April 27, 2020
Under most types of indemnity insurance policies, including car insurance, home insurance, property insurance and liability insurance, insurance companies may have the right of subrogation. Essentially, subrogation allows an insurer, who pays an insured for a covered loss under an insurance policy or assumes liability for coverage, to advance a claim against the third party responsible for the loss.
Insurance in Alberta
The insurer’s ability to subrogate is governed by legislation, the terms of an insurance policy, and the common law. It looks like this:
For the law to find that an insurance company has the right of subrogation, there must be:
- a contract of indemnity (i.e. the insurance company promises to pay the insured party for a specified loss); and
- a legally enforceable right against a third party for compensation (i.e. a right under a contract or at common law).
Insurance Companies and Subrogated Claims
An insurance company’s right to pursue a subrogated claim requires that the insured party receives full indemnification for the loss at issue, although this requirement is often modified by statute and contract. From there, the insurer is entitled to the same rights as the insured would have had, but no more. Unlike in the United States, most Canadian jurisdictions require an insurer to bring an action against a third party under the name of the insured party.
Although the concept of subrogation appears fairly straightforward, there are many issues adjusters should consider before bringing a subrogated action, and that insured parties should be aware of. A primary issue to be alert to is the difference in how subrogated claims operate in different jurisdictions.
Pursuing Subrogated Claim from Outside of Alberta
If you are pursuing a subrogated claim from outside of Alberta, getting local advice on how to proceed can save time and expense. Other issues that can arise include:
- Whether the insurer is at risk of being considered a “volunteer”, and therefore prevented from having standing to advance a subrogated claim. For example, if an insurer settles a claim where there is reason to believe that the insured was not entitled to coverage for the purpose of avoiding a coverage dispute, a court may consider the insurer as a volunteer and deny it standing to advance a subrogated claim;
- Contractual provisions regarding the placement of insurance between the insured and a third party that may prevent the insurer from advancing a subrogated claim. These provisions are often referred to as covenants to insure and are found in commercial leases;
- The interpretation of waiver of subrogation clauses often found in insurance policies. For example, many insurance policies include waiver provisions that prevent subrogation claims against an insured’s subsidiary companies or other non-arm’s length companies. Similarly, in the condominium context an all risk policy insuring a Condominium Corporation may include a waiver of subrogation provision against individual unit owners;
- Statutory limitations on the ability to subrogate; for example subsection 588(2) of Alberta’s Insurance Act provides that the payment of accident insurance benefits or “basic coverage”, including Section B benefits, constitute a release of the insurer’s right of subrogation;
- Who controls the litigation as between the insured and the insurer? Although typically an insurer will control a subrogated claim, there may be situations where an uninsured loss is much greater than a subrogated claim and an insured will want to control the litigation;
- Distribution of any recovery to the insurer and insured where the recovery is not sufficient to cover the entire loss; for example, subsection 546(2) of Alberta’s Insurance Act provides that, after deduction of the costs of recovery, the remaining amount recovered must be divided between the insurer and the insured in the proportion in which the loss or damage has been borne by the insurer and insured;
- The utility of subrogation agreements. These agreements deal with matters like who controls the litigation, what lawyer will be retained to advance the action, and how the proceeds of a settlement or judgment would be divided between the insurer and the insured; and
- An insured’s options if the insurer elects not to pursue a subrogated claim. One option is to advance a claim in your personal capacity for your own benefit.
These and other issues must be carefully considered when contemplating a subrogated claim or when an insured party is involved in a subrogated claim. If you have any questions about a subrogated claim, from either an insurer or insured perspective, contact any of the insurance lawyers at Carbert Waite LLP.