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The Origins of Subrogation

By John J. O’Brien, J.D., CLU, CPCU

The concept of subrogation began in ancient Rome. If Claudias paid Caesar’s debt to Brutus, then Claudias filled the shoes of Brutus as to his ability to recover from Caesar.

It wasn’t long after insurance companies began paying claims that insurance executives began to think of ways to recoup some of the money that they had paid out to their insureds and subrogation began to appear in insurance practice. Subrogation is firmly based in the concept of indemnity and a method where insurance can be made affordable. The gains achieved through subrogation are eventually passed on to the insurance- buying public through lower insurance premiums.

In eighteenth century England, Lord Mansfield recognized subrogation in court cases. The underlying doctrine was to prevent a windfall to an individual insured. The Courts did not think it fair that a person could recover both against the insurance company that insured the loss as well as recovering against the person who caused the loss. The courts and the insurance companies felt that to allow the insured to recover twice would be a “windfall” to the insured. (As you may already know, the King owned all the trees in England but the peasants could have the trees that fell or branches that came down when the wind blew – hence the origin of the term “windfall.”)

There are actually two views as to how the doctrine of subrogation developed. The first view is that it developed as part of the English legal system known as equity. The equity side of the courts strove to right “wrongs” and to follow the natural law. They attempted to be fair. The idea is that double indemnity offends natural justice.

The other view is that the doctrine stems from the common law. Applying common law (law that is not written down as an ordinance or statute), courts implied that every insurance contract contained a term that gave the insurer the tacit permission of its policyholder to exercise any recovery rights that may exist against the party that caused the wrong even though that party is not a party to the contract. Hence we find the origins for the word subrogation, which means “substitution”. In these cases it means the substitution of the insurer for the insured.

The founding father of insurance law Lord Mansfield addressed the concept of subrogation in Mason vs. Sainsbury in 1782. He spoke in that case about the right of the insurer to step into the shoes of its insured and recover its losses. In Mason vs. Sainsbury rioters ransacked Mr. Mason’s house and his insurance company paid the claim. At the time there was a Riot Act of 1714 that provided a means to recover damages against the local administrative district body. The insurance company pursued a recovery action against this administrative body in the name of its insured.

This case was predated by the case of Randall vs. Cochran in 1748 where the insurer for an English ship taken by the Spanish was permitted to bring suit in the name of its insured against the administrators of a public prize fund, that was compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor declared:

“…the plaintiffs had the plainest equity that could be. The person originally sustaining the loss was the owner; but after satisfaction made to him, the insurer…the assured stands as trustee for the insurer, in proportion for what he paid…”

One hundred years later came the case of Castellan vs. Preston, which is probably the leading case in England establishing the principal of Subrogation. In that case a house that the owner had agreed to sell was damaged by fire before it was sold. His insurers indemnified him for the value of the repairs. The buyer for the house paid full price for the house in its damaged condition. Subsequently, the insurers learn that their insured had received full price for the house without deduction for the insurance proceeds that it paid to its insured – the seller of the property. Lord Justice Rhett set forth the principle that has been followed in England and United States up until present time:

“… The contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnified only, … the insured shall be fully indemnified, but shall never be more than fully indemnified. This is the fundamental principle of insurance; if ever a proposition is brought forward which is at variance with it, that proposition must certainly be wrong. ”

Subrogation in America

It is difficult to pinpoint one early case in the United States that can be said to mark the beginning of our court’s recognition of the doctrine of subrogation. Essentially subrogation as a doctrine was transferred from England over to this country as part of Anglo Saxon law and equity. It has always been accepted here. Cases in the late nineteenth century contain descriptions of subrogation and represent a clear understanding and acceptance of the concept.

In 1888, the United States Supreme Court was asked to consider the subrogation claim of Aetna Life Insurance Company against the township of Middleport, Illinois. The town had issued bearer bonds to the Chicago, Danville & Vincennes Railroad Company to convince the railroad to construct a railroad through the township. Aetna purchased the bonds from the railroad. The railroad built the line but then went out of business and Aetna tried to collect on the bonds claiming that the railroad had acted and the line was a benefit for the town and that by virtue of equitable subrogation Aena stood in the place of the railroad. The court in its decision pointed out that equitable subrogation is a well-recognized doctrine but that in this particular case, the court felt that Aetna had acted as a pure volunteer and that, therefore, the doctrine of equitable subrogation was not applicable..

A case decided on February 10, 1890 in Arkansas makes reference to an academic treatise on the subject, namely, Sheld on Subrogation and recites that:

“The right of the insurance company that has paid a loss to recover of the wrong-doer, after payment of the loss does not depend upon contract, agreement, stipulation, or privity. The right of subrogation is sometimes spoken of as an ‘equitable assignment,’ but that is only a convenient figure of speech. From the time of the insurance the insurer has a pecuniary interest in the thing insured, and he becomes entitled to a legal remedy whenever he suffers a loss by reason of that interest, and it appears that the loss has been occasioned by the wrongful act of another. Of course, he has no right of action until he has paid the loss to the insured, because until that time he has suffered no damage.”

So fairly uniformly American courts from colonial times have recognized with favor the principle of subrogation as it was stated as recently as 1999 in a case involving none other than Lloyds themselves:

“Subrogation has been equated to and interchanged with the word substitution and the basic idea is that of substituting the insurance carrier for the insured in the insured’s action against a third party. Subrogation is an equitable doctrine and is applicable whenever a debt or obligation is paid from the funds of one person although primarily payable from the funds of another.” Prime Hospitality Corp. et al v. Underwriters at Lloyd’s et al, Civil No 1997-91 United States District Court for the District of the Virgin Islands, 1999 U.S. Dist. LEXIS 6725

There are some writers and jurists who believe that subrogation is not an appropriate remedy because there is no actual proof that subrogation recoveries are passed on to the insurance-buying public. These critics of subrogation view subrogation as nothing more than a windfall for the insurance industry.

At the present time there is at least one state that has legislation pending that would eliminate the insurance company’s right to subrogation. Ironically the basis of this legislation is that a claimant should be allowed to recover both against a wrongdoer and his insurance company. A legislator should not consider voting in favor of such legislation without studying and understanding the logic and thought given by Lord Mansfield and those jurists who came after him both here and in England. Over two centuries of thoughtful consideration and reasoned opinions should not be thrown aside in an unthinking reaction to purported “consumerism.” Where is Lord Mansfield when we need him?

John J. O’Brien JD, CLU, CPCU is the CEO of Charleston Captive Management Company and O’Brien Law Firm in Charleston, S.C. You may reach him by calling (843) 819-7681.

Posted: Friday, January 14, 2005 12:00:00 AM. Modified: Wednesday, September 07, 2005 3:26:58 PM.

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