Compensation in the order of subrogation
In the field of property insurance, there are situations where the occurrence of an insured event was triggered by someone else’s actions. If you are an insured under such a contract, that person or entity becomes your debtor, but the insurer from whom you took out the insurance still pays for the damages.
The payment of compensation is a turning point in the legal relationship – the subrogation procedure, which is often confused with recourse and cession, comes into play. Let’s break it all down.
If, on the contrary, you are the debtor, the perpetrator of the insured accident, then expect the insurance company to apply to you by way of subrogation. That’s fair, but often insurers overstate the amount of the claim. If you don’t know how to act in such a situation, you need the help of a qualified insurance lawyer as soon as possible.
Subrogation, Recourse, and Cession – Flies Away, Cutlets Away
One of the fundamental rules of civil law is that any damages must be compensated. The damage can be compensated directly, as well as through subrogation or recourse. The second one is often confused with the third one, as well as with cession (assignment of the claim under the contract), so for better understanding of the mechanism of compensation in subrogation we will consider it against the other two related ones.
Two Articles of the Civil Code (general and special) – Articles 387 and 965 – tell us what subrogation is. Subparagraph 4 of paragraph 1 of the first explains that it is the transfer of rights of claim against the person responsible for the damage from the original creditor to the insurer under the law.
Article 965 extends and supplements this definition by stating that such relations arise under a property insurance contract, and that the scope of rights transferred to the insurer is limited to the insurance compensation paid by the insurer. That is, in essence, it is a transfer of the right of claim from one to another, which means that we cannot talk about the emergence of a new legal relationship.
The mechanism of action is as follows. The occurrence of the insured accident was facilitated by a certain culprit (debtor). The policy holder goes to his insurance company, which pays him a compensation for the damage. The policy holder no longer has the right of claim against the debtor – it passes automatically to the insured, because the law says so. From there, the insurance company deals with the debtor on its own (more often by collecting).
Right away, let us note the importance of the fact that the transfer of the right is due to the requirement of the law. This is the essential point that distinguishes the institution we are considering from the cession.
The latter presupposes a voluntary assignment of the right of claim, that is, under the contract and at any time. The subrogation procedure is possible only after the occurrence of an insured event and its payment.
The scheme of cession works in any contractual legal relations, the compensation for damages by way of subrogation is possible only under the contract of property insurance (voluntary, because MTPL, for example, implies recourse).
Here we get to compensation by way of recourse, which is the emergence of your right to recover from the original debtor the amount you paid for the harm he caused to someone (a citizen, an organization).
Example: an employee has harmed someone (their health or property), and according to the law, the employer must answer, which from that moment has the right to demand the money from their employee.
The key word is arising. A regressive right is a newly created right that does not cancel the original relationship between the creditor and the debtor. Regress is what applies in tort relations (when an obligation arises from the infliction of harm), which can be related to insurance relations as well as to employment or subcontracting relations, etc.
To illustrate the differences between subrogation and recourse compensation in insurance relations, here is an example. You have caused an accident in a state of alcoholic intoxication. The victim claimed compensation from your insurer under the MTPL contract, and the insurer paid it out.
Under other circumstances, that would have been the case. But the fact that you were drunk gives your insurer the right to demand compensation from you in the amount of compensation paid to the victim. And there are a lot of reasons for the insurer to have the right of recourse to the person who caused the accident. Full list is set out in Article 14 of the law on MTPL.
In other words, both subrogation and regress have in common that they are aimed at prevention of unjust enrichment – in other words, so that the guilty party is not paid, and he himself would avoid property losses.
Subrogation, however, involves the transfer of a right within the same relationship, while regress involves the emergence of a new one. This is important from the point of view of calculating limitation periods: in the first case they start at the moment of the origin of the original obligation, and in the second – at the moment of the origin of the recourse right.
It is also important to note that a subrogation right cannot arise for the insurer if the insured has reconciled with the perpetrator, or if by his own fault he lost the right of claim.
Reconciliation here means a waiver of the said right. In this case, the insurer may claim the excess compensation from the policyholder. The right of recourse arises irrespective of the relationship between the insured person and the injured person.
Peculiarities of compensation by way of subrogation
One of the peculiarities of compensation for damages under the subrogation procedure is that the initial creditor should provide the insurer with all documents related to its right of claim, as well as provide all information necessary for the insurer to claim compensation.
Also, the property insurance contract cannot contain a clause about the abolition of the insurer’s subrogation right, because it is established by law. Such a clause will be deemed null and void.
In addition to the provisions of the Civil Code, the norms of the Resolution of the Plenum of the Supreme Arbitration Court No. 58 also work in the field of subrogation. According to them, for example, an insurer under CASCO (voluntary comprehensive property insurance of a car) may pay to the injured party a compensation which exceeds the amount of payment under MTPL.
In this case, the insurance company can collect damages by way of subrogation from the insurer of the accident victim. The amount of the recovery will be limited to the amount of the CMTPL insurance payment that was due to be made by the relevant insurer.
The relationship of the insurer with the debtor will be governed by the same rules of law that would have governed the relationship of the original creditor with the debtor.
Certain types of property insurance contracts are regulated by other legislative acts, which may slightly modify the terms of compensation for damages by way of subrogation.
What should you do if the insurance company demands subrogation compensation from you?
If you are the party at fault and it was your actions that caused the insured accident, after you pay compensation to your creditor, the insurance company will send you a claim which sets the deadline for fulfilling the obligation. If you do not fulfill it for any reason, the insurer will go to court to collect.
It is not recommended to ignore the claim, you should answer with a letter (preferably by registered mail with the list of enclosures), stating the reason for your refusal or inability to pay. Perhaps the insurance company will meet you halfway and, for example, provide you with an installment plan. In any case, the fact of your silence will affect you in court.
If the case goes to court, you can try to prove the absence of a causal link between your actions and the occurrence of the insured event, that is to deny your guilt. But if you have already compensated the client of the insurance directly, and the organization continues to demand money from you, you will need to provide a document confirming the fact of payment.
Therefore, it is strongly recommended to take a receipt from the lender of the money and, if possible, certify it by a notary. You can also try to challenge the very fact of the insurance case. As court practice shows, even in the presence of objections from the plaintiff’s side, the court will investigate the fact.
To summarize. Subrogation is a kind of replacement of the creditor in the obligation without changing the obligation itself. It is used in cases of property insurance, relieves the debtor of all obligations to the original creditor. It differs from cession in the compulsory nature of its occurrence, and from recourse in the fact that it does not create a new legal relationship.
Entrust the task to professionals. The lawyers will perform the order at the cost you specify. You won’t have to study the laws, read the articles and understand the issue yourself.
What is the difference between subrogation and recourse in auto insurance
54. Subrogation and recourse issues (Article 965 of the Civil Code)
In accordance with Paragraph 1 of Article 965 of the Civil Code, unless the property insurance contract provides otherwise, the right of claim which the insured (beneficiary) has against the person liable for the losses compensated as a result of insurance shall transfer to the insurer who has paid the insurance compensation within the paid sum.
At the same time, subparagraph 4 of paragraph 1 of Article 387 of the Civil Code refers to the transfer to the insurer of the rights of the creditor to the debtor responsible for the occurrence of the insured event. The person responsible for losses is not always the same as the person responsible for the occurrence of the insured event. Such cases include the liability of a legal entity for harm caused by an employee (article 1068 of the Civil Code); liability for harm caused by defects in goods, work or services (article 1085 of the Civil Code); liability for harm caused by a source of increased danger (article 1079 of the Civil Code) and others.
The right of claim passes to the insurer on the basis of the law at the moment of insurance payment. The insurer does not have the right to demand from the tortfeasor the amount which he paid to the insured in violation of the terms of the insurance contract.
See paragraph 18 of the Information Letter of the Presidium of the RF from 28.11.2003 N 75 “Review of the practice of disputes relating to the execution of insurance contracts.
With the entry into force of Part 2 of the Civil Code applies subrogation to all contracts property insurance . Article 965 of the Civil Code of the RF talks about the transfer to the insurer of the right of claim of the insured or the beneficiary to the person responsible for the losses. If the person responsible for the losses of the beneficiary is the insurant himself under the contract of liability insurance, then formally Article 965 of the Civil Code does not limit the transfer to the insurer on subrogation of the right of claim of the beneficiary against the insurant. The doctrine recognizes that under the contract of insurance the risk of losses of the policyholder is transferred to the insurer and the insurer should not be able to get back from the policyholder the compensation paid. Judicial practice proceeds from the impossibility of subrogation against the insured and other persons covered by insurance coverage, although this position does not directly follow from the current wording of Article 965 of the Civil Code. At the same time, subrogation may transfer to the liability insurer the rights of claim against the person who jointly caused the damage (clause 2 Article 1081 of the Civil Code). In general, the problem of limiting subrogation in liability insurance contracts can be solved by establishing a general prohibition on subrogation with respect to the insured and the insured. At the same time, the current rule of inadmissibility of the prohibition of subrogation in case of intentional infliction of losses should be retained.
Article 22 of the original version of the Law on Organization of Insurance Business provided for subrogation only under property insurance contracts.
The absence of subrogation to the insurant (the debtor) distinguishes an insurance contract from a surety, in which the surety receives under subrogation the right of claim against the debtor in the amount of sums paid under the surety for the debtor.
For instance, courts do not allow recovery under subrogation from persons allowed by the car owner to drive the insured vehicle and included in the insurance policy (Ruling of the Supreme Court of the RF of 23.08.2011 N 1-V11-6).
Another problematic issue is the lack of restrictions in the current version of Article 965 of the Civil Code in respect of subrogation of spouses and close relatives of the insured. In practice, insurers declare such subrogation claims, which leads to a negative social effect. Judicial practice has tried to correct the shortcomings of such regulation by denying subrogation against spouses, but the Supreme Court of the Russian Federation has recognized the lawfulness of subrogation of the insurer to recover from the spouse of the insured the amount of insurance compensation paid. Obviously, the problem of limiting subrogation to spouses and other close persons of the insured (insured person) requires a legislative solution.
Courts have justified the denial of subrogation by the coincidence of the debtor and the creditor in one person when damage is caused to the common property of spouses (Article 413 of the Civil Code). See, for example, the appellate determination of the Supreme Court of the Republic of Khakassia of May 17, 2012 in case N 33-792/2012; the appellate determination of the Judicial Board for Civil Cases of the Omsk Regional Court of May 21, 2014 in case N 33-2751/2014.
See the definition of the Supreme Court of the Russian Federation of April 23, 2018 N 49-KG17-36.
The study of foreign experience shows that subrogation is applied in loss insurance contracts and is not applied in life and accident insurance contracts. In the laws of European countries subrogation is not applied to the insured and persons close to him. In Germany, the insurer may not make subrogation claims against persons living together with the policyholder, unless they have intentionally caused the damage. In France the insurer cannot make subrogation claims against children, heirs, lineal relatives, officials, employees, workers, servants and other persons normally resident in the policyholder’s home. In English law subrogation does not apply to persons in an employment relationship with the policyholder and his family members .
Article 86 of the German Insurance Contract Act 2008.
Article L 121-12 of the French Insurance Code.
See Clarke M. The Law of Insurance Contracts. P. 1050.
In view of the above, it is advisable to establish in Article 965 of the Civil Code a list of persons in respect of whom subrogation is not allowed. To this end, it is suggested to add a new clause to Article 965 of the Civil Code stipulating a ban on subrogation of subrogation rights of claim against insured and insured person, as well as a ban on subrogation against spouse, close relatives (parents, children, brothers and sisters) and disabled dependents of insured (insured person), except in cases of deliberate harm caused by these persons.
The above proposal is based on the fact that the exercise of subrogation rights by the insurer must not deprive the insured of insurance protection. By analogy with Article 313(5) of the Civil Code, as far as subrogation is concerned, it should be understood that the insurer may not exercise the subrogation rights to the detriment of the insured. Anything else may be perceived by the courts as an abuse of right.
In view of the absence in Russian legislation of general provisions on the grounds for the emergence of insurer recourse claims against the insurant (insured person) it is advisable to include in a separate article of Chapter 48 of the Civil Code of the Russian Federation an indication that insurer recourse claims against the insurant (insured person) arise in cases provided for by law.