Subrogation is a pivotal concept in South African insurance law, with well-established roots. Its history in our law is founded in English law principles, infused with Roman-Dutch law, in particular the rules of the lex mercatoria. Subrogation is underpinned by sound commercial and legal considerations that should not lightly be interfered with.
Author: Andrew Clark, managing partner at Cox Yeats
Recent developments in our law
Insurers would be forgiven for experiencing a sense of deja vu when learning of the recent judgment of the High Court in the Western Cape Division, Cape Town, in Le Bonheur Wine Estate (Pty) Ltd v Stellenbosch Vineyards (Pty) Ltd. This judgment revisited the issue of subrogation but in a different way than the KwaZulu-Natal High Court, Pietermaritzburg, on appeal in November 2010 in Des O Smith v A K Banjo.
Le Bonheur Wine Estate
The facts in Le Bonheur were that a fire occurred on 23 October 2018 at commercial premises owned by Stellenbosch Vineyards, occupied at the time by Le Bonheur under a warehousing agreement. As a result of the fire, goods belonging to Le Bonheur were lost and damaged.
These goods were covered under a contract of insurance between Le Bonheur and the insurer, Hollard, in terms of which Hollard fully indemnified Le Bonheur for its losses. Upon such indemnification, an agreement of loss was concluded between Le Bonheur and Hollard, and subrogation occurred, including potential causes of action against third parties, such as Stellenbosch Vineyards.
Exercising its rights of subrogation, Hollard duly pursued legal proceedings in the Western Cape High Court against Stellenbosch Vineyards, in the name of Le Bonheur in order to recover these losses. There was nothing unusual in this course of action. On a daily basis in South Africa, insurers pursue recovery actions against third parties in the names of their insureds, and such is a very well-established practice.
The twist in the tale, however, was a change in circumstances leading to an about turn by the insured, Le Bonheur, shortly before the trial. It transpired that post the commencement of the litigation, Le Bonheur and Stellenbosch Vineyards had become wholly owned subsidiaries of Advini South Africa (Pty) Ltd. The practical effect of this was that Le Bonheur and Stellenbosch Vineyards shared common commercial interests and objectives.
The directors of Le Bonheur decided that the litigation between the companies was detrimental to the interests of the group, and they resolved to terminate the action shortly before the trial was to commence.
Thus, the limelight was shone on the principle of subrogation. In its judgment, the Court held as follows on the issues relevant to subrogation:
the fact of an insurer pursuing a claim under subrogated rights is a material fact that ought to be disclosed by the insurer;there is nothing to preclude an insurer from pursuing its claim under the exercise of subrogated rights through any way permitted by law, other than in the name of its insured;if the insurer wishes to protect its interests as a litigant with procedural rights, it must formally become a party to the action in its own name;Le Bonheur acted lawfully by revoking the authority of Hollard’s attorneys to continue to act as agents on behalf of Le Bonheur in the action;subrogation does not bring about a transfer of substantive or procedural rights from an insured to an insurer, which results in an insurer substituting an insured as a creditor; andin the present Constitutional era in South Africa, the common law of subrogation had been developed by judicial fiat in Rand Mutual Assurance Co from the law of insurance that existed in pre-Constitutional times.Rand Mutual Assurance Co Ltd
To properly understand the legal debate around subrogation, it is necessary to consider the judgment of the Supreme Court of Appeal (SCA) in Rand Mutual Assurance Co Ltd v Road Accident Fund, delivered in 2008.
The facts in that case were quite different to Le Bonheur. Rand Mutual Assurance was a mutual association which held a licence to insure employers against their liability to employees in terms of the Compensation for Occupational Injuries and Diseases Act 130 of 1993 (COIDA).
An employee of the insured employer was injured in a motor vehicle accident which occurred in the course of the employee’s employment with the insured. The accident was caused by the negligence of the driver of the third-party vehicle, which gave rise to a claim against the Road Accident Fund on the part of the employee in respect of his damages. Having paid the injured employee under its policy, Rand Mutual claimed in its own name against the Road
Accident Fund (RAF). They relied upon S36(1)(b) of COIDA, which entitles inter alia: the employer by whom compensation is payable to recover the compensation from a third party liable for the injury. The difficulty faced by Rand Mutual Assurance was that it was not the employer.
The employer, being a mining company, did not itself seek to recover from the RAF, and Rand Mutual Assurance did not sue in the name of the insured. In addition, Rand Mutual Assurance did not sue under an agreement of cession.
The SCA analysed the history of subrogation in South African law, initially strictly applied in accordance with principles of English Law and then infused with Roman-Dutch Law, forming the substance of our common law. The SCA noted that Roman-Dutch Law recognised that an insurer who indemnified an insured under a contract of insurance was entitled to exercise rights of recourse against third parties in respect of that loss.
The SCA referred to three rules of the lex mercatoria, namely:
a third party is not entitled to benefit from the fact that the party who was wronged held insurance at the time of the loss;
an insured is not entitled to be enriched at the expense of the insurer by claiming and receiving both an indemnity from the insurer and damages from the third party; and
the insured is subrogated by the insurer, which entitles the insurer to claim the loss from the third party.Additionally, the SCA noted the prevailing practice in terms of which insurers would litigate against third parties in the name of their insureds, with insurers remaining in the background. Whilst the SCA expressed some concerns with this being a “less than desirable practice”, it did not go so far as to say that such practice was wrongful or unlawful. The SCA expressed the view that it would be “wrong to abolish it by judicial fiat”.
The SCA further held that unless there would be prejudice to the third party in a procedural sense, Courts would be entitled to permit an insurer to proceed in its own name in the exercise of rights under subrogation.
Des O Smith v A K Banjo
This case occurred after Rand Mutual Assurance but before Le Bonheur. It turned on the standing of the plaintiff, who was the owner of a motor vehicle damaged in a motor vehicle collision, to bring an action for damages against the third party. The Magistrate’s Court, which initially heard the matter, determined that whilst the plaintiff was the owner of the vehicle, he did not bear the risk of loss and therefore did not have title to sue. This was in circumstances where the motor vehicle was insured by a trust.
On appeal to the KwaZulu-Natal High Court, Pietermaritzburg, the Court held that subrogation was res inter alios acta and “at best a collateral fact which is not capable of affording any reasonable presumption or inference as to the principal matter in dispute”.
Relying inter alia on the judgment of the SCA in Commercial Union Insurance Company of South Africa Ltd v Lotter and Rand Mutual Assurance, the Court found that it was unnecessary for the involvement of the insurer in the lawsuit to be pleaded as it was irrelevant to the issues in the underlying action. He also referred to the historical practice of our courts allowing an insurer to institute an action in the name of the insured on the basis that the insurer effectively steps into the shoes of the insured.
This, it seems, is in stark contrast to what was held by the Court in Le Bonheur, where the view was expressed that the involvement of an insurer behind the scenes is not a practice that should be tolerated and should be disclosed.
Commentary
Respectfully, it is difficult to reconcile the decision in Le Bonheur with the decisions of the SCA in Commercial Union Insurance and Rand Mutual Assurance, as well as the decision of the appeal court in KwaZulu-Natal in Banjo.
It is particularly important to note that each of these judgments preceded Le Bonheur and was delivered in our Constitutional era. In the premises, there does not appear to be any real force to the argument that Le Bonheur should be decided differently on the grounds of Constitutional considerations.
It is apparent from Rand Mutual Assurance, Commercial Union Insurance and Banjo that the SCA and the appeal court in KwaZulu-Natal recognised the well-established practice of insurers exercising rights of subrogation by pursuing claims against third parties in the name of the insured. When called upon to determine whether this practice should be abolished by the stroke of a judicial pen, the SCA was not prepared to do so.
The practical impact of this is that insurers are left in an invidious position. Are they obliged to disclose their involvement in a subrogated recovery action in the Western Cape and cite themselves as a party to the recovery action proceedings, in circumstances where, in KwaZulu-Natal and elsewhere, they would not be obliged to do so?
It should be noted that there are sound commercial reasons for insurers wishing to remain in the background in proceedings against third parties. One example is that insurers may not wish to debate the basis upon which they concluded that the claim under their policy was payable. What if this were objectively debatable? Would it be open to the third party to raise this as a defence in the action, when this issue is clearly res inter alios acta?
An important takeaway from the facts in Le Bonheur is the difficult position that an insurer may find itself in where an insured does an about turn on the obligations set out in the agreement of loss. Academic authority on point suggests that in those circumstances, the insurer can compel the insured to act. However, at a practical level, that may be easier said than done. Is it necessary for the insurer to seek an order for specific performance under the agreement of loss, and if so, how is this achieved practically (i.e. is it in the same case as the recovery action litigation or in a separate case?).
As a matter of contract law, in the event that an insured has signed an agreement of loss or subrogation form in terms of which it has agreed that the insurer may use its name in the litigation, pending the outcome of that litigation, and further undertaking to render all assistance reasonably required by the insurer in the action, then an about turn by the insured would constitute a breach of the agreement of loss or subrogation form. An insurer would be entitled to recover loss or damages suffered as a result of such breach.
In summary, insurers would be well advised to review the standard wording of their agreements of loss and subrogation forms with a view to ensuring that appropriate provisions are contained therein to the effect that the insured will be liable to the insurers for all loss and damages arising out of a breach of the agreement of loss or subrogation form.
The Insurance Team at Cox Yeats has recommendations on how insurers should address these risks. For further information on this topic, please contact our Insurance Team.
