REFORMING INSURANCE LAW: - Law Commission

Co, 458 in which an employer’s insurers exercised subrogation rights against an employee
responsible for the injuries of a fellow employee (who happened to be his father). The ALRC
regarded this type of action as inconsistent with sound practice in the field of industrial
relations, 459 and as far as the UK is concerned insurers agreed with the Government immediately
after the decision that they would not rely upon their rights in this regard.
8.20 Thirdly, s 67 is concerned with the allocation of third party recoveries as between insurers
and assured. The common law operates on a recover down basis, the assumption being that the
insurance is to be treated as having been placed in layers so that the highest layer insurer bears
the lowest risk and thus benefits from the subrogation recovery first. 460 Accordingly, if the
assured obtains a policy for £1000 in excess of a deductible of £100, and suffers a loss of £1500
only £800 of which is recoverable from the third party, the £800 is allocated first to the assured
for his uninsured loss as the notional top layer insurer (£400), then to the insurers (£400), with
the deductible being borne by the assured himself. 461 The 1984 Act is most curious. Under s 67,
the assured is entitled to claim from the subrogation recovery no more than one of two amounts:
(a) an amount greater than the amount by which the amount recovered by the insurers exceeds
the amount paid to the assured; or (b) an amount that, together with the amount paid to the
assured by the insurers, is greater than the amount of the assured’s loss. Suppose, therefore, that
(disregarding any deductible) the assured has suffered a loss of £1000 and has received £600
from the insurers. The insurers then exercise subrogation rights and recover £800. Under (a), the
assured may not recover more than £200, the amount by which the sum recovered by the insurers
exceeds the amount paid to the assured. The assured thus recovers a total of £800 while the
insurers retain their full payment of £600. Under (b), the assured obtains his full loss of £1000, as
he receives the £600 paid by the insurers plus the amount necessary to make good his loss, £400.
In determining the amount recovered by the insurers, they are entitled to deduct administrative
and legal costs incurred in effecting the recovery. It is unclear whether the assured recovers the
greater or the lesser of amounts provided for by these alternative methods of calculation. 462
Whichever is correct, the principles are subject to contrary agreement after the loss has
occurred, 463 so that it is open to the assured to agree to allow insurers to exercise subrogation
rights even though he has not been paid a full indemnity but on condition that the insurers can
retain a proportion of the sum received: presumably the assured can refuse to agree to this and
remains entitled to pursue the third party for his uninsured loss. 464 The notion that the insurers
can benefit from subrogation recoveries before the assured has recovered a full indemnity (net of
deductible) is alien to the common law and has little justification. The approach adopted in the
1984 Act was rejected by the ALRC in its review of marine insurance law. The ALRC there
recommended a codification of the recover down principle. 465 This was accepted by Treasury
458 [1957] AC 555.
459 ALRC 20, para 306.
460 Napier and Ettrick Ltd v Kershaw [1993] AC 713.
461 This rule becomes more complex when the policy is valued or is subject to average, or both. For the
permutations, see Colinvaux’s Law of Insurance, 8th ed 2006, para 11-19.
462 Sutton, para 16.64.
463 So that the agreement cannot be a policy term.
464 See ALRC 20, paras 300-302.
465 ALRC 91, para 12.17.
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