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The doctrine of subrogation has boggled the minds of legal practitioners and judges alike for decades. Some argue that subrogation constitutes a new cause of action that must be pleaded accordingly, while others contend that same is irrelevant and not worthy of procedural recognition. This article will focus on what subrogation entails, whether it should be disclosed and whether it constitutes a new cause of action, which must be pleaded and proved. A brief discussion on the issue of double compensation within the context of subrogation will also follow.
Subrogation
Subrogation – which is predominantly relevant in insurance law – refers to the assumption of one party’s right of recourse by a third party following a reimbursement of the former by the latter. The third party may then, through subrogation, exercise those assumed rights by claiming damages from the wrongdoer and reimbursing itself out of the proceeds.
The following practical example will illustrate the operation of subrogation: A and B were involved in a motor vehicle collision caused by B. Since A has suffered patrimonial harm, A has a delictual claim for damages against B. However, instead of claiming from B, A claims from his insurer, X, with whom he has an insurance policy. X compensates A accordingly. By virtue of subrogation, X assumes A’s right of recourse against B. X is now entitled to claim damages from B to the value of A’s damages.
One must be cautious not to confuse subrogation with cession. Cession refers to a transfer of rights from the cedent to the cessionary. The cessionary, as the new holder of the ceded rights, now enjoys the full benefit of those rights while the cessionary falls away. Subrogation on the other end does not entail a ‘transfer’ of rights, but rather an ‘assumption’ of rights. The insurer never replaces the insured as with cession. Instead, the insurer only becomes entitled to exercise the insured’s rights of recourse as if it was the insured itself exercising those rights. From there the obiter: ‘the insurer effectively steps into the shoes of the insured’ (see Smith v Banjo [2011] 2 All SA 577 (KZP) at para 11). In doing so the insurer can then reimburse itself from the proceeds of the claim which the insured has, or may have, against the wrongdoer. The insurer’s right to reimburse itself stems from the personal right it has against the insured. The personal right came into existence the moment the insurer reimbursed the insured.
In order for subrogation to take place, the following requirements must be met:
In regard to the third requirement, it is important to note that the only rights, which can be subrogated are those which the insured has against the wrongdoer. If the insured limits or waives its rights, say for example by concluding a settlement agreement with the wrongdoer or by acknowledging debt, then the insurer can only subrogate those rights, which survived the limitation or waiver. Where there are no rights, subrogation cannot take place. Subrogation is no magic formula by which the insurer can revive rights that have been limited or waived.
In practice, most insurers cover themselves against a limitation or waiver of rights by inserting a clause in the insurance contract in terms of which the insured undertakes not to limit or waive its rights in any way. Where the insured then limits or waives its rights the insurer has a contractual right of recourse against its own insured. This is to guarantee that the insurer never draws the short straw.
The insured has little to no say in the insurer’s decision to institute subrogated litigation, although they are required to give their cooperation insofar as it may be necessary, for instance by testifying at trial. The insurer is always the one driving the litigation and also the one carrying the risk of litigation.
Separate cause of action or undisclosed fact?
There is still a great debate over whether subrogation must be disclosed and whether or not it constitutes a new cause of action, which must be pleaded and proved. This is a relevant question since subrogated litigation is almost always conducted in the name of the insured with little to no disclosure of the insurer’s involvement.
In Goodwin Stable Trust v Duohex (Pty) Ltd and Another 1998 (4) SA 606 (C) the court held that it is generally not permissible for a person to litigate in the name of another without disclosing that fact and the legal basis therefore. The underlying rationale is that such a non-disclosure undermines the integrity of the administration of justice as it is misleading. It was further held that subrogation is a ‘special case’ as it is only applied in insurance law. Because of its specialised application, litigants involved in insurance litigation will be aware of subrogation and ought not to be misled nor taken by surprise. This dictum provides authority for the proposition that subrogation needs not be disclosed and, by implication, not be pleaded.
Following the decision in Goodwin, the jurisprudence was that subrogation need not be disclosed or pleaded. Then came the decision of Nkosi v Mbatha (KZP) (unreported case no AR20/10, 6-7-2010) (Madondo J), which overturned the position. In Nkosi the insurer compensated the insured (Nkosi) for damages suffered as a result of a motor vehicle collision. The insurer then instituted a subrogated action against the wrongdoer. The action was instituted in the name of the insured. The court a quo dismissed the action on the basis the plaintiff lacked locus standi. The court a quo reasoned that only the insurer had locus standi because it had already compensated the plaintiff and that subrogation must have been pleaded accordingly. The plaintiff unsuccessfully appealed to the High Court. In dismissing the appeal, the court of appeal held that subrogation must be pleaded and proved. This implied that subrogation is a new cause of action.
However, before the ink of the Nkosi judgment could dry, the matter of Smith came before the same court of appeal as Nkosi. In Smith the court held that the involvement of an insurer in a lawsuit is irrelevant as it is res inter alios acta (a matter between others). All that needs to be pleaded and proved are those facts necessary to sustain a cause of action. Subrogation is not a necessary fact, but a collateral one, which does not have to be pleaded or proved. It was accordingly held that Nkosi was wrong and not binding on future courts.
There has been some debate as to whether a subrogated insurer may litigate in the name of its insured. It has been argued that a subrogated insurer ought to litigate in its own name in order to promote transparency. The generally accepted practice, however, is that subrogated litigation takes place in the name of the insured, meaning that the insured will be cited in all papers and not the insurer. This practice was criticised by the Supreme Court of Appeal in Rand Mutual Assurance Co Ltd v Road Accident Fund 2008 (6) SA 511 (SCA) as being outdated and undermining of transparency. Despite the court’s criticism the court did not abolish the practice by judicial fiat as the court was reluctant to interfere with settled legal principles. At the same time, the court had not as yet held that the insurer is not entitled to sue in its own name. An insurer may, therefore, litigate either in its own name or in the name of the insured.
While legal certainty on this point is surely desirable, I submit that the practice of litigating in the name of the insured ought to prevail. The underlaying premise for this submission is that litigation in the name of the insurer will necessitate subrogation to be pleaded and proved in order to avoid an exception or special plea of locus standi. This has the potential of opening a whole new can of worms, which will unnecessarily cloud the real issues to be decided. It is noteworthy that the Smith case reaffirmed the position that an insurer may litigate in the name of its insured, thereby suggesting that this practice is indeed preferable. The court furthermore held that subrogation has no bearing on the insured’s locus standi.
Double compensation
With subrogation often comes the defence of double compensation – the defendant will argue that the insurer has already compensated the insured, hence there can be no claim against the defendant. This is incorrect. The fact that the insured has been indemnified does not absolve the defendant from delictual liability, it only means that the insured may not benefit from the litigation. Only the insurer may benefit. In Nkosi the court correctly remarked that the moment the insurer indemnifies the insured, the latter becomes a trustee of the former for any compensation, which may be received after the indemnification. The insured would be legally obliged to hand over to the insured any and all compensation received after the fact (see Ackerman v Loubser 1918 OPD 31).
Agreed, there are instances where an optimistic insured, claims from both the insurer and the defendant in order to make a quick buck. Assuming both the insurer and the defendant compensated the insured, the insurer would not be able to subrogate any rights. Instead, the insurer will have a claim against its insured for unjustified enrichment.
Conclusion
In conclusion, an insurer is entitled, after having reimbursed its insured, to subrogate the insured’s rights to itself and institute action against the insured’s wrongdoer to reimburse itself from the proceeds of the action. The insurer may elect to litigate in either its own name or the name of its insured, albeit general practice is to litigate in the name of the insured. There is no duty to disclose subrogation. Subrogation does not constitute a separate cause of action; hence it does not have to be pleaded or proved.
Alno Smit LLB (Stell) is a legal practitioner at Van Breda & Herbst Inc Attorneys in Cape Town.
This article was first published in De Rebus in 2021 (May) DR 18.
