When does an insurer have the right of subrogation? Many assume that personal accident policies are not contracts of indemnity, and hence do not give rise to subrogation rights of the insurer, but a recent case from Western Australia, Insurance Commission of WA v Kightly  WASCA 154, is an important reminder that this isn't always the case.
The injury, the policy, and the subrogation argument
Mr Kightly was a volunteer with a group that was insured by the Insurance Commission under a policy which provided "special cover" in the case of a bodily injury caused to any volunteer by an accident. He was required to do a training course conducted by Surf Life Saving Western Australia Inc, during which he was injured.
He received $70,000 from the insurer under the policy, and then decided to sue Surf Life Saving for negligence. This was settled; he received $145,000 in full and final settlement of any and all causes of action or claims. As a condition, Mr Kightly indemnified Surf Lifesaving and its insurer against any claims for repayment arising from the settlement.
Sure enough, a repayment claim was made by the insurer Insurance Commission, based on its right of subrogation. Did it have that right?
The Western Australian Court of Appeal said it did. The policy set out four types of expenses payable by the insurer and the limits on those expenses. In each case the policy provides for indemnification in the case of actual, proved, financial loss (so payment was not simply contingent upon an event). There was nothing in the policy reflecting an intention to exclude the right of subrogation so the Court held that the insurer had the right of subrogation in respect of each of the four heads of claim.
Did it matter that Surf Life Saving did not admit liability? The insurer could have exercised its right in respect of Mr Kightly’s claim against Surf Life Saving (because that claim being in respect of the very injury which led to the expenses paid by the insurer), but the settlement or release precluded its exercise by the insurer. That is, Mr Kightly’s own acts prevented the inquiry into Surf Life Saving’s liability. On the facts, the Court said that the settlement had been made with no bona fide consideration of the insurer’s interests.
Lessons for insurers - and insureds
Whatever might be the assumption about types of insurance, you should always look at the actual terms of a policy to determine whether it is governed by the principle of indemnity or not, and hence whether subrogation is available. There are two possible avenues of subrogation of an insurer to consider :
- If the insured is the injured individual, if the policy has indemnity characteristics the insurer may be subrogated to any cause of action which he or she has against a third party;
- If the insured is an employer, who has insured a contractual obligation to pay benefits to an injured employee, the employer may have a servitium claim against the third party who has injured the employee. It is an interesting question whether the insurer would be subrogated to that, when what they have insured against is not the loss of servitium per se but the payment of the benefit.
This case also highlights the danger for insureds under such policies of settling tort cases against third parties without regard to the possibility that the insurer may have a right of subrogation, and they may have to pay back the policy benefit they have received out of the damages they settle for.