REFORMING INSURANCE LAW: - Law Commission

which the need for each of the parties to take out insurance to guard against a subrogation action
can be eliminated. In practice, therefore, many instances of subrogation can be resolved by
proper contractual arrangements which make it clear who bears the risk. Subrogation thus raises
an issue of principle where the loss is caused by a third party who has no prior arrangements with
the assured. In practice the exercise of subrogation rights is likely to depend upon whether the
third party has his own insurance, 450 in which case subrogation operates as a mechanism to
switch losses between first and third party insurers. There are also issues, which post-date the
ALRC’s report, concerning the allocation of policy proceeds, particularly where there is a
shortfall in recovery from the third party and the assured has to bear a hefty deductible. 451 There
also remain questions to be asked about the use of subrogation, not to preclude a double
indemnity but to strip the assured of any benefits at all when he has – perhaps unwisely –
compromised his potential claim against a third party. 452 These points do cast doubt as to the
need for subrogation, although this is a matter which cannot readily be resolved other than by a
detailed investigation into its operation in practice.
8.17 Various aspects of the law of subrogation were nevertheless regarded as worthy of reform
by the ALRC, and the necessary changes were implemented by ss 65 to 68 of the Insurance
Contracts Act 1984. Four changes were made.
8.18 First, s 65 removes the right of insurers to exercise subrogation against a third person 453 in
circumstances where the assured would not reasonably have been expected to have exercised any
cause of action either by reason of a family or other personal relationship or by reason of the fact
that the assured had consented to the third party’s use of a motor vehicle covered by the
insurance. 454 Even if this requirement is not met, or if the third party has been guilty of wilful or
serious misconduct 455 or was an employee of the assured, a subrogation action cannot go ahead if
the third party was not himself uninsured. The section goes on to prevent its avoidance, by
outlawing any attempt by the insurers to take an assignment of the assured’s rights. The extent to
which this is a problem in the UK is uncertain, although a subrogation action against a friend or
family member would almost certainly have the effect of requiring that third party to bear a
deductible under his own policy and a possible penalty on renewal.
8.19 Secondly, s 66 456 applies much the same exclusion to a third party who is an employee of
the assured and the conduct giving rise to the loss was not serious 457 or wilful. The section
reverses the notorious decision of the House of Lords in Lister v Romford Ice and Cold Storage
450 See, for a recent example, Ronson International Ltd v Patrick [2006] EWCA Civ 421
451 See Napier and Ettrick Ltd v Kershaw [1993] AC 713, which adopts a “recover down” approach and thereby
denies the assured recovery of his deductible in the event of a shortfall.
452 Commercial Union Assurance Co v Lister (1874) LR Ch App 483; West of England Fire Insurance Co v Isaacs
[1897] 1 QB 226; Phoenix Assurance Co v Spooner [1905] 2 KB 753.
453 ALRC 20, para 305.
454 Sutton, paras 16.25 to 16.28.
455 This must relate to the event itself and not to the subsequent investigation of it: Lennock Motors Pty Ltd v
Pastrello (1991) 6 ANZ Ins Cas 61-033.
456 Sutton, paras 16.20 to 16.24.
457 Drunkenness is serious misconduct: Boral Resources (Qld) Ltd v Pyke [1992] 2 Qd R 25; Ingham v Vita Pacific
Ltd (1995) 8 ANZ Ins Cas 61-272.
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