involved in the accident is
the insured and the third party, the name of the insured must be used by the insurer to
take action against the negligent party. As referred in the case of Newfield Peninsula
Malaysia Inc v The Owners of the Shio or Vessel ‘Tanjung Pinang 1’ where one of
the issues explains the right of the insurer to claim for the recovery money using the
insured name after having the insured indemnified.24 It was held that when the insurer
had paid for the loss and damage under an insurance policy, the insurer is entitled to
claim the recovery money from the third party by using the insured name. This is
because the cause of action is between the insured and the wrongdoer while the insurer
does not have anything related to the wrongdoer.

Other principles under subrogation related to indemnity are in the case of

distribution of monies recovered. In the situation where the amount of recovery is the
same as the amount that was indemnified. There will be no distribution of money
between the insured and insurer as it does not have any surplus or deficit in the amount
being recovered and being indemnified. However, in the situation where the amount of
money recovered exceeds the amount of loss, the insurer is not entitled to hold onto the
remaining of the money and the insured are entitled to claim for the excess money. This
is where the insurer had indemnified the insured based on the amount of loss, but the
amount exceeds the indemnified amount upon recovery of the losses..25 As referred in
the case of Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd where the insurer
was not entitled to claim the full amount of money after it was changed from Canadian
Dollar to Pound Sterling.26 This is because the insurer is only entitled to the amount that
was used by the insurer to indemnify the insured that is £72,000 (RM421, 065) but the

23
Sum,Cheah You. Malaysian Insurance Law. 2018. Thomson Reuters Malaysia Sdn Bhd.
24
Newfield Peninsula Malaysia Inc v The Owners of the Shio or Vessel ‘Tanjung Pinang 1’ [2013] 10
MLJ 650
25
Ibid.,3
26
Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2 Q.B 330

9
recovery amount is £126,000 (RM736, 865). The insured are entitled to the remaining
£55,000 (RM315, 800) and the insurer is only entitled to £72,000 (RM421, 065).

Other than that, in the situation of policies subject to average which applies in the
case of underinsured where the amount insurance policy is insufficient to cover the
amount of damage or losses. It is usually a condition that was used in calculating a
pay-out against a claim where the policy undervalues the sum insured.27 In the situation
where the amount of insurance policy that the insured has is not enough to cover the
amount of damage, the insurer will indemnify the insured based on the amount that has
been insured in the policy. Applying the principle of subrogation, the insurer will have
the right to take action against the third party. However, in this case, the excess money
that the insurer received from the third party will remain with the insurer and the insured
does not have the right to claim for the excess money. This is because the insured
could only benefit from having to suffer no loss as all the amount has been insured.
Since the insurer covered the full amount including the uninsured amount, the insurer is
entitled to keep the remaining money.

Next is in the case of uninsured or underinsured losses. The action that was
taken against the third party or negligent party can only be done once meaning that
either the insurer or insured claim for the recovery money from the third party and it
must be for the whole loss. In other words, the insurer must indemnify the insured the
full amount even though it includes the number of uninsured losses. This is because
after indemnifying the insured, the insurer has the right to take action against the third
party and could claim for the full amount. Since action can only be done once, the
insurer needs to fully indemnify the insured even if the amount exceeds the policy or
premium. The insured was only indemnified by the insurer the amount based on the
insurance policy and needed to claim the other uninsured amount from the third party.
The insured right to recover the expense will be removed or lost as the action to recover
the money or amount loss can only be done once.

27
Evans P, ‘What Is Average in an Insurance Policy & How Does It Affect You?’ (Professional
Indemnity | Product Liability | Medical Indemnity | Business Insurance, 9 February 2016)
<https://butlerevans.co.uk/what-is-average-in-an-insurance-policy/> accessed 20 May 2021

10
 As referred to in the situation where the amount of loss larger than the amount
being insured.28 It refers to the valued policies in which the insurer is obligated to
indemnify the insured regardless of the original price of the policy. For example, the
insured had bought an insurance policy for RM100, 000 but the loss suffered is RM150,
000. The insurer cannot only pay according to the amount being insured which is
RM100, 00, they must pay the full number of losses as the insurer will not suffer losses.
Once the insured was indemnified by the insurer, the insurer has the right to recover the
money by taking action against the third party. This principle relates to the situation
where the action taken against the third party can only be done once. Meaning that, if
the insurer were to indemnify the insured for the loss, they must indemnify the insured
the whole amount of loss and partial as the action taken against the third party once. By
indemnifying the insured half and claim for the recovery money from the third party. The
insured will lose his chance in recovering the money lost as he could claim the other
half of the money since the insurer had taken action regarding the same matter once.
Thus, it would cause injustice and the insured would suffer losses. By having the valued
policy concept, the insurer is under the obligation to indemnify the insured the full
amount including the uninsured amount as the insurer could later claim the full recovery
money from the third party.29

The principle of subrogation according to the common law is that the insurer
does not have the right to subrogation. The insurer will only have the right after he had
indemnified the insured. The principle of subrogation is that the insurer has the
responsibility to indemnify the loss suffered by an innocent party and later could take
action against the negligent party. In some cases, the insured had voluntarily or
intentionally caused damage to their property so that the insured need to indemnify
them for the damage suffered. In this situation, the insured is committing fraud and is
guilty of the act, the insurer will pay the innocent party for the loss suffered and claim for
recovery money from the insured. Even though it is against the principle of subrogation
as the insurer does not have the right to recover the damage against the insured.

28
Ibid.,3
29
‘Valued Policy Law (VPL) - Overview, How It Works, Coverage’ (Corporate Finance Institute)
https://corporatefinanceinstitute.com/resources/knowledge/other/valued-policy-law-vpl/ accessed 20 May 2021

11
However, as referred in the case of Madsen v Treshermen’s Mutual Inst Co where the
court supports the general principle of insurance. The court had also acknowledged that
in the situation where the insured was found guilty for the act, he is liable for the loss if
the act did was intentional.30 Thus, the insurer can claim for the recovery money from
the insured or policyholder if the insured was found liable for intentionally caused
damage to the property or had acted fraudulently.31

In conclusion, it can be seen that Malaysia has applied the Common law principle
of Subrogation as referred to in the Malaysian cases that discuss the application of
subrogation. Even though some existing statutes are used as a complementary
reference, the Common law principle of Subrogation is still applied as some of the
cases referred to in the discussion of the case applied the principle of subrogation from
Common law. Common law focuses more on the right of a person who is qualified to be
indemnified if there is the damage suffered. As stated, the insurer held the responsibility
to indemnify the innocent party and claim for the recovery money from the negligent
party while applying the principle of subrogation in Malaysia focuses more on the benefit
of the insurer. This is because based on the case Tiong Trading & Transport (M) Sdn
Bhd v Commercial Union Assurance (Malaysia) Sdn Bhd that confirmed the
application of subrogation in Malaysia where it confers the right of the insurer after
indemnifying the insured and the right of the insurer in exercising the right under the
insured name.32 Some of the law that governs on the principle of subrogation in
Malaysia that as referred in the cases are Financial Services Act and Merchant
Shipping Ordinance 1952.33

3.0 VALID SUBROGATION CLAUSES

30
Madsen v Threshermen’s Mut. Ins.Co 149 Wis. 2d (1989)
31
‘The Right of Subrogation by an Insurer Against Its Insured and the Impact of Recent
Legislation’ (Findlaw)
<https://corporate.findlaw.com/litigation-disputes/the-right-of-subrogation-by-an-insurer-against-its-insured-and.h
tml> accessed 18 May 2021
32
Tiong Nam Trading & Transport (M) Sdn Bhd v. Commercial Union Assurance (Malaysia) Sdn Bhd
[2008] MLJU 494
33
‘What Is Subrogation?’ (Azhar & Wong | Advocates & Solicitors)
http://www.azharwong.com.my/?cur=page/page&id=33&title=What_Is_Subrogation? accessed 20 May 2021

12
 Subrogation is a legal right granted to the insurers in which it allows them to seek
compensation for the losses they have paid by suing the parties that were the cause of
the losses. Generally, the subrogation clause can be found in the policy conditions and
may vary but will still serve the same purpose. The right of subrogation will only exist
when the policy provides the necessary clauses. In addition, even though the specific
provision of the subrogation exists in the policy, the insured needs to acknowledge the
carrier's right to be subrogated to his interest before the payment can be made to an
insured under the agreement involving payment such as medical payment. Therefore,
the issue of the validity of the subrogation clauses arose in determining the legal right of
the insurers to seek compensation from parties causing the losses.

The courts have given various reasons for upholding subrogation clauses as
valid. One of the significant reasons for the clauses being valid is that the subrogation
clauses merely constitute conventional subrogation and do not constitute an assignment
of a cause of action.34 Conventional subrogation, also known as contractual
subrogation, designates the insurance company's rights to seek compensation from a
third party the moment when it has paid claims made against a policy.35 In conventional
subrogation, the policyholder does not have the right to separately seek damages from
a third party who was the cause of the losses while also claiming from the insurer. Also,
the insurance company will be stepping into the shoes of the policyholder when it seeks
damages from a third party. Therefore, a subrogation clause must constitute pure and
simple subrogation where it is clear and very distinguished from an assignment of a
cause of action.36 The subrogation clause must clearly state the rights given to an
insurance company in which it allows them to pursue the third party for compensation
after making payments on the losses suffered by the insured.

In De Cespedes v Prudence Mutual Casualty Company, an insured under an

automobile policy that contained a medical payment provision brought an action against

34
Rex Capwell, Thomas E. Greenwald, ‘Insurance: Legal and Practical Problems Arising from Subrogation Clauses in
Health and Accident Policies’ (1971) 54 Marq. L. Rev. 255.
35
Julia Kagan, Conventional Subrogation (Investopedia.com, 21 March 2021) <
https://www.investopedia.com/terms/c/conventional-subrogation.asp> accessed 26 May 2021.
36
n 1.

13
the insurer to recover for his medical expenses.37 Prior to bringing the suit the insured
had settled with the third party tortfeasor and had executed a full release. The medical
payments provision of the insured's automobile policy contained 'the standard
subrogation clause, which included a provision that the insured "shall do nothing after
loss to prejudice (the insurer's subrogation) rights." The insured attacked the validity of
the subrogation provisions arguing that the subrogation clause constituted to an
assignment of a claim for personal injuries that was invalid under the common law and
had not been altered by any statute. The court of appeals rejected such argument
holding that the concept of subrogation was distinct from an assignment of a cause of
action. It was held that an insured was not qualified to recover the medical payment
coverage of an automobile policy containing a subrogation clause after the insured had
settled his claim against the third-party tort-feasor and executed a full release.

Next, the courts merely withdraw from the old common law rule prohibiting the
assignment of a cause of action for personal injuries instead of differentiating
subrogation from an assignment when upholding the subrogation clauses as valid.38
The courts stated that the present conditions in the society command that the old
common law rule prohibiting the assignment of a cause of action for personal injuries be
repealed in favour of permitting such an assignment.39 To understand this, firstly, an
assignment is the act of transferring to another or part of one’s property, interests or
rights. In the early years, common law had rejected all assignments of a cause of action
regardless of whether it was based in contract or tort. However, the restrictions lessen,
but the rights arising out of a personal injury or wrongful death are typically considered
unassignable.40 Today, the courts has almost fully deserted the original common law
rule of non-assignability. The leading question to test on the assignability is whether or
not the cause of action survives the plaintiff's death and can be taken up by his estate or
a representative appointed by law. In this case, if the cause of action survives, it is
assignable.41
37
De Cespedes v Prudence Mutual Casualty Company [1967] 193 So. 2d 224 (Fla. Dist. Ct. App.).
38
n 1.
39
ibid.
40
Patrick T. Morgan, ‘Unbundling Our Tort Rights: Assignability for Personal Injury and
Wrongful Death Claims’ (2001) 66 Mo. L. Rev. 1.
41
Anthony J. Sebok, ‘The Inauthentic Claim’ (2011) 64 Vanderbilt Law Review 61.

14
 This is explained clearly in the case of Davenport v. State Farm Mutual
Automobile Insurance Company, where State Farm Mutual Automobile Insurance
Company had paid the sum of $1,565.78 to its injured assured Mr. and Mrs. Hanley,
according to the medical payment proviso of the automobile policy.42 Ralph O.
Davenport was the tortfeasor who had caused personal injuries during a car accident
with the Hanleys. The claim of the Hanleys against Davenport was settled for the sum of
$8,000. Before the settlement, State Farm had written to Allstate Insurance Company
(Davenport's insurance carrier) a letter to give notice about their subrogation claim
based on the subrogation clause provided in the insurance policy of the Hanleys but it
was ignored by Davenport and his insurance carrier Allstate when they were settling the
Hanley's claim. The lower court found that the payment of medical expense was a
subrogable item and ruled in favour of State Farm. Davenport and his insurer went for
an appeal and the Nevada Supreme Court held that the modern rule in regard to the
assignment of a cause of action is that if the cause of action would survive the death of
the person injured, as a cause of action for personal injury does, then that right is
assignable. Therefore, a provision in a contract for medical payments which subrogates
the company, to the extent of the medical payments made by it to the insured, to the
rights of the injured party against the tortfeasor or those responsible for his negligent
acts is valid.

In addition, the courts also held the clauses as valid if the subrogation clauses do
not constitute to an assignment of a cause of action but rather operate as an impression
of lien in favour of the insurer or organization providing the benefits upon recovery by
the insured from the tortfeasor.43 According to Black’s Law Dictionary 8th Edition, a lien
is a legal right or interest that one has in the property of another.44 It is a claim of a right
to payment. The subrogation clause can operate like a lien where it allows for
reimbursement if a monetary recovery is obtained from a third party. Furthermore, the
insurance company would have paid the amount due to its insured before proceeding to
seek for compensation from the tortfeasor. If the insured obtained a monetary recovery

42
Davenport v. State Farm Mutual Automobile Ins. Co. [1965] 404 P.2d 10.
43
n 1.
44
‘lien’, Black’s Law Dictionary (8th Edn)

15
from the tortfeasor, the insurer has the right to reimburse the amount paid on behalf of
the insured. Thus, the subrogation clause must clearly show that it allows the insurance
company to be subrogated to the insured's claim and did not act as an assignment of a
cause of action.

Therefore, the case that can be referred to for more understanding of the reason
provided is the case of Damhesel v. Hardware Dealers Mutual Fire Insurance.45 In
this case, the appellant was a passenger in a car owned and driven by George
Kleckauskas. The car was involved in an accident with a car operated by Peter Spogis
and it was determined that the negligence of Spogis was the cause of the accident.
Kleckauskas was protected by the appellee’s automobile liability insurance policy in
which it contained provisions for the payment of passenger’s medical expenses.
However, the appellant had executed a general release after settling his claim for
personal injuries with Spogis. In the insurance policy, it contained a subrogation clause
as follows:

“In the event of any payment under the Medical Expense Coverage of this policy, the
company shall be subrogated to all the rights of recovery therefor which the injured
person or anyone receiving such payment may have against any person or organization
and such person shall execute and deliver instruments and papers and do whatever else
is necessary to secure such rights. Such person shall do nothing after loss to prejudice
such rights.”

The court held that appellant had breached this clause by executing a general release
for a valuable consideration. The release that was made was considered as prejudice to
the rights of the insurance company.

Lastly, a subrogation clause is held as valid by the courts when the right of
subrogation cannot be considered contrary to public policy based on the fact that the
state insurance commission had approved the form of the policy in issue.46 For
example, in Smith v. Motor Club of America Insurance Company, an insured, having
settled with the tortfeasor for an amount including medical expenses, brought suit
against his insurer seeking to have the policy reformed by having the subrogation

45
Damhesel v. Hardware Dealers Mutual Fire Insurance [1965] 60 Ill. App. 2d 279.
46
n 1.

16
clause deleted, and then recovering his medical expenses under the medical payments
provision.47 The insured alleged that the subrogation provision was illegal, void and
against public policy. However, the court granted the summary judgment for the insurer
and held that the provision was presumed neither unfair, inequitable nor against public
policy since the Commissioner of Banking and Insurance, who was vested with
legislative authority to strike from any policy any clauses he deemed to be unfair or
inequitable, took no action with respect to subrogation provisions applying to a medical
payment endorsement in automobile insurance policies.

In general, there are many reasons that the courts applied in upholding a
subrogation clause as valid. One of the many reasons is subrogation clauses clearly
constitute a conventional subrogation where it does not assign a cause of action.
Secondly, the court withdraw from the old common law rule which prohibits assignment
of cause of action and use the leading test of assignability to determine the subrogation
clause as valid. Furthermore, the court held a subrogation clause as valid when the
clause act like a lien in which it favours the insurer in obtaining their legal rights. Last
but not least, a subrogation clause will be held valid by the courts if the right to
subrogate provided in the clause did not contravene the public policy.

4.0 INVALID SUBROGATION CLAUSES

Subrogation is a well-established doctrine in insurance law. An insurer obligated

by contract to indemnify the insured for any loss sustained is entitled to be subrogated
to legal rights on the insured at the time of loss, owing to which he might compel
another to compensate the insured wholly or partly for such loss. However, in basic
principle, the right of subrogation hold by the insurer can only be affected if it is explicitly
provided beforehand in the policy. Nonetheless, before the insurer can gain the
payments through subrogation clauses, acknowledging the right from the insured is a
must. The subrogation clause may be held invalid for the reason of statutory provision.
Under common law, the assignment of a cause of action for a personal injury claim is
prohibited. The personal tort victim is forbidden from relying on the subrogation clause

47
Smith v. Motor Club of America Insurance [1959] 30 N.J. 563.

17
in any dispute concerning the personal injury claim he suffered due to the negligent acts
of a tortfeasor.

The concern is that such claims may induce an increase in total litigation, and the
insurer might take advantage of the unsophisticated insured. In addition, some view the
act of selling personal injury claims as offensive. Subrogation indeed benefits the
insurer as they gain the reimbursement securely when they invest in an action belongs
to the insured where they found potentially profitable. Such claims provide more
excellent compensation to the insured who need immediate settlement and risk-averse
in a poor bargaining position. Nonetheless, if the subrogation is upheld and resulted
valid, the possibility of multiple litigation and complication of settlements might happen.48

In State Farm Fire and Casualty Company v Knapp,49 grandchildren of the

insured, Mary E. Knapp, were injured while riding in the insured's car, which the
insured's daughter drove. The other car was driven by Mark Garcia, the insured by the
Farmers Insurance Group. Garcia's insurer settled the grandchildren’s claims, and Mrs.
Martha Knapp executed releases relieving Garcia from all further liability. Later, when
the insured brought suit against State Farm, the insurer contended that the insurer had
breached the subrogation clause in the policy.

Under coverage C Division 2, the insurer had the obligation "to pay reasonable
medical expenses …to or for any other person who remains bodily injury, caused by an
accident while occupying the owned automobile…" The subrogation clause qualifies this
duty to pay as upon payment under coverage C of this policy. The insurer must be
subrogated to the extent of any settlement or judgment that may result from the
exercise of any rights of recovery which the injured person or anyone receiving such
payments may have against any person or organization. Such a person shall do nothing
after loss to prejudice such rights. If this subrogation clause is valid, the plaintiff's claim
is lost since it is accepted that plaintiff has harmed State Farm's right to subrogation by
signing the release. However, the Supreme Court of Arizona agreed with the decision of

48
Srail DJ, ‘Insurance Subrogation in Personal Injury Torts’ 39 18
<https://kb.osu.edu/bitstream/handle/1811/65065/OSLJ_V39N3_0621.pdf> accessed 27 May 2021
49
107 Ariz. 184, 484 P.2d 180 (Ariz. 1971) See. Harleysville Mutual Insurance v. Lea, 2 Ariz. App. 538, 410 P.2d 495
(Ariz. Ct. App. 1966),

18
the Missouri Court of Appeals for the case Travelers Indemnity Company v
Chumbley50 that if the subrogation clause is held valid despite the long-existing legal
principle prohibiting assignment of a cause of action for personal injury, both practical
and legal problems will overload.

According to common law, a single cause may not be "split" or divided among
many actions. This rule is a part of the legal doctrine of res judicata and intended to
avoid the exact cause of action from being litigated in many lawsuits. The other
purposes are to avoid wasting the court's time and keep the defendant from being
harassed. As a result, it requires an inevitable expansion of the concerns in single
litigation or risks losing the possibility to fight them elsewhere. In insurance law, since it
violates the common law rule against the splitting cause of action, some subrogation
clauses would have been invalidated by the court. If the insurer brought a claim for
reimbursement against the tortfeasor as a subrogated party, the injured party would be
precluded from further action to recover the remaining injuries.51 Otherwise, the
defendant has to defend against the exact cause of action twice.

In the case of Lowder v Oklahoma Farm Bureau Mutual Insurance

Company,52 after paying the medical expenses of its insured, the insurer brought a
claim against the tortfeasor on the ground that it had subrogation rights per stated under
a provision in the automobile policy. In overruling the judgment of this particular case,
the Oklahoma Supreme Court highlighted a single cause of action against the tortfeasor
could not repeat in multiple litigations. The judgment in the case Carper v Montgomery
Ward & Co53 held similarly. A fire partially damaged the plaintiff's home and its
belongings, which the plaintiff claimed was caused by the defendant's careless,
improper and negligent installation of a heating furnace, pipes, and other parts. The
property was only partially insured, and the insurance company reimbursed the loss
covered by its policy. The plaintiff sued the defendant for damages to the dwelling's
contents and awarded a judgment. Later, she filed a second action against the

50
(8416) 394 SW 2d 418 (Court of Appeals, Southern Dist)
51
State Farm Mut. Auto Ins. Co. v. Salazar, 155 Cal. App. 2d 861 (1957)
52
436 P.2d 654 (Okla. 1967).
53
13 S. E. (2d) 643 (W. Va. 1941)

19
defendant, this time for the insurance company's benefit, to recover damages to the
dwelling. The defendant restricted the plaintiff from initiating a second complaint,
although the plaintiff claimed she had two different causes of action emanating from the
fire. The court refused to entertain the arguments since they were unsupported by the
record instead of the defendant's favour on his special plea of res judicata.

Other courts put importance on upholding the common law rule against the
splitting of a cause of action. In Simpson v Robert’s Express Inc,54 the plaintiff was
involved in an automobile accident and suffered injuries. His insured automobile was
also damaged in the accident. The plaintiff obtained a personal injury verdict against the
tortfeasor. With the knowledge of the plaintiff's action, the automobile insurance
company filed a suit for property damage resulting from the same accident right after
the judgment. The court ruled that the single cause of action could not be split between
the insured and insurer because the personal injury and property damage occurred in
the same accident. The court further held that the insurer's refusal to intervene in the
insured's injury action precluded the subrogation claim.

In some cases, the court would hold a judgment to invalidate the subrogation
clause because it goes against public policy. As a matter of principle, once the insured
paid a premium under a specific insurance policy, he is entitled to receive insurance
benefits if he suffers loss. If the insurer has collected a premium for some coverage, the
court is reluctant to allow the subrogation claim by the insurer. The courts' views on this
are the insurer is possibly to gain double recovery and unjustly enriched if both
subrogation and retention of the premiums paid by the insured are allowed.55

In Allstate Ins. Co. v. Reitler,56 the court held that medical payment subrogation
clauses are invalid as it contradicts public policy. In this case, an automobile driven by
the defendant hit another car driven by the defendant. At that time, Welton was insured
by Allstate. Under its policy, Allstate had the right of subrogation for its insured. After the
accident, Allstate had paid the medical expenses to Welton, but Welton brought a suit

54
182 A.2d 449 (NH 1962)
55
Allstate Ins. Co. v. Druke, 576 P.2d 489 (Ariz. 1978); Allstate Ins. Co. v. Reitler, 628 P.2d 667 (Mont. 1981); Maxwell
v. Allstate Ins. Co., 728 P.2d 812 (Nev. 1986
56
628 P.2d 667 (Mont. 1981)

20
against Reitler. Allstate sent a notice of its subrogation to Reitler's insurer, and the latter
contended that it was released of any personal injury claims to Welton. The court further
explained that public policy played an influential role in invalidated the medical payment
on a few grounds:

1. Since the insured paid a premium for medical payments coverage, there is no
presumption that the insured will gain double recovery without medical
payments subrogation.
2. If medical expenses obtained must be reimbursed from a third-party recovery,
the insured will likely suffer the most. The cost of the lawsuit, including legal
fees and litigation expenses, is borne by the insured. However, under a
subrogation provision, the insurer gains full recovery without any liability to
pay the said expenses.
3. Because the injured party has already compensated for medical
expenditures, the tortfeasor's carrier can make a lower offer to reimburse
such payment. If the injured party must return the subrogation interest, he or
she may not recover any medical expenditures.
In another case, Maxwell v Allstate Ins. Co.,57 Jimmie Brown and Roger L.
Maxwell were in an automobile accident. Allstate Insurance Companies was Brown's
insurer, while appellant Farmers Insurance Exchange was Maxwell's insurers. Brown's
insurance policy included coverage for medical expenses for injuries sustained in a car
accident. The district court ruled that Allstate was entitled to subrogation up to the
number of medical costs received under the policy clause. However, the Supreme Court
overruled the previous decision. It held that a subrogation clause under which the
insurer obtains subrogation rights from its insured for medical payments violates public
policy with reference to the case Reitler.

In deciding the validity of the subrogation clause, the court will consider whether
the said clause is either against the common law rule such as the assignment of a
cause of action for a personal injury claim or splitting cause of action or it against it the
public policy. Nonetheless, the court will mainly refer to the facts and circumstances of

57
728 P.2d 812 (1986)

21
the case. Following the precedent cases, some subrogation clauses, if held valid, might
cause injustice towards the injured party (insured) and the tortfeasor. Thus, the court
needs to be very careful in ruling the case to avoid inflicting more loss and pain to the
aggrieved party and raising multiple legal problems for the near future.

5.0 EFFECT OF SUBROGATION

Generally, an insurance policy contract is an agreement between an insurance

company that is deemed as the insurer with the insured whereby the insurer will provide
benefits in return of the prior payment of a premium by the insured. Thus, an insured
party is the one who buys an insurance policy from the insurance company in order if an
event happens, his loss will be covered by the insurance company. Under an insurance
policy, there are a lot of terms and conditions that must be clearly understood by the
party who is interested in buying the insurance policy. Every clause that has been
stipulated in the agreement will indicate the rights that an insured and insurer are
entitled to. Indeed, a simple clause of subrogation in the contract will have a huge effect
on the insurance policy.

Firstly, the effect of the doctrine of subrogation is that the subrogated party is
entitled to stand in the shoes of another and that other party’s legal rights.58 It arises
from an obligation on the part of the insurer in representing the insured to bring the
claims against the third party. In the case Rafiah Bte Bakar v East West - Umi
Insurance Bhd, the defendants made a claim in its own name as the insurer by
claiming a set-off and counterclaim for 30 percent of damages paid. According to the
court rule, the right of subrogation is not automatically granted to the insurers on behalf
of the insured to entitled all the rights and remedies in which the insured has against a
third party. The insurers cannot bring an action against the third party in their own
names if there has been no such formal assignment of the right of action has been
stipulated in the contract.59 Therefore, even though the doctrine of subrogation gives
rights to the insurer to replace the insured in order to seek a claim from the third party,
indeed there must be evidence from the insurance contract entered between both

58
Nasser Hamid, “Insurance Law.” (Malaysia: Gavel Publications, 2009), p. 281.
59
Rafiah Bte Bakar v East West-Umi Insurance Bhd [1993] 1 MLJ 39

22
parties that such rights have been agreed in the contract. Nevertheless, the Louisiana
Civil Code regulates subrogation in a chapter devoted to the transfer of obligations,
displacing that regulation from its earlier location, where it was treated as a special
effect of an act of payment.60 Furthermore, once the subrogation becomes effective, the
right of the insured will move to the subsisting party whereby in this case the insurer, as
result of the payment of the insurance policy. Hence, if the insured has not yet paid for
the full payment of the policy, then no right of subrogation arises to the insurer.

It must be noted, the principle in subrogation stipulates the right for an insured to
obtain compensation from an insurer as has been prescribed under the coverage of an
insurance policy but the insured is only entitled to receive a recovery, no more than
prescribed recovery.61 Marine insurance is a contract of indemnity and the insurance
company is liable only to the extent of the actual loss suffered. For instance,
subrogation prevents an insured from receiving a clawback from the insurer based on
his contractual obligations and a second clawback from the third party under the general
principles of tort. A doctrine of subrogation in the insurance policy allows the insurer to
bring suit on behalf of the insured after an event occurred and the insurer will be
responsible for the litigation costs and in consequence the insurer will pay to the insured
from the award if the claim is successful.

The doctrine of subrogation does not merely give the benefits only to the insured
in claiming the compensation but such rights also will be available to the insurer
whereby once an insurer has paid the losses to an insured, subrogation enables the
insurer to recoup all or some of that money from a third party who caused to the loss. In
Tiong Nam Trading & Transport (M) Sdn Bhd v Commercial Union Assurance (M)
Sdn Bhd, the principle of subrogation is determining in this case as an insurer's right of
subrogation is not limited to the claims that the insured can make in relation to the
claim, but extends to any claim which, when met, will reduce the losses. However, the

60
Snellings III, G. M. (1961). The Role of Subrogation by Operation of Law and Related Problems in the
Insurance Field. La. L. Rev., 22, 225.
61
Castellain v. Preston (1883) 11 Q.B.D. 380.

23
insurer's right cannot be greater than the insured’s rights.62 As in the general rule, the
insurer’s right to subrogate extends only to the amount they actually paid to the insured.
In the case, Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd, the insured’s
vessel was insured for £ 72.000. Due to the third party’s negligence, the vessel was
totally lost and the insurers paid. The pound was subsequently devalued and the
converted dollars produced an excess of £ 42.000. Diplock J in this case found that the
insured was entitled to the excess on the grounds that subrogation cannot produce for
the insurer more than the sum he had paid out.63

In contrast, there is also a situation whereby the insurer is entitled to obtain the
whole of the sum from the claim but is restricted to certain circumstances. It can be
illustrated in the case Winkelmann v. Excelsior Insurance. Accordingly, the court
found an insurer who has paid its insured the full amount due under a fire policy, but
less than the insured's loss, may proceed against the third-party who is responsible for
the loss before the insured has been made whole by the third party.64 This case has
become significant as it derived from the general principles in the subrogation as it
recognized the insurer's subrogation rights as of the insured's failure to promptly
prosecute a third-party claim.

Essentially, in order to establish liability in the law of subrogation, the insurer

must prove that the third party had breached a responsibility they owed to the insured.
The insurer may reimburse its losses by an indemnity action against the third party.
Hence, the effect of subrogation will raise rights to the insurer to proceed with a claim
against the third party who is responsible for causing the loss on behalf of the insured’s
name and also entitled to recover money that they paid out in a claim.

Nonetheless, every contractual agreement will give effect to both parties who
enter into the contract. As an agreement involves two parties, hence, it is important to
be aware of the duty to each other in order to avoid conflicts and misunderstandings. In

62
Tiong Nam Trading & Transport (M) Sdn Bhd v Commercial Union Assurance (Malaysia) Sdn bhd [2008] 6
MLJ 342
63
Yorkshire Insurance Co. Ltd. V. Nisbet Shipping Co. Ltd. [1960 Y. No. 977.], [1962] 2 Q.B. 330
64
Winkelmann v. Excelsior Insurance Company, 204 A.D.2d 622, 612 N.Y.S.2d 229 (N.Y. App. Div. 1994)

24
the principle of subrogation, such right does not arise unless the insurer had indemnified
the insured and the insured cannot refuse the bringing of such claims in his name if he
receives a proper indemnity against cost.65 The right of an insurer to be subrogated to
the rights of its insured is usually based upon the terms of the policy of insurance.66 But,
even though the insurer is the one who claims against the third party on behalf of the
insured, the cost of action is still by the insured. Hence, whether such effect of
subrogation will be effective depends on the circumstances and the terms and
conditions stipulated in the contract.

6.0 IMPORTANCE OF SUBROGATION

There are several significances when it comes to subrogation. Subrogation is a

legal term that refers to a process in which one party is judged to have substituted for
him to acquire and impose the other's rights against a third party for his interest.67
Subrogation protects a person and the insurance company from having the burden to
pay for an accident that was not their fault.

As a person is involved in an accident in which that has been decided that he is

not to blame, the wrongdoer's insurer, who was responsible, will assist in covering the
costs of repairs and medical bills. If reimbursement from the other driver's insurance
company that delayed for some other reason, the person's insurance will frequently step
in to help pay for repairs and other expenditures. If the collision was not even the one's
fault, subrogation permits one's insurer to recover costs such as medical expenses from
the wrongdoer's insurance company, including one's deductible.

In the case of Darrell v Tibbitts, the plaintiff was the owner of a Brighton home.
Mr. B. rented the residence under a lease.68 The tenant was required to manage the
premises under the terms of the lease. The Union Society insured the plaintiff's home
65
Teo Kim Kien & Ors v Lai Sen & Anor [1980] 2 MLJ 125
66
Ahmed, I. B. (2006). Some Aspects of the Doctrine of Subrogation in Insurance law (Doctoral dissertation,
University of Khartoum).
67
Azhar& Wong | Advocates & Solicitors,
http://www.azharwong.com.my/?cur=page/page&id=33&title=What_Is_Subrogation?#:~:text=Subrogation
%20literally%20means%20'substitution'.&text=In%20as%20far%20as%20an,made%20under%20a%20p
olicy%2Fcoverage
68
Darrell v Tibbitts, (1880) 5 QBD 560, 42 LT 797

25
against fire and gas explosion damage. The insured's facilities had damaged in
consequence of a gas explosion caused by the Corporation of Brighton. The plaintiff
eventually sold the property to the defendant, and the insurance policy benefits were
transferred to the defendant. The insurers compensated the defendant for the damage
to the insured properties. The Corporation of Brighton reimbursed the tenant. The
insurers used their right of subrogation to recover the payment from the defendant after
learning that the house had been restored. As a result, the insurance company may sue
the renter on contract in the landlord's name to obligate the renters to repair the house
or pay damages equal to the maintenance's costs.

It is also crucial because insurers use subrogation to lessen and maximize the
impact of a paid loss, which can benefit the insured by improving their loss history. In a
harsh industry, this can be critical. The insured ought to abide by their policies to help
with subrogation and ensure that they do not jeopardize the insurer's subrogation rights.

For instance, in the United States, employers gain benefits from subrogation because it
keeps the workers' compensation premiums reasonable. This principle implies that
when an employer's insurance premiums are calculated, some factors are considered,
such as loss history, previous years' income, and subrogation claims. John Marr, senior
vice president of claims at Maine Employer's Mutual Insurance Co., mentioned in an
article, "subrogation," has been around since the first employees' compensation policy
was drafted. However, numerous insurance companies have not followed up on
subrogation possibilities as thoroughly as they should." Enabling subrogation
encourages carriers to pursue a legal alternative accessible to them that benefits their
insured rather than discouraging them. Furthermore, keep both the cost of insurance
and the terrible impact that unexpected accidents can have on the cost of doing
business, especially catastrophes that are not the organization's fault.

The policyholders are not required to do much throughout the subrogation

process. Subrogation is when insurance companies decide who pays for the
behind-the-action sequences. Depending on the size and nature of a loss, several
measures are required to support subrogation. The first stage is to conduct a thorough

26
investigation into the loss, including determining the cause. It is also a must to gather
information from witnesses and collect and verify data, such as photos, visual
inspections, and tests, concerning the incident location and its condition shortly after the
event. The person needs to engage outside counsel early to take statements and assist
with the investigation if there has been a significant loss or if litigation is expected. Early
legal representation will also be beneficial if workers, residents, or customers who have
been affected by the occurrence file claims. Other than that, in determining the cause of
loss, one may seek the help of an expert if it is deemed necessary. In most cases, the
expense of investigating the loss, including the appointment of specialists, is paid by
insurance plans or can be agreed upon by insurers after a loss.

Collect documents that will affect subrogation, such as contracts with parties
associated with the site or the job. Not only have that, by collecting information on the
event's totaled financial impact as well. This includes the expenditures incurred by the
insured in investigating the loss and bringing it to a settlement. It also contains
information on the effects of the occurrence on the insured's activities. For instance,
higher expenditures and lost revenue, as well as the third party costs to repair or
replace the insured object.

A person should be consistent in notifying the insurer of any incidents and letting
them know whether they intend to pursue legal action or accept a settlement, mainly if it
requires a waiver of subrogation. A waiver of subrogation is when one party agrees to
renounce subrogation rights against the other in the case of a loss. The waiver's
purpose is to prohibit one party's insurer from seeking subrogation from the other. In
most cases, an insured's waiver of subrogation against a third party before a loss does
not limit coverage.69

Its needs to be denoted on how important it is where this is an agreement that

restricts one's insurance company from pursuing the wrongdoer party on one's behalf to
recuperate expenses. A waiver of subrogation occurred when the wrongdoer decided to
negotiate the collision without dealing with one's insurance company. General liability,

69
International Risk Management Institute,
http://www.irmi.com/online/insurance-glossary/terms/w/waiver-of-subrogation.aspx

27
employees' compensation, commercial property, and commercial auto insurance
policies frequently use waivers of subrogation. Mutual waivers of subrogation for losses
covered by commercial property insurance are common in business contracts. During
construction projects, these waivers are also prevalent.70

In Morris v Ford Motor Co Ltd, the plaintiff worked for a cleaning company at
the defendant's auto manufacturing.71 The cleaners agreed, among other things, to
compensate the defendant in the event of any responsibility arising from the negligence
of their respective employees or agents, and the contract mentioned the necessity for
insurance to cover that risk. The plaintiff was injured at work as a result of the
defendant's employee's negligence. The plaintiff sued the defendant, who filed a
third-party lawsuit against the cleaners, claiming an indemnity under the contract to
cover the plaintiff's claim. The cleaners brought the employee in as a fourth party
because they were supposed to benefit from the defendant's rights against the
employee. It was held in the Court of Appeal that it would be inequitable for the
employer to pursue reimbursement from an employee whose negligence is covered by
insurance. Moreover, it was deemed undesirable given the circumstances of that
incident. Not only that, allowing an act to subrogate against an employee is
unreasonable, according to the court, who added that there should contain clauses in
the insurance policy prohibiting subrogation against workers.

Subrogation has an even significant role in keeping workers' compensation

premiums low than it does in other insurance categories. As the insurance company
recovers money through the subrogation procedure, their key point benefits may be
passed on to the insured in the form of decreased premiums. Any deductibles and over
budget payments incurred as a result of the covered loss will be paid to the insured. In
most jurisdictions, subrogation has the right to apply the worker's net recovery as a
credit against any future benefit payments it could owe.

70
Matthiesen, Wickert & Lehrer, S.C., Attorneys at Law. "Understanding Waivers of Subrogation," Pages
44-46. Accessed July 17, 2020.
71
MORRIS v. FORD MOTOR CO. LTD. CAMERON INDUSTRIAL SERVICES LTD. (THIRD PARTY)
ROBERTS (FOURTH PARTY) [1969 M. No. 1833], [1973] Q.B. 792

28
7.0 LIMITATIONS OF RIGHTS AND LIABILITY IN SUBROGATION.

Generally, subrogation applies inherently to all contracts of indemnity, although it

can be restricted or expanded by express terms of the agreement. The strict rule is that
the right of subrogation does not arise unless the insurer has indemnified the insured. In
other words, the insurer would be entitled to all benefits of rights and remedies
possesses by the insured against third parties in any respect of the issue that allowed.
This can be supported by the case of Abdullah bin Maalof (melalui wakil dirinya
Hamzan bin Abdullah) v Ummi Kalthom bt Mohd Zain (menyaman sebagai
pentadbir harta pusaka Mohamad bin Abu Talib), where the insurer had settled the
amount of loss with Maybank Finance, the owner of the vehicle since the car was still
under hire purchase financed by them. In other events, the insured representatives
sued the third party in the accident for damages who argued, among other things, that
only the insurer had the right to claim under the principle of subrogation. The court held
that once the insurance company paid the loss to Maybank Finance, its right to sue had
been subrogated to the insurance company, and there was no instruction by the insurer
for the respondent in this case to recover the amount paid. Thus the respondent had no
right to file the claim.72

However, the insurer would be unable to sue the third party in its name if there is
no formal assignment of the right of action. It is because subrogation is not an automatic
process where the insurer would be entitled to the insured benefits of claim against the
third party. There is a need for formal assignment or requirement; the subrogation
clause in the insurance contract that delegates the insurer's power to subrogate. If not,
the insurer cannot bring an action against a third party in their names.73This principle
can be referred to Rafiah bte Bakar v East West-UMI Insurance BHD.74 The court
held that the claim could not be entertained and dismissed when there is no evidence of
a formal assignment for subrogation.

72
Abdullah bin Maalof (melalui wakil dirinya Hamzan bin Abdullah) v Ummi Kalthom bt Mohd Zain
(menyaman sebagai pentadbir harta pusaka Mohamad bin Abu Talib) [2010] 7 MLJ 403
73
Insurance Law, ‘( 4 ) Subrogation in Insurance’ (2010) 20 3.

74
Rafiah bte Bakar v East West-UMI Insurance BHD [1993] 1 MLJ 39

29
 As mentioned above, the formal assignment or the subrogation clause is a
clause that gives power to the insurer to enter a claim against a third party. Thus, before
the insurance contract is signed, the insured must fully express the risks to the insurer
to ensure they might not lose the claim in the future. However, the right of subrogation
can be waived, such as where the insurance company will not exercise its right of
subrogation. It is a situation where the insurer believed that the claim might be unjust or
contrary to the public policy. Further, the right to waive can be expressed by words or
implied.75 The case where the right to waive was implied is in the case of Cooper v
Jenkins.76 In this case, the plaintiff was driving an uninsured vehicle owned by Dalana
Norman, and he was struck by the defendant, who was also driving an uninsured car.
The plaintiff sued for the benefits, and the Farm Bureau Insurance Company was
assigned to strike the damages awarded for the attendant care provided by Norman,
which stipulated was $60,000. The plaintiff argued that the claim is not involving the
vehicle owner, Norman, as it is a claim between the Farm Bureau and the defendant. It
was held that Norman, the owner of the uninsured vehicle, was not eligible to be paid
personal protection insurance benefits. The insurer to whom claims have been assigned
shall preserve and enforce rights to indemnity or reimbursement against third parties
and account to the assigned claims facility, therefore and shall transfer such rights to
the assigned claims facility upon repayment by the designated claims facility.

7.1 THE EXTENT OF RIGHT.

There is a situation where the insured entered an insurance contract with another
insurer. For that, an insurer's rights in the agreements entered will not be affected by
any agreement made by the insured with another insurer later, and the insurer will
entitle to what have they indemnified.77 In Boag v Standard Marine Insurance Co Ltd,
a cargo was insured with one insurer for its total value at shipment. Later, when its value
rose during shipment, that cargo was insured for its increased value with other insurers.

75
Equitable Doctrines, ‘(10) Subrogation’ (2013) 11 7.

76
Cooper V Jenkins [1863] 32 Beav 337
77
Law (n 2).

30
Subsequently, the cargo faced total loss, and the court held that the primary insurer was
entitled to the benefits and remedies due to complete loss.78

In contrast, the later insurers were not entitled to share proportionate to their
increased value policy. Besides, suppose the insured has renounced any of the rights or
remedies against the third parties. The insured signed an insurance contract with a
subrogation clause to give the insurer power to commence the subrogate action. In that
case, the insured will have to answer the insurer for the total value received from the
third party. It is a general rule of subrogation where the insurer steps into the insured's
shoes to receive the benefits on rights and remedies against the third party who has
occasioned the loss. This principle is well explained in AXA Griffin General Insurance
Bhd v k Thanarajah A/L Kanagaratnam.79 The defendant purchased an insurance
policy from BH Insurance Company, the plaintiff, to protect and cover the damage to his
house at Bukit Antarabangsa, Kuala Lumpur. The sum insured was RM555 000.00.
Subsequently, the defendant's house was destroyed due to the massive landslide, and
the plaintiff offered the defendant the recovery amount of RM530, 000.00. On the other
hand, the defendant, with the other residents, filed a legal suit against the developer,
and the defendant received RM1 297,000.00 for the house damage. The plaintiff
demanded the RM530, 000 transferred to the defendant as required under the
subrogation clause. The court held the plaintiff entitled to the RM530, 000 transferred
earlier to the defendant under the term of subrogation clause that the defendant had
signed.

Furthermore, there can be no limitation to the payable amount in compulsory

motor insurance and the third party compulsory motor insurance. On the other hand, the
insurer cannot give a full indemnity in some types of liability insurance.80 For that, the
policy may fix a maximum total payable during the currency of the policy, which this
principle was decided in the case of British General Insurance Co v Mountain.81 It
was held under the original policy; there was a maximum liability for the year and a
78
Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113
79
AXA Griffin General Insurance Bhd v k Thanarajah A/L Kanagaratnam [2017] 10 MLJ 243
80
British Cash, ‘( 1 ) General Features’ (1952) 20 4.

81
British General Insurance Co v Mountain [1919] 36 TLR 171

31
maximum liability for each accident. The situation to illustrate the case above is the
insured involved in an accident. He might be entitled to be indemnified to the maximum
amount. However, if the insured involves in a new accident, the previous accident will
not be counted, and he is entitled to be indemnified to the specified maximum amount.

7.2 RECOVERY IN SUBROGATION.

The rule in subrogation is that the insurer would be entitled to recover their
payment to the insured for the damage recovery, as explained in AXA Griffin General
Insurance Bhd v K Thanarajah A/L Kanagaratnam. However, how will it be if the third
party faces bankruptcy and cannot pay the total amount like what has been paid by the
insurer to the insured? Then, if this case happens, there will be a sharing in
subrogation, and two factors need to be determined which any recovery of the
subrogation would be shared. Firstly, the amount of the recovery obtained concerning
the loss and secondly, whether the insurance covers the total or partial loss.82 The
situations would arise such as follow:

1. The recovered amount is the same as the amount lost.

This situation is straightforward and understandable, where the recovered amount is

equal to the amount of loss paid by the insurer to the insured.83

2. The recovered amount exceeds the amount of loss.

It is a situation where the amount received from the third party to the insured
exceed the amount paid by the insurer. In other words, there is a surplus. The insurer is
only entitled to the amount paid, and the rest belongs to the insured to keep.84 This
principle had been illustrated in the case AXA Griffin General Insurance Bhd v K
Thanarajah A/L Kanagaratnam.85 It is immoral and against the public policy when the
82
Michael Furmston, ‘Malaysian Insurance Law’ (2020).

83
ibid.

84
ibid.

85
AXA Griffin General Insurance Bhd v k Thanarajah A/L Kanagaratnam [2017] 10 MLJ 243

32
insurer's claim exceeds what he already paid to the insured. He is entitled to the amount
of loss that his company has indemnified. The other case that can be referred to is
Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd.86 It was held that the insured
entitled to surplus amount of £55,000 while the insurer was only entitled to £72,000 of
the recovered amount. It was due to the whole claim by the insurer against the insured
for the loss of ship collision, and the insurer was mala fide to gain advantage to claim as
the loss paid was in the rate of exchange from Canadian Dollars to Sterling Pound.

1. The recovered amount is less than the amount of loss.

It is a situation where the third party cannot pay the amount of damage suffered
by the insured. The factors that may lead to this situation are that the third party cannot
pay more and be insolvent or bankrupt. There is a calculation to solve this matter which
was derived from the case of Napier v Hunter.87 The analysis is concerned with the
deductible amount agreed by the insured in the policy contract. For example, the
insured faced a total loss of RM200, 000.00, and the insurer can pay RM180, 000.00
because the sum insured is limited to RM180, 000.00. Here, Napier v Hunter's principle
will apply where the insurer can deduct the deductible for which the insured has agreed
to bear in the insurance contract.

8.0 JURIDICAL BASIS IN SUBROGATION

8.1 ADMINISTRATION LAW OF RIGHT OF SUBROGATION

As explained aforesaid, the doctrine of subrogation is another word for

substitution, the insurer or the insurance company paid in place of the insured loss.
Thus, if it is established that the wrong caused by a third party, the insurer has a right to
extend his right to claim against the third party, where the right of subrogation comes
into operation. The insurer's situation to claim against the third party for the loss
incurred could be interpreted as an indemnity for what has insurer has paid before a
claim against the third party, the one who is accountable for the loss. The right of

86
Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2 QB 330
87
Napier v Hunter [1993[ 2 WLR 42

33
subrogation is also not independent on the insurer's part as it arises from the insured.
Simply put, the insurer cannot bring a legal suit against the third party without the
insured's permission or is known as the policymaker. The doctrine is not administered
as a legal right but as a principle applied to serve the ends of justice and do equity.88

8.1.1 HOW DOES THE RIGHT OF SUBROGATION TO BE ASSERTED.

Several prerequisites must be fulfilled before the insurer could raise a right of
subrogation for the payment he had made. However, it is subjected to the terms in the
insurance policy. The first thrust to be satisfied is that there must be a relevant loss
insured. The second thrust is complete indemnification to the full extent as written in the
insurance policy by the insurer in lieu of the insured.

Regarding the former situation, the right of subrogation will never arise if the
contract between the insurer and the insured is void. No right of subrogation exists if the
insurance contract is void. The insurance contract may become invalid if any of the
main thrust in the agreement is negated. For instance, the insurable interest is none to
be existent. Therefore, if the policy in the contract requires the insurer to insure the loss
that the insured incurred, the right of subrogation will never arise. It is due to the
payment made by the insurer is not purported to the obligation to reimburse the insured,
implying the contract between them was never valid from the start due to elements of
the insurance contract is yet to be established to constitute an obligation derived from
the agreement. The payment made by the insurer to insure the loss incurred is
supposed to be a discharge of liability deriving from the contract, but it is void.
Therefore, there was never an obligation; this situation is highlighted in John Edwards
and Co V Motor Union Insurance Co Ltd (1922) 2 KB 249.89 Therefore, it is essential
to affirm that the insurer is obligated to assure the relevant loss. It is immaterial if the
insurer already made a payment for the insured's loss if the contract between them is
void.

88
Cagle Inc v Sammons 198 Neb 595; 254 NW 2d 398 (1977). See CCH Australia Limited, "Australian
and New
Zealand Insurance Reporter" (2004)
89
John Edwards and Co V Motor Union Insurance Co Ltd (1922) 2 KB 249.

34
 Moreover, in the latter situation, the insurer must have fully indemnified the
insured to the required length in the insurance policy. The right of subrogation on the
part of the insurer will be exercisable. Aside from that, the insurer will never exercise the
right of subrogation until the contract is fully indemnified. The failure to subrogate due to
incomplete indemnification is illustrated in Page v Scottish Insurance Co Ltd.90 In the
mentioned case, the insurer already indemnified the insured on the motor vehicle
repairs; however, it is not yet a full indemnification due to several issues on the insurer's
liability. In that case, the insurer is yet to be able to exercise the right of subrogation due
to incomplete indemnification on the losses as per the policy term in the contract. It is
pivotal on behalf of the insurer to make a full indemnification on the loss insured as
employed in the insurance policy to exercise the right of subrogation.

Also, another issue on the full indemnification will appear if the insurer has
already made indemnifications or is regarded as not a full indemnification due to the
discontentment of the indemnification made. For example, the motor vehicle has been
sent to the workshop to fix the broken parts accrued due to the accident; however, the
workshop does not correctly purport the dissatisfaction of the insured. This has been
adapted in the case of Scottish Union & National Insurance Co v Davis where the motor
vehicle repairs are not performed correctly, purporting to discontentment, which makes
the indemnification not fully inconsistent with what has been written in the past the
contract.91

There are several ways in which the right of subrogation could emanate or, in
either means, how to administer the right of subrogation on behalf of the insurer. One of
the circumstances is that the insurer can arrange a legal suit against the third party to
be held accountable for causing loss, purporting the loss of the insured paid by the
insurer.92 This evident that if the insured is involved in a situation where the loss
incurred is within the scope that the insurance company covers, the insurer will pay it in
place of the insured to discharge his liability due to the obligation attached to the
90
Page v Scottish Insurance Corp Ltd [1929] 98 LJKB 308 at 312
91
1970) 1 Lloyd's Rep 1190
92
‘What Is Subrogation?’ (Azhar & Wong | Advocates & Solicitors)
http://www.azharwong.com.my/?cur=page/page&id=33&title=What_Is_Subrogation? accessed 20 May
2021

35
contract between the insurer and insured. Then, if the insured seeks to make the third
party or prove before the court the third party who is at the wrong causing the loss on
the insured, the recovery money acquired from the judgment is subjected to the right of
the insured insurer. Or in other words, the insured seeks to obtain a legal judgment
against the third party. The insurer can arrange a legal suit to be commenced against
the third party. If the decision is obtained in favor of the insured, where the third party
must compensate the loss, the insurer's right will come into operation. Legally, it is
regarded as the insured's action, and the insurers effectively benefit from such action.93
As explained, the subrogation claim is a contract of indemnity where the insurer is
entitled to indemnify what has been paid before the judgment obtained against the third
party. Besides, aside from the subrogation claims purporting to indemnify what has
been incurred, the said doctrine also avoids an "unjust enrichment" doctrine.

The unjust enrichment could be exemplified in the circumstances where the

insured already claimed payment from the insurer as per the policy terms of the
insurance contract between them. The insured also has successfully obtained a
judgment against the third party acquiring another benefit or payment of claim derived
from the accident. The doctrine of subrogation is an intervention of right where the
insurer will refrain the insured from obtaining double recovery, or we could term it as
unconscionable conduct. Plus, that insurer is held that to have enforceable equitable
lien or charge upon money recovered.94

In a similar vein, the insurer can employ his right of subrogation when the insured
assigns or delegate his cause of action towards the third party to the insurer. Thus, with
that assignment of cause of action has been transferred from the insured to the insurer,
the insurer gets to bring a legal action in their capacity. This has been evident in the
case of Rafiah bt A Bakar v East West-UMI Insurance Bhd, Justice James Foong
stated that:

"Subrogation is not an automatic process given to the insurer by his insured to be

placed in a position to be entitled to the advantages of all rights and remedies which

93
You Sum, Cheah. Malaysian Insurance law. 2018.
94
Ibid.

36
 the insured has against the third party in respect of the subject matter. There must be a
formal assignment of the right of action, and an insurer cannot in the absence of such a
formal assignment bring an action against a third party in their names".95

Insurers may only proceed with an action under subrogation if the rights are
assigned to them by the insured.96 As narrated by the judge, there must be a formal
assignment on the insured's cause of action to the insurer. The insurer has no cause of
action that can be raised independently without the work or reason of action derived
from the insured. If there is no commencement of proceeding towards the third party to
claim a loss incurred to the insured, then there is no room for indemnification of what
has been paid to the insured; automatically, there is no room for subrogation
implemented.

9.0 JUDICIAL BASIS OF SUBROGATION

9.1 AUTHORITIES FOR THE RIGHT OF SUBROGATION UNDER INSURANCE

CONTRACT ACT 1948

In the context of subrogation under the Insurance Contract Act 1948, multiple
provisions provide the implementation of subrogation's doctrine in the insurance
contract. It is envisaged in section 64 of the Insurance Contract Act 1948. It connotes
the application of subrogation's principle to the third-party beneficiaries.97 Then, section
65 mentions on regards of the subrogation to rights against the family of the insured.98
The said provision discusses the insurer's possibility to be subrogated against the third
party that may have a family relationship with the insured. Further in section 66, it could
be seen where the case of the right of subrogation could be exercised against the
insured's employee. In contrast, section 67 of the Act covers the right of money
recovery between the insured and the insurer, which was acquired under the
subrogation.99 Then the final provisions enshrined in the Insurance Contract Act is

95
[1992] 1 AMR 440 at 444; [1993] 1 MLJ 39 at 44, HC..
96
Rafiah bt A Bakar v East West-UMI Insurance Bhd [1992] 1 AMR 440; [1993] 1 MLJ 39, HC.
97
INSURANCE CONTRACT ACT 1948
98
Ibid
99
Ibid

37
section 68, where it mentions an insurance contract that affected the right of
subrogation where the terms in the policy limit the said right.100

9.2 JUSTIFICATION OF SUBROGATION ISSUES IN CASES.

As the right of subrogation is not an automatic right that can be exercised like
any other rights, which to emphasize, it arises out from the insured or an extension of
right by the insurer. The doctrine of subrogation could be orchestrated to both marine
and non-marine insurance. For non-marine insurance, the principle is exercisable for
any insurance contract, which is consonant to a doctrine of indemnity's contract. An
indemnity contract could be interpreted as an agreement that allows the process of
compensation or reimbursement towards another party. Under this such contract, the
liability of the person entitled to indemnify the other person emanates by the loss
incurred by the indemnified person due to the failure made by the promissor who
agreed to indemnify or caused by an anonymous person. Several examples of a
contract of indemnity are fire insurance or motor insurance. It is to be noted that the
doctrine of subrogation is not implemented in life or accident insurance contracts. Such
contracts do not fall within the ambit of a contract of indemnity. Conventionally, the
doctrine works as a device to retrieve any interest or benefit received by the insured.
Several contentions pertinent to the right of subrogation are viewed differently in several
cases, depending on the circumstances of the issues.

In the case of Tiong Nam Trading & Transport (M) Sdn Bhd v. Commercial
Union Assurance (Malaysia) Sdn Bhd, the Court of Appeal had briefly clarified the
principle of subrogation in its judgment as follows:

'It must be borne in mind that the right of an insurer to be subrogated is

not confined to claims which the insured may make in respect of the
loss, but extends to all claims which, if satisfied, will diminish the loss.101

100
Ibid
101
Tiong Nam Trading & Transport (M) Sdn Bhd v. Commercial Union Assurance (Malaysia) Sdn Bhd
[2008]

38
 The Court of Appeal further confirmed that the subrogation doctrine comprises
two different rights on the insurer after compensating the insured's loss. The first one is
that the insurer is subjected to the benefit of all rights and remedies of the insured have
towards third parties, which, if satisfied, the insurer will get whatever the insured gets.
Secondly, the insurer subrogated the right, placing the insurer's place in the insured's
place. Briefly, the insurer is subjected to the insured's rights to seek compensation for
the loss from third parties.

Further, analyzing the case of Abdullah bin Maalof (melalui wakil dirinya
Hamzan bin Abdullah) lwn Ummi Kalthom bt Mohd Zain (menyaman sebagai
pentadbir harta pusaka Mohamad bin Abu Talib), a vehicle involved in a car accident
was under hire purchase financed by Maybank Finance.102

In this case, the non-availability of the right of the insured to claim against the
third party. The situation is when the vehicle still under a hire purchase agreement was
involved in the motor accident. The insurer for the car has compensated every loss and
expense regarding the accident; however, the insured, in his capacity without the
insurer's instruction, wanted to file a legal suit against the third party. However, it is
argued that the insured has no locus standi considering the insurer has already
indemnified the insured. If the insured is allowed to claim, he is entitled to seek the
double recovery derived from the insurer and the third party. The court held that, once
the payment made by the insurer to indemnify the insured, the right is subrogated to the
insurer to claim against the third party, then the insured, without being instructed to do
so, has no right to file the claim. The same principle also applied in the case of Teo Kim
Kien v Lai Sen. The issues were when the insurer claiming against the third party using
the right of subrogation when the insurer already made an indemnification for the loss
towards the cyclist and the car itself, the third-party contended that the insured does not
bear any loss as the insurer already compensate everything.103 But it is held that the
claim of subrogation from the insured against the third party by request from the insurer
is maintainable. It is in line with the principle that the insured has been indemnified fully.

102
Abdullah bin Maalof (melalui wakil dirinya Hamzan bin Abdullah) lwn Ummi Kalthom bt Mohd Zain
(menyaman sebagai pentadbir harta pusaka Mohamad bin Abu Talib) [2010] 7 MLJ 403
103
Teo Kim Kien v Lai Sen [1980] 2 MLJ 125

39
The insured can bring a case against the third party by the insurer's request to exercise
the subrogation right to obtain the judgment compensating what he has paid before the
claim sought.

It can be submitted that both cases have similarities where the possibility of the
right of subrogation is available; however, it depends on the case facts themselves. For
the former case, it could be observed that once the insurer makes the full
indemnification for the loss incurred to the insured, he ceases to have the locus standi
against the third party. But, this does not necessarily mean that the insured cannot
initiate a legal suit to make the loss compensated on the part of the third party who
caused the loss. It can be illustrated that it must be at the insurer's request where the
right of subrogation came into operation. In contrast, in the latter case, it could be
clearly understood that the insurer has a right of recovery of what he has paid in lieu of
the insured loss, where the insured brought a case against the third party to seek the
compensation through the request made by the insurer. There has always been a
distinct reason to deliver a judgment regarding the availability of the right of the insurer
or insured to claim a legal suit against another party. However, to be noted that it is
plausible for the insured to get requested by the insurer before initiating a lawsuit
against the third party as it possibly is regarded as double recovery in the situation, the
insured has been compensated by the insurer. If the judgment obtains between him and
the third part favored him, he will obtain another recovery due to loss. If it were done
with the insurer's knowledge, then the insurer will get reimbursed for what has been
paid for the insured loss, coincidental with the purpose of the right of subrogation.

10.0 SUBROGATION VS CONTRIBUTION

10.1 PRINCIPLE OF CONTRIBUTION

Another legal principle in insurance is known as the principle of contribution. The

principle of contribution in insurance is the right of an insurer who has paid under a
policy to call upon other interested insurers but not necessarily equally liable to the
same insured to share the cost of an indemnity payment. Similar to subrogation,

40
contribution only applies to the contract of indemnity insurance.104 The principle of
contribution works where, if there is more than one policy covering the same loss at the
time of loss, then all policies should pay the loss proportionately to the extent of their
respective liabilities. The principle aims to avoid the insured getting more than the
complete loss he or she had suffered from all sources, i.e., from both insurers who
cover the same loss. Suppose a particular insurer had paid the total loss to the insured.
That insurer shall have the right to call all the interested insurers to pay him back to the
extent of their liabilities, whether equally or otherwise. Moreover, the insured shall not
be under any circumstances allowed to take advantage of all policies individually to get
the whole claim for the loss many times. Even if the insured recovers from all the
policies, he shall refund all such payments over the actual loss sustained.105

In the case of Royal Globe Ins V Aetna Ins., the court described the doctrine of
contribution arises among co-insurers in permitting one of the insurers who has paid the
total loss to reimburse from other insurers who are also liable for the loss since the
insurer has paid the debt which the other insurers equally owe.106 Moreover, this court
also stated that an insurer that took on the burden of paying a total settlement payment
before a possible judgment does not mean that insurer is a volunteer (where it can also
consider as ex gratia payment). Hence, it does not preclude the insurer who has paid
the whole amount from recovering contribution from other insurers who also liable for
the same loss. In addition, the courts in Malaysia, when describing the principle of
contribution in determining a case decision is through quoting the passage from the
book Law of Insurance by Poh Chu Chai (3rd Ed), which states as follows:

"When a particular risk is insured with two or more insurers and a loss arising from the
risk insured is fully paid for by one of the insurers, the insurer who has indemnified the
insured for the loss is entitled to claim a contribution from the other insurers who have
not indemnified the insured. An insurer's right of contribution does not arise from the

104
You Sum, Cheah. Malaysian Insurance law. 2018.
105
How Principle of Contribution Works in Insurance.” IEduNote.Com, 11 June 2018,
https://www.iedunote.com/principle-of-contribution
106
Royal Globe Ins. Co. v. Aetna Ins. Co., 82 Ill. App. 3d 1003, 403 N.E.2d 680 (Ill. App. Ct. 1980).

41
 contract but in equity, namely that persons who are liable for the same loss should
contribute equally towards the loss."107

Besides that, the situation where more than one policy insured the same loss is
double insurance. Double insurance aims to ensure that an insured must not receive
more than the loss he suffered to prevent unjust enrichment. Double insurance occurs
when the same interest is insured more than once against the same risk. The insured
here either may have recovered the complete loss from one of the insurers, or he may
recover it from all insurers.108 Besides that, double insurance unintentionally arises from
arranging insurance from business transactions or fulfilling contractual requirements. If it
did deliberately, then it would be considered as an attempt to commit fraud.109 One must
not confuse or claim that just because there is an overlapping between the insurance,
double insurance arises. This was stated clearly in AXA Affin General Insurance Bhd
v Mitsui Sumitomo Insurance Malaysia Bhd, where both plaintiff and defendant's
policy seemed to be overlapping.110 However, due to the difference in the scope of
coverage and interests insured, it does not constitute double insurance. A simple
example of double insurance arises when an insured has five restaurants in Malaysia,
and he purchased the insurance to cover all his restaurants. At the same time, he also
bought another insurance to cover only one of the restaurants. Double insurance arises
if both insurance policies cover the same risk on the same restaurant and the same
insured party. Therefore, if the insured has more than one policy but they cover different
risks, then there can be no contribution arise among the insurers. Instead, the principle
of subrogation may then apply according to its' general principle and conditions applied.

10.2 SUBROGATION VS CONTRIBUTION.

People may be confused on how the terms of subrogation and contribution work
in insurance law because sometimes the court use the word 'indemnity,' 'subrogation'

107
The judge mentioned in the case of AXA Affin General Insurance Bhd v Mitsui Sumitomo Insurance
Malaysia Bhd [2011] 2 CLJ and MSIG Insurance Malaysia Bhd v Overseas Assurance Corp [2011] 1 MLJ
392.
108
Imtihal, and Babiker Ahmed. Some aspects of the Doctrine of Subrogation in Insurance Law. University
of Khartom.
109
You Sum, Cheah. Malaysian Insurance law. 2018.
110
AXA Affin General Insurance Bhd v Mitsui Sumitomo Insurance Malaysia Bhd [2011] 2 CLJ.

42
and 'contribution' interchangeably. Apart from that, the parties in dispute or parties in the
insurance contract always decide how both principles may affect each other so that the
insurer cannot sue or make any claim against another insurer. To understand how each
principle works in insurance law clearly, one should recognize the difference between
these two principles.

10.3 THE PURPOSE OF THE PRINCIPLE.

Both of the principles have different rights. Subrogation gives the insured's
indemnity right to the insurer to request reimbursement from a third party, which causes
a loss after having indemnified the insured. Meanwhile, for contribution, if an insured is
insured by more than one policy, the insurer has the right to call another insurer to share
the burden for the loss incurred according to the liability of each insurer.

10.4 THE GENERAL PRINCIPLE.

Contribution can only arise when it fulfills five conditions.111 Firstly, there must be
two or more indemnity policies, and all of them are in force. Secondly, each of the
insurance policies insure the same subject matter of the loss. There is no need for the
subject matter to be the same, such as covering the subject matter by each policy.
Thirdly, each of the insurance policies insures the common peril causing the loss. In
MSIG Insurance Malaysia Bhd V Overseas Assurance Corp, the defendant tried to
defend that there was a distinction between the damage covered by each polices and
also claimed that liability only attached if the damage caused due to subsidence.112 The
court held that both policies were effected against the same peril, and the plaintiff could
claim for contribution. Fourthly, each of the policies must insures the same interest, i.e.,
the same insured. This can be seen in North British and Mercantile Insurance Co v
London, Liverpool and Globe Insurance Co, where due to the different interest
insured, the contribution failed.113 Lastly, each policy is respectively liable for the loss. It

111
MSIG Insurance Malaysia Bhd v Overseas Assurance Corp [2011] 1 MLJ 392 and “How Principle of
Contribution Works in Insurance.” IEduNote.Com, 11 June 2018,
https://www.iedunote.com/principle-of-contribution.
112
Ibid.
113
The North British and Mercantile Insurance Company v. McLellan (1892) 21 SCR 288.

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must make sure that there is no provision or any stipulation that excludes the right to
contribution.

Meanwhile, it only arises after the insurer has indemnified the insured's claim
under a contract of indemnity for subrogation. This is fundamental so that the insurer
has the right to claim under subrogation against the party who caused the loss. Like
contribution, if an insurer has reserved his rights as to liability or withheld part of the
indemnity, no subrogation arises.

10.4.1 THE CONFLICT BETWEEN SUBROGATION AND CONTRIBUTION.

Generally, the principle of subrogation applies where an insurer, after indemnified

the insured, had the right to stand on the insured's name to request compensation from
another party who caused the loss. However, this is not the problem where the conflict
between subrogation and contribution lies. The conflict lies when there are issues in
identifying the risk coverage because some insurers claim that the risk their policy cover
is either different or similar to another insurance policy.

In the occasion of different risks, the conflict arises between the excess insurer
and primary insurer. The case to be referred to is in New Amsterdam Casualty Co. v.
Certain Underwriters.114 In this case, Chester A. Fiske was driving a rented car owned
by Hav-A-Kar, which was insured by Certain Underwriters (the defendant) against
liability in the operation of its vehicles when driven by a named assured or with
permission of a named assured. Fiske also has his insurance policy named New
Amsterdam (the plaintiff), which protects him from liability arising out of the operation or
use of his car and any other vehicle he might operate. The plaintiff's insured had an
accident while driving the rented vehicle belong to the defendant's insured, and the
injured persons in the other car filed suit against Fiske. When the plaintiff tendered the
insured's defense to the defendant to paid the loss, the defendant refused. The court
held that the plaintiff who had paid the loss was subrogated to their insured's right and
received the total amount of damages and expense because the plaintiff was an excess
insurer while the defendant is the primary insurer.
114
New Amsterdam Cas. v. Underwriters, 34 Ill. 2d 424, 216 N.E.2d 665 (Ill. 1966)

44
 Another issue is between a primary insurer and a primary insurer covering a
different risk. Different from the above situation, in this issue, both insurers do not have
an excess clause. Hence, in the situation where an insurer is only secondarily liable has
paid a loss, he can apply for equitable subrogation against another insurer who was
primarily liable. Equitable subrogation permits one insurer not mainly liable to the
insured to shift the entire loss to another insurer primarily responsible to the insured.115
The application of equitable subrogation can refer to State Farm & Casualty Co. v
Cooperative of American Physicians.116 A patient named Doris Smith fell off from
examination table after received an injection from Dr. Wrobel. She then sued the
medical practice group both for malpractice and premises liability. At the time of the
accident, the medical practice group is insured for premises liability by State Farm and
professional liability by Cooperative and Mutual Protection Trust. However, both medical
malpractice insurers refused to settle the loss, and instead, State Farm determined
settlement was in the best interests of the insureds and settled with Smith before trial.
State Farm later sued both insurers for a declaration of coverage for the Smith claim
and reimbursement of the settlement amount. The court held that State Farm should
recover the cost through equitable subrogation.

Lastly, an issue arises when both insurance policies had overlapping coverage.
However, one of the insurers claimed that the covered risk is different and try to shift all
the burden to another insurer. In Indiana Ins. Cos. v Granite State Ins. Co., the court
held that both policies had identical risks because risk coverage does not require the
total coverage to be the same.117 The same happened in MSIG Insurance Malaysia
Bhd V Overseas Assurance Corp.118 Therefore, as long as both policies cover the
particular risk involved in the case, the coverage is duplicate, and contribution will be
allowed for an insurer to claim against another insurer for partial reimbursement rather
than full reimbursement because both insurers share the loss.

115
The Courts and Equitable Subrogation versus Equitable Contribution (Part 1) | Expert Commentary |
IRMI.Com.
116
State Farm Fire & Cas. v Cooperative of American Physicians, 163 Cal App 3d 199, 209 Cal Rptr 251
(Cal App 1984)
117
Indiana Ins. Cos. v Granite State Ins. Co., 689 F Supp 1549 (SD Ind 1988).
118
MSIG Insurance Malaysia Bhd v Overseas Assurance Corp [2011] 1 MLJ 392.

45
 What can be emphasized from all these three issues is that both insurers
covered the same loss. In any event, it does not mean that contribution can be applied
because the interest insured is different. Secondly, if more than one policy covered the
same insured, for instance, medical practice group, it does not mean the proper
contribution arises. Instead, subrogation arises because the risk coverage is not
identical. Thirdly, when both policies covered the same interest insured, the same
subject matter, and similar risk, contribution arises. In conclusion, identifying the
principle of subrogation and contribution seems more manageable when one
understands its general principle. However, when it comes to applying it, there is some
conflict because some insurers tend to shift the blame to another insurer to avoid paying
the loss saying that either the risk coverage is different or similar.

11.0 CONCLUSION

Overall, it is clear that the nature of the right of subrogation is indeed one of the
equitable doctrines provided for the insurer that originated from equity and was
practiced simultaneously in Common Law courts. Subrogation demands good
understanding and consideration between the insurer and the insured since it plays a
vital role in insurance law. Both parties must be aware of the obligation they owe each
other as per what has been agreed in the insurance policies. The doctrine of
subrogation will affect the insured and the insurer as they have a responsibility towards
their insured. In contrast, the insured also should provide precise information and inform
the insured if they have paid by the third party. Hence, before the court decides whether
the subrogation clause is either valid or invalid, the court must notice how to serve
justice between the insured, the insurer, and the third party. It must be in mind that there
are few situations where the insurer can and cannot be liable to subrogation rights. The
same goes for the insured, as he can lose the payment received from the third party
according to the principle of subrogation. There are also mathematical requirements
needed to obey in recovery under the doctrine of subrogation. Lastly, subrogation is
always confused with the element of contribution. Therefore, understanding the
differences between subrogation and contribution can avoid any unnecessary conflict
that will delay the responsible insurer indemnifying and defending the insured.

46
47
12.0 BIBLIOGHRAPHY

Articles

1. ‘Subrogation Principle in Insurance’ (iEduNote.com, 21 June 2018)

2. ‘The Right of Subrogation by an Insurer Against Its Insured and the Impact of Recent
3. ‘Valued Policy Law (VPL) - Overview, How It Works, Coverage’ (Corporate Finance
Institute)
4. ‘What Is Subrogation?’ (Azhar & Wong | Advocates & Solicitors)
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> accessed 20 May 2021
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8. Anthony J. Sebok, ‘The Inauthentic Claim’ (2011) 64 Vanderbilt Law Review 61.
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(Professional
10. How Principle of Contribution Works in Insurance.” IEduNote.Com, 11 June
2018, https://www.iedunote.com/principle-of-contribution.
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<https://butlerevans.co.uk/what-is-average-in-an-insurance-policy/> accessed 20 May
2021
12. Julia Kagan, Conventional Subrogation (Investopedia.com, 21 March 2021) <
https://www.investopedia.com/terms/c/conventional-subrogation.asp> accessed 26 May
2021.
13. Legislation’ (Findlaw)
<https://corporate.findlaw.com/litigation-disputes/the-right-of-subrogation-by-an-insurer-
against-its-insured-and.html> accessed 18 May 2021
14. Matthiesen, Wickert & Lehrer, S.C., Attorneys at Law. "Understanding Waivers
of Subrogation,", Accessed July 17, 2020.
15. Patrick T. Morgan, ‘Unbundling Our Tort Rights: Assignability for Personal Injury and
Wrongful Death Claims’ (2001) 66 Mo. L. Rev. 1.
16. Rex Capwell, Thomas E. Greenwald, ‘Insurance: Legal and Practical Problems Arising
from Subrogation Clauses in Health and Accident Policies’ (1971) 54 Marq. L. Rev. 255.

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 17. The Courts and Equitable Subrogation versus Equitable Contribution (Part 1) |
Expert Commentary | IRMI.Com.
https://www.irmi.com/articles/expert-commentary/the-courts-and-equitable-subro
gation-versus-equitable-contribution-part-1#7. Accessed 27 May 2021.

Journals

1. Ahmed, I. B. (2006). Some Aspects of the Doctrine of Subrogation in Insurance

law (Doctoral dissertation, University of Khartoum).
2. Snellings III, G. M. (1961). The Role of Subrogation by Operation of Law and
Related Problems in the Insurance Field. La. L. Rev., 22, 225.
3. Skinner M, and Cross J, 'Subrogation'

Books

1. Black’s Law Dictionary (8th Edn)

2. Imtihal, and Babiker Ahmed. Some Aspects of the Doctrine of Subrogation in
Insurance Law. University of Khartoum.
3. Nasser Hamid, “Insurance Law.” (Malaysia: Gavel Publications, 2009), p. 281.
4. Robinson, Allens Arthur. SUBROGATION. 2006.
5. You Sum, Cheah. Malaysian Insurance Law. 2018. Thomson Reuters Malaysia
Sdn Bhd.
6. Halsbury's Laws Of Malaysia (Lexis Nexis Malaysia 2010)
7. Insurance Contract Act 1948

Cases
1. Abdullah bin Maalof (melalui wakil dirinya Hamzan bin Abdullah) v Ummi
Kalthom bt Mohd Zain (menyaman sebagai pentadbir harta pusaka Mohamad bin
Abu Talib) [2010] 7 MLJ 403
2. AXA Affin General Insurance Bhd v K Thanarajah A/l Kanagaratnam [2017] 10
MLJ 243.
3. AXA Affin General Insurance Bhd v Mitsui Sumitomo Insurance Malaysia Bhd
[2011] 2 CLJ.
4. Boag v Standard Marine Insurance Co Ltd [1937] 2 KB 113

49
5. British General Insurance Co v Mountain [1919] 36 TLR 171
6. Cash B, ‘( 1 ) General Features’ (1952) 20
7. Castellain v. Preston (1883) 11 Q.B. 380
8. Cooper V Jenkins [1863] 32 Beav 337
9. Damhesel v. Hardware Dealers Mutual Fire Insurance [1965] 60 Ill. App. 2d 279.
10. Davenport v. State Farm Mutual Automobile Ins. Co. [1965] 404 P.2d 10.
11. De Cespedes v Prudence Mutual Casualty Company [1967] 193 So. 2d 224 (Fla.
Dist. Ct. App.).
12. Doctrines E, ‘(10) Subrogation’ (2013) 11
13. Furmston M, ‘Malaysian Insurance Law’ (2020)
14. Indiana Ins. Cos. v Granite State Ins. Co., 689 F Supp 1549 (SD Ind 1988).
15. Law I, ‘( 4 ) Subrogation in Insurance’ (2010) 20
16. Madsen v Threshermen’s Mut. Ins.Co 149 Wis. 2d (1989)
17. MSIG Insurance Malaysia Bhd v Overseas Assurance Corp [2011] 1 MLJ 392.
18. Napier v Hunter [1993[ 2 WLR 42
19. New Amsterdam Cas. v. Underwriters, 34 Ill. 2d 424, 216 N.E.2d 665 (Ill. 1966).
20. Newfield Peninsula Malaysia Inc v The Owners of the Shio or Vessel ‘Tanjung
Pinang 1’ [2013] 10 MLJ 650
21. Rafiah Bte Bakar v East West-Umi Insurance Bhd [1993] 1 MLJ 39
22. Royal Globe Ins. Co. v. Aetna Ins. Co., 82 Ill. App. 3d 1003, 403 N.E.2d 680 (Ill.
App. Ct. 1980).
23. Scottish Union and National Insurance Co v Davis 1970 1 Lloyd's Law Report 1
CA
24. Smith v. Motor Club of America Insurance [1959] 30 N.J. 563.
25. State Farm Fire & Cas. v Cooperative of American Physicians, 163 Cal App 3d
199, 209 Cal Rptr 251 (Cal App 1984).
26. Teo Kim Kien & Ors v Lai Sen & Anor [1980] 2 MLJ 125
27. The North British and Mercantile Insurance Company v. McLellan (1892) 21 SCR
288.
28. Tiong Nam Trading & Transport (M) Sdn Bhd v Commercial Union Assurance
(Malaysia) Sdn bhd [2008] 6 MLJ 342

50
29. Tiong Nam Trading & Transport (M) Sdn Bhd v. Commercial Union Assurance
(Malaysia) Sdn Bhd [2008] MLJU 494
30. Winkelmann v. Excelsior Insurance Company, 204 A.D.2d 622, 612 N.Y.S.2d 229
(N.Y. App. Div. 1994)
31. Yates v Whyte and Others, [1838] 132 ER 793 [283]
32. Yorkshire Insurance Co Ltd v Nisbet Shipping Co Ltd [1962] 2 Q.B 330

Websites

1. Azhar & Wong | Advocates & Solicitors,

http://www.azharwong.com.my/?cur=page/page&id=33&title=What_Is_Subrog
ation?#:~:text=Subrogation%20literally%20means%20'substitution'.&text=In%
20as%20far%20as%20an,made%20under%20a%20policy%2Fcoverage.
2. International Risk Management Institute,
http://www.irmi.com/online/insurance-glossary/terms/w/waiver-of-subrogation.
aspx

51