OF SUBROGATION RIGHTS AND COVENANT-TO-INSURE CLAUSES
|(1995) 7 SAcLJ 58
|01 December 1995
|01 December 1995
The subrogation rights of insurers in the various common law countries have of late come under increasing judicial assault. This is especially so in the area of landlord and tenant. Whether this is reflective of a growing acceptance that there must be limits on the exercise of these rights, or whether it turns purely on the construction of the covenant to insure and other relevant clauses, will be explored in the present paper. Fresh impetus for examining this issue has arisen in the recent Court of Appeal decision of.
In insurance law, subrogation generally refers to the transfer of the rights and benefits possessed by the insured (against a third party) to the insurer.1 This occurs by operation of law and holds even without any assent of or assignment by the insured.2 It has been said that the express purpose of this doctrine is essentially to prevent any unjust enrichment at the expense of the insurer.3 Although the underlying principle is in itself both sound and sensible, there are unfortunately instances where the operation of this doctrine has ironically inflicted considerable hardship and injustice, especially when the insurer is able to foist liability on an uninsured third-party tortfeasor. A simple comparison of the position of the beleaguered tortfeasor (who unlike the insurance companies is in no position to spread such a loss amongst a premium-paying client base) with that of the insurer (who in the first place has already been paid a premium to assume the risk of such a liability) is sufficient to draw attention to this particular problem which, if left unredressed, may tarnish the image of the insurance industry. Indeed, critics have often accused it of being expensive as well as wasteful of resources — unnecessarily promoting multiple insurances since the same risk has now to be covered by both damage and liability policies.4
It may therefore not be all that surprising to note that there is apparently an increasing judicial tendency to curtail subrogation rights, eg in the relationships between employer and employee,5 between contractor and sub-contractor,6 and more recently between landlord and tenant.7 The basic issue is this: When X agrees with Y to insure a particular subject matter in which both have an interest (though not co-terminous), does that agreement exempt Y from liability should it be established that the loss of or damage to the subject matter is due to Y’s negligence? If the answer is in the affirmative, it would then follow that X could not sue Y and likewise X’s insurer (who cannot assume greater rights than the insured X) should be precluded from suing Y in X’s name; however, the resulting body of case law produced thus far has not been able to shed clear guidelines as to whether subrogation ought to be allowed. Also to be addressed is the question of whether the apparent judicial assault on subrogation is reflective of a growing acceptance that there must be more limits on the exercise of these rights, or whether it is rather a case of subrogation rights being modified by some contractual clause (although the clause8 that performs such a modification is not contained in the contract between insurer and insured but instead in that between the insured and a third party).
Hasson has observed that “probably the most drastic curtailment of subrogation rights both in the United States and in the Commonwealth has come in the field of landlord and tenant”,9 and it is to this category of contractual relationship — in the form of leases between lessors and lessees — that the present discussion will now turn. In addition, there has been fresh impetus for an examination of this important issue in the local context as the recent case of 10 has brought it into focus for the first time here in Singapore. The
present article, therefore, seeks to re-examine this particular issue with a view to determining the perimeters drawn by the judicial onslaught on subrogation rights in the other countries, as well as to evaluate those implications that may prove to be of relevance to Singapore’s position on the matter.
In the absence of any exculpatory or exemption clauses in the lease, the lessee would be held liable for any damage caused to the leased premises as in general there would be a covenant requiring him to surrender possession in good repair at the termination of the tenancy, with the usual exceptions being for fair wear and tear as well as for fires.11 As for the latter fire exception, there is not much controversy with the commonly-held understanding that the lessee is not to be absolved from responsibility if it can be established that the fire had been negligently caused by him. What is usually in contention is whether the existence of a fire policy (taken out by the landlord) would relieve the lessee of liability for damage to the leased premises due to his negligence — an important question since this will in turn affect the subrogational rights of the landlord’s insurer (which are derived from the rights of the landlord and can be exercised only after compensation has been paid).12
The answer would have been relatively straightforward if the lessee’s name had also been included in the policy taken out by the landlord: This would have made the lessee a co-insured, in which case the insurer ought clearly to be precluded from subrogation.13 In actual practice, however, the situation is often not so simple and litigation is rife in many countries over such problems. There is unfortunately some resultant confusion over the guidelines to be adopted and it is therefore useful to review the positions adopted by others (viz Canada, United States, United Kingdom and New Zealand) prior to a consideration of our own local position.
Canada provides a natural starting point as her judges were the first in the Commonwealth to join ranks with the American judges14 in breaking away from the tradition of rigidly upholding subrogation rights; in fact, they
have in so doing also helped to blaze the trail for the other commonwealth countries as well.
It would be appropriate to begin by casting back to the traditional position upheld by the Canadian Supreme Court in the 1937 case of 15 which revolved around a lease that contained the standard covenant obliging the tenant to repair any damages save for that caused by, inter alia, fire. The premiums for the insurance policy were in this instance paid by the landlord. In a rather unexceptional decision, the Supreme Court affirmed the ruling of the appellate court that the tenant (who through negligence had caused the explosion and consequent damage by fire) was liable to the insured landlord and thus to the insurer (who after settling the claim lodged by the landlord chose to be subrogated against the tenant):
“… the appellant [tenant] could not be relieved from such liability under the exception in the covenant to repair. It would require much stronger language to permit the appellant to escape payment for damages caused by its negligence.”16
Neither were the various other clauses in the lease agreement — also examined in detail by the judges — of any avail to the defence of the tenant. The parties to the lease should have incorporated an appropriate exculpatory clause or utilised some more fitting language if there had originally been an intention to absolve the tenant from such acts of negligence.
Canada adhered to this traditional position for the next four decades until the seventies when her Supreme Court appeared to have spearheaded a movement — patterned on certain developments in the American scene17 — to curb the subrogational rights of the insurer in the following trilogy of cases:
(a) In the first case of 18 the least contained a covenant requiring the lessor “to insure … against all risk of loss or damage caused or resulting from fire …” as well as an exculpatory clause stipulating that the lessee had to make repairs “except for damage caused by …, inter alia, perils against which the lessor is obligated to insure hereunder.” The Supreme Court held that the covenant to insure and the exculpatory clause (both of which were absent in the case) clearly protected
the tenant in the event of fire, whether it be due to accident or negligence, since the wording of this rather forceful exculpatory clause did point towards an intention to exonerate the tenant from liability with regard to all the perils covered in the policy; in other words, the insurance benefitted the tenant too. As such, the landlord — and in turn the insurer — had no claim against the tenant for having negligently caused the fire.
(b) In the second case of 19 the lease did not contain a covenant to insure by the landlord but there was a term requiring the tenant to pay the “insurance rates immediately when due”. The majority judges viewed the risk of loss or damage by fire as having been passed back to the landlord since the premiums for the insurance taken out by the landlord on the premises were paid for by the tenant; as Laskin CJ had pointed out, it was in effect an “assertion of a claim by a tenant to benefit from its payment for insurance pursuant to the terms of its lease …”20 and the tenant, having “paid for an expected benefit”, was accordingly absolved in respect of loss due to fire. Hence, the insurer was precluded from exercising any subrogated claim. It is submitted, however, that this case is slightly weaker than that of 21 as there are certain weaknesses (which would be discussed later)22 in pivoting the decision on the fact that the tenant had paid for the premium.,
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