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Insurers' subrogation rights reinforced

Feature Articles

Cite as: April 2015 89 (4) LIJ, p.48

A judgment of the Supreme Court of Victoria underlines the importance of keeping insurers' rights of subrogation front of mind during the litigation process. 

By Calum Cook

Subrogation is the substitution of one person for another, so that the rights and duties of the original person attach to a substituted one. This concept arises in insurance law, where the doctrine of subrogation allows an insurer to:

  1. exercise, in the insured’s name, rights that the insured may have against third parties; and
  2. claim from an insured any double recovery made by that insured.

This article deals with the latter circumstance.

Given that an insurer’s right of subrogation is somewhat latent, it is a right which can be easily overlooked, especially when the insured is involved in litigation to which the insurer is not a party.

In the judgment of Bupa Australia Pty Ltd v Shaw & Anor (Shaw)1 the Supreme Court of Victoria upheld the right of Bupa (a health insurer) to recover, pursuant to the doctrine of subrogation, almost $340,000 which it had paid to indemnify an insured for medical expenses which were necessary following a surgical procedure that later became the subject of a negligence claim against the surgeon.

This judgment provides some important lessons to insurers, insureds and their legal advisers.

Bupa Australia v Shaw

Mr Norman Shaw underwent five years of ongoing medical treatment as a result of complications arising from a gastrectomy performed in September 2005. Mr Shaw was a member of Bupa throughout this period and Bupa paid $338,953.56 in respect of the medical treatment, under Mr Shaw’s policy. In September 2008, Mr Shaw commenced legal proceedings against the surgeon who performed the gastrectomy, seeking damages for medical negligence. The damages claimed by Mr Shaw included the medical treatment costs that had, in fact, been paid by Bupa.

Mr Shaw died on 2 May 2010 and the negligence proceeding was continued by Mr Shaw’s wife, as substitute plaintiff on behalf of Mr Shaw’s estate. Because the damages claimed included many other heads of loss, such as general damages, to which Bupa was not subrogated, the control of the proceeding remained with Mr Shaw and, after his death, his estate.

In or about December 2011, the executors of the estate settled the negligence proceeding against the surgeon. The terms of settlement included the surgeon providing Mr Shaw’s estate with an indemnity in respect of action by Bupa to recover medical costs paid by Bupa.

Bupa had become aware of the negligence proceeding in March 2010, when Mr Shaw’s solicitors requested details of all medical expenses paid by Bupa following the gastrectomy. When providing these details to the solicitor, Bupa asked to be kept informed in relation to the legal proceedings, as any benefits which related to Mr Shaw’s claim would need to be refunded to Bupa in the event the claim was successful. Unaware of the settlement, on 16 February 2012, Bupa made inquiries of Mr Shaw’s solicitors as to the progress of the claim and was informed that the claim had settled. Bupa demanded repayment, but the estate denied any liability to repay Bupa.

Bupa then initiated proceedings against the estate for repayment of the $338,953.56, pursuant to its right of subrogation. The proceeding was defended on behalf of the estate by the lawyers who had acted for the surgeon in the negligence proceeding.

The findings

Justice Almond posed three questions, the answers to which formed the basis of his Honour’s order that Bupa was entitled to equitable compensation in the sum of $338,953.56, plus interest.

Were the payments for medical expenses made by way of indemnification under the insurance policy, giving rise to an entitlement to exercise the right of subrogation?

The answer to this question was important because an insurer has no right of subrogation except in respect of payments made pursuant to a policy of indemnity insurance. In finding that the answer to this question is “yes”, Almond J pointed to the fact that under the terms of Mr Shaw’s insurance policy, benefits for hospital and general treatment are prima facie payable to recompense the policyholder for those expenses and that the contractual obligation on Bupa to indemnify Mr Shaw was very clear. Almond J held at [43] that:

“The purpose and object of the health insurance policy is to indemnify policyholders for medical and like expenses . . . In my view, a reasonable person in the position of the parties would have understood . . . that insurance cover (save for any relevant waiting periods) would be immediate and comprehensive and that claims would be met to discharge liabilities incurred.” It flows from this that Bupa was entitled to exercise the right of subrogation, which is inherent in a contract of indemnity.2

In making this finding, Almond J rejected arguments that Bupa’s Fund Rules excluded or modified the right of subrogation and its exercise.

The estate also argued that Bupa’s payments of medical expenses were made in error on the basis that, given the claim against the surgeon, Bupa was not, under its Fund Rules, required to pay the medical costs. In response, Bupa relied on the 19th century decision of the Privy Council in King v Victoria Insurance Company Ltd (King).3 In that case it was held that a right of subrogation arises where the insurer makes a payment honestly in consequence of a policy and in satisfaction of a claim by the insured, even though the payment might not strictly be within the terms of the policy.

Almond J accepted Bupa’s submission and applied the principle in King not only to the majority of payments, which were made while Bupa was unaware of the claim against the surgeon, but also to payments made after Bupa became aware of that claim. In relation to the latter payments, Almond J held that Bupa acted reasonably and in good faith in continuing to pay Mr Shaw’s medical claims given his dire medical condition at the time.

Was Bupa’s right of subrogation prejudiced by the terms on which the negligence claim was settled?

In finding that the answer to this question is also “yes”, Almond J held at [76] that “the insured released, diminished and compromised the benefit of the right to which Bupa was entitled to succeed and enjoy under its right of subrogation in this case” and therefore Bupa’s exercise of its right of subrogation was prejudiced. This occurred by virtue of the Deed of Release containing a provision in which the estate released the defendant in respect of all rights of action that arose out of Mr Shaw’s medical treatment provided by the surgeon – this extinguished any right Bupa might otherwise have had to stand in the shoes of the insured and bring a claim against the surgeon.

Was Bupa prevented from exercising its right of subrogation as a consequence of its own conduct?

In finding that the answer to this question was “no”, Almond J rejected the estate’s arguments that Bupa waived its right of subrogation by allegedly being inactive in pursuing that right (including by deciding not to intervene directly in the negligence proceeding) and by also demanding immediate payment prior to settlement of the negligence claim (which would have been inconsistent with the right of subrogation, which cannot operate unless the insurer provides an indemnity). Almond J relied on correspondence from Bupa seeking to be kept informed of the progress of the negligence claim and maintaining its right to reimbursement. This included a letter from Bupa to the estate’s solicitor some nine months prior to settlement of the negligence claim, which specifically requested that the insured:

  • have regard to Bupa’s interests;
  • pursue the compensation claim in good faith and do nothing to prejudice the right of subrogation; and
  • inform Bupa if and when the medical expenses or other damages were paid and to account to Bupa in respect of amounts recovered.

Key lessons for insurers and their legal advisers

  • Insurers that may have subrogation rights should have sound internal mechanisms to ensure that any trigger for such a right is detected and that this is followed up. In Shaw, Bupa was asked by Mr Shaw’s solicitors for a schedule of benefits which led to Bupa asserting its rights of subrogation. An insurer may also have systems which detect insurance claims that could be the subject of a separate claim (and could therefore be recoverable).
  • When on notice that an insured has made a separate claim which may be recoverable, an insurer should assert its subrogation rights as soon as possible, issue a valid notice of charge, and actively monitor and follow up legal proceedings. The insured should be reminded to have regard to the insurer’s interests, pursue the claim in good faith and do nothing which prejudices the insurer’s right of subrogation. An insurer may, after taking appropriate advice, intervene in proceedings or exercise, in the insured’s name, rights that the insured may have against a third party (i.e. the first type of subrogation mentioned at the start of this article).4 However, in circumstances where the insured is already taking action against the third party (which was the case in Shaw), the insured is carrying the risk and bearing the costs in relation to the broader legal claim, with the possibility that the insurer will become entitled to some of the monies recovered at a later stage (which will often make more commercial sense for the insurer).
  • Finally, insurers should ensure that their Fund Rules, policy of insurance or equivalent instrument effectively preserves the right of subrogation and does not interfere with this right in any way.

Key lessons for insureds and their legal advisers

  • When advising in relation to litigation or potential litigation of claims against third parties which include losses which are insured, either in whole or in part, advisers should at the outset seek instructions from their client on their insurance coverage and the terms of that coverage. Advisers should then provide appropriate advice on the insurer’s right of subrogation and any impact this may have on the primary legal claim (including the settlement strategy).
  • Insureds who are aware that their insurer has a right of subrogation should not act in a manner inconsistent with that right. For example, care should be taken to ensure that any settlement terms do not offend the doctrine of subrogation and that the insurer’s right is taken into account – doing otherwise could be extremely costly for an insured. Although in Shaw the settlement between the estate and the surgeon failed to provide for repayment to Bupa, Bupa was ultimately awarded the full amount of its claim. This was notwithstanding that the estate had carried the cost and risk of litigation and compromised its claim against the surgeon. If not for the inclusion of the indemnity in the terms of settlement, the liability for Bupa’s claim would have fallen to the estate, rather than the surgeon.
  • Insurers should be notified and kept up to date in relation to the litigation (including any settlement).
  • Generally speaking, in the context of any mediation or settlement, the insured must have regard to the insurer’s interests, pursue the compensation claim in good faith and do nothing which prejudices the insured’s right of subrogation.5

CALUM COOK is the head of Legal, Employment and Litigation for Bupa Australia and New Zealand. He was the in-house counsel with carriage of the Shaw matter on behalf of Bupa.

The numbers in square brackets in the text refer to the paragraph numbers in the judgment.

  1. [2013] VSC 507.
  2. See Insurance Commission of Western Australia v Kightly (2005) 225 ALR 380.
  3. [1896] AC 250.
  4. Note: in some circumstances, the party who conducts the litigation (the insurer or the insured) and recovers an amount may be entitled to first payment of their share of the loss and their costs under s67 of the Insurance Contracts Act 1984 (Cth). However, the rules in that section can be displaced by the terms of the insurance contract (s67(9)) and the Act does not apply to contracts of private health insurance (s9).
  5. See SGIO (Qld) v Brisbane Stevedoring (1969) 123 CLR 228, at 240-1.


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