Subrogation is the legal technique under the
by which one party, commonly an insurer (I-X) of another party (X), steps into
X's shoes, so as to have the benefit of X's rights and remedies against a third
party such as a defendant (D). Subrogation is similar in effect to
assignment, but unlike assignment, subrogation can occur without any
agreement between I-X and X to transfer X's rights. Subrogation most commonly
arises in relation to policies of
but the legal technique is of more general application. Using the designations
above, I-X (the party seeking to enforce the rights of another) is called the
subrogee. X (the party whose rights the subrogee is enforcing) is called the
In each case, because I-X pays money to X which otherwise D
would have had to pay, the law permits I-X to enforce X's rights against D to
recover some or all of what I-X has paid out. A very simple (and common) example
of subrogation would be as follows:
X, the insured party, has
Collision insurance, and claims (i.e., asks for payment) under his
against I-X, his insurer.
I-X pays in full to have X's car repaired.
I-X then sues D for negligence to recoup some or all of the
sums paid out to X.
I-X receives the full amount of any amounts recovered in the
action against D up to the amount to which I-X indemnified X. X retains none
of the proceeds of the action against D except to the extent that they
exceed the amount that I-X paid to X.
If X were paid in full by I-X and still had a claim in full
against D, then X could recover "twice" for the same loss. The basis of the law
of subrogation is that when I-X agrees to indemnify X against a certain loss,
then X "shall be fully indemnified, but never more than fully indemnified ... if
ever a proposition was brought forward which is at variance with it, that is to
say, which will prevent [X] from obtaining a full indemnity, or which will give
to [X] more than a full indemnity, that proposition must certainly be wrong."
I-X will normally (but not always) have to bring the claim in
the name of X. Accordingly, in situations where subrogation rights are likely to
arise within the scope of a contract (i.e. in an indemnity insurance policy) it
is quite common for the contract to provide that X, as subrogor, will provide
all necessary cooperation to I-X in bringing the claim.
Subrogation is an
equitable remedy and is subject to all the usual limitations which apply to
Although the basic concept is relatively straightforward,
subrogation is considered to be a highly technical area of the law.
It is periodically argued that the concept of
unjust enrichment provides the conceptual underpinning for the law of
Whilst this is probably true as a matter of the English language (otherwise X
could be paid twice in respect of the same claim), other academic commentators
have disagreed that subrogation fits squarely with accepted legal reasoning
relating to this field.
In reality, the argument as to the conceptual underpinning for the legal
technique is more theoretical than practical.
There is also lively debate in legal circles as to whether the
rights of subrogation are the subject an express or implied agreement, or
whether they arise automatically by operation of law. The reasoning of the
courts has not always been clear in relation to this,
but the answer is probably all three in many cases. It is clear that subrogation
rights can arise even where there is
between subrogor and subrogee,
so it is clearly not necessary for there to be an express or implied term.
However, it clearly is an implied term of any policy of insurance or
the insurer or guarantor will be subrogated in the event of any payment by the
insurer to the insured party. However, in practice, most policies of insurance
will contain an express clause regulating subrogation rights as well.
Types of subrogation
Although the classes of subrogation rights are not fixed (or
closed), types of subrogation are normally divided into the following
Indemnity insurer's subrogation rights
Surety's subrogation rights
Subrogation rights of business creditors
Lender's subrogation rights
Banker's subrogation rights
Although the various fields have the same conceptual
underpinnings, there are subtle distinctions between them in relation to the
application of the law of subrogation.
Indemnity insurer's subrogation
An indemnity insurer in fact has two distinct types of
subrogation right. Firstly, they have the classic type of subrogation used in
the example above; viz. the insurer is entitled to take over the remedies of the
insured against another party in order to recover the sums paid out by the
insurer to the insured and by which the insured would otherwise be
Secondly, the insurer is entitled to recover from the insured up to the amount
which the insurer has paid to the insured and by which the insured is
The latter situation might arise if, for example, an insured claimed in full
under the policy, but then started proceedings anyhow against the tortfeasor,
and recovered substantial damages.
Surety's subrogation rights
surety who pays off the debts of another party is subrogated to the
creditor's former claims and remedies against the debtor to recover the sum
This would include the endorser on a
bill of exchange.
In relation to a surety's subrogation rights, the surety will
also have the benefit of any
security interest in favour of the creditor for the original debt.
Conceptually this is an important point, as the subrogee will take the
subrogor's security rights by operation of law, even if the subrogee had been
unaware of them.
Accordingly, in this area of the law at least, it is conceptually improbable
that the right of subrogation is based upon any implied term.
Subrogation rights against trustees
trustee of a
enters into transactions for the benefit of the
beneficiaries of the trust is generally entitled to be indemnified by the
beneficiaries for personal loss incurred, and has
lien over the trust
assets to secure compensation. If, for example, the trustee conducts business on
behalf of the trust and fails to pay creditors, then the creditors are entitled
to be subrogated to the personal and proprietary remedies of the trustee against
the beneficiaries and the trust fund.
Where under the terms of the
trust instrument the trustees are permitted to trade in
derivatives as part of the trust's investment strategy,
then the derivatives document will also normally contain a subrogation clause to
bolster the common law rights.
Lender's subrogation rights
Where a lender lends money to a borrower to discharge the
borrower's debt to a third party (or which the lender pays directly to the third
party to discharge the debt), the lender is subrogated to the third party's
former remedies against the borrower to the extent of the debt discharged.
However, if the original loan was invalid (because, for example,
it was ultra
vires the borrower) then the lender generally cannot enforce the third
party's claim against the borrower as this would indirectly validate an invalid
Nonetheless the claim can subsist insofar as the unlawfully borrowed
money was used to discharge lawful debts, by inferring the legality of
the use of the funds to the right of subrogation.
The law in this area has been subject to conflicting decisions.
Banker's subrogation rights
bank, acting on what it believes erroneously to be the valid mandate of its
client, pays money to a third party which discharges the customer's liability to
the third party, the bank is subrogated to the third party's former remedies
against the customer.
In Lord Napier & Etterick v Hunter  2 WLR 42, the
House of Lords confirmed that an indemnity insurer's subrogation rights
against the assured are not limited to a simple personal remedy; the insurer
also has the benefit of an
equitable lien over the
received by the assured. That case also controversially held that in working out
the overcompensation to which the insurer is entitled the assured cannot first
recover the whole of his uninsured loss, and must instead bear the excess
^ This illustrates
the etymology of the term subrogate, in this context meaning "to
ask for payment under the terms of the policy" (which as explained below
is based on the original Latin sense, and not on the present-day legal
meaning). The term "subrogate" descends from the Latin sub
(under) and rogare (to ask). See "subrogate" in Webster's New
World Dictionary of the American Language, p. 1419 (2d College Ed.
1978) (from subrogatus, surrogatus), and cross-reference
to "surrogate", id., p. 1433. The denotative sense has been transmuted
from an "asking under" to a substitution or succession with respect to
the right of payment. "Subrogation typically arises when an insurance
company pays its insured pursuant to a policy; the company is then
subrogated to the cause of action of its insured." Barron's Law
Dictionary, p. 461 (2d ed. 1984). Although the term "subrogation"
has come to mean the substitution - the insurance company replacing the
insured as the party holding the right to payment - the insurance
company is still called the "subrogee" (the person who has been "asked
under" the policy) with the insured still referred to as the "subrogor"
(the person "asking under").
^ In Yorkshire
Insurance Co v Nisbet Shipping Co  2 QB 300
Lord Diplock indicated that subrogation was just shorthand for an
implied term in contracts of marine insurance.
^Esso Petroleum v
Hall, Russell & Co Ltd  AC 643
guarantees usually contain a clause, at the behest of the bank, that the
guarantor's subrogation rights against the borrower are subordinated
until the bank has been paid in full; this is to avoid the guarantor
competing against the bank in the event of a
bankruptcy on the part of the borrower.
Sainsbury (1782) 3 Dougl KB 61; Morris v Ford Motor Co 
Preston (1883) 11 QBD 380; Re Miller, Gibb & Co  1 WLR
^ In practice there
are many reasons why an insured may do this; to recover a related
uninsurable loss, to establish a defence to other claims against the
insured. However, in each case the law requires them to return the
amount of any compensation received in respect of which they have also
received insurance payments to the insurer.
(1880) 15 Ch D 548; Re Oxley  1 Ch 604
^ In most
jurisdictions the trustees would be prohibited from such risky
investments by law unless expressly empowered by the trust instrument.
^Butler v Rice
 2 Ch 277; Ghana Commercial Bank v Chandiram  AC 732
Brougham  AC 398; much criticised on this point.
^Orakpo v Manson
Investments Ltd  95, per
^ For example, in
Nottingham Permanent Benefit Building Society v Thurstan  AC 6
House of Lords held that a building society could be subrogated to
an unpaid vendor's lien in respect of an unlawful loan to an infant to
(Liverpool) Ltd v Barclays Bank Ltd  1 KB 48