REFORMING INSURANCE LAW: - Law Commission

Baxendale) at the date of the claim or at the date on which payment was refused. The difference
could be crucial for a small business which acquired a lucrative contract after the inception of the
policy but is unable to fulfil it by reason of late payment of the proceeds. There is certainly an
argument that in the special case of insurance, where the obligation is to hold the assured
harmless, insurers should face liability for consequential loss which has been brought to their
attention once a claim has been made.
Subrogation
8.16 Subrogation is a major issue which is referred to in the Law Commissions’ Scoping Paper
as an area to be investigated in due course. The ALRC considered in principle whether
subrogation ought to be retained, and ultimately accepted that subrogation could be justified in
that it prevented the assured from obtaining a double indemnity. 444 One particular possibility
discussed by the ALRC was whether subrogation rights should be confined to proceeding against
persons who deliberately or recklessly caused the insured loss, although this was ultimately
rejected on the grounds that: (a) the effect would be to confer the benefit of insurance on a third
party who had no contract with the insurers; 445 (b) the standard of care might be reduced if third
parties were immune from suit by the fortuity of the victim having insurance cover; 446 and (c)
there might be adverse effects for reinsurance cover. 447 The ALRC also scrutinised the most
common situations in which subrogation issues arose, namely vendor and purchaser, mortgagor
and mortgagee and landlord and tenant were scrutinised, the ALRC concluding 448 that although
there was a risk of hardship in that the loss would be transferred to an uninsured party, the first
could be dealt with by transferring the benefit of the policy to the purchaser in the period
between exchange and completion, 449 the second was resolved by the near universal practice of
the parties becoming co-assureds and the third was an issue of landlord and tenant law. In fact,
scrutiny of cases decided in the last two decades shows the construction industry has generated
more subrogation disputes than any other sector, the question often being whether the contract
between the insured employer or contractor required them to take out insurance and thereby to
retain for themselves as against any sub-contractor the risk of any loss. The cases have all turned
on the proper construction of the risk allocation provisions, and it might be thought that it is now
perfectly possible for contracting parties to enter into suitable risk allocation arrangements under
444
ALRC 20, paras 309-313
445
The very argument used by the House of Lords to justify subrogation in Caledonia North Sea Ltd v British
Telecommunications plc [2002] Lloyd’s Rep IR 261
446
An argument which misses the point that a third party will rarely be worth suing unless he has insurance, in
which case the effect on the third party will be confined to any applicable deductible and his ability to obtain
favourable renewal, arguably insufficient deterrents against negligent behaviour.
447
It is certainly the case that excess of loss treaties calculate the trigger point of the reinsurers’ liability as the
reinsured’s ultimate net loss taking into account subrogation recoveries, so that cover is based on the concept that
the reinsured will exercise subrogation rights. It would also seem that in other situations reinsurers themselves have
subrogation rights, in that they are subrogated to the subrogated rights of the reinsured. The author has heard the
argument that the reinsured is under an implied obligation to exercise subrogation rights so that any recovery from
reinsurers is net of actual or potential subrogation recoveries, although is of the view that this does not represent the
law.
448
ALRC 20, paras 299-304.
449
Effected by s 50 of the 1984 Act: see infra.
84