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Chapter 8 Contribution and subrogation 8/7

Let us look at the leading case concerning indemnity and subrogation, namely
Castellain v. Preston (1883).
Preston was in the course of selling his house to Rayner when it was damaged by fire. Preston recovered
the money for the damage from his insurers, but did not carry out any repairs. Subsequently, Preston
received the full purchase price for the house, even though the building had not been repaired.
An action was brought on behalf of the insurers to recover the payment they had made to Preston. The
action was successful because of the principle of indemnity and the doctrine of subrogation. The
policyholder had received more than a full indemnity as he had been paid both compensation from his
insurers and the full purchase price for the house.
However, it is more usual for insurers to recover all or part of their losses from the third party.

Consider this…
Why does the principle of subrogation not apply to life or personal accident policies?

D Insurer’s subrogation rights

In keeping with the principle of indemnity, insurers are also not entitled to recover more than they have
paid out. This is seen in the case of Yorkshire Insurance Co. v. Nisbet Shipping Co. Ltd (1961). In this
case, the insurers made a settlement of £72,000. However, there was a long period of time between the
payment of the claim and the recovery from the third party and there had been changes in the rates of
exchange which meant they actually recovered £127,000. It was held that the insurers were only entitled
to £72,000 and the policyholder was entitled to the balance.
Subrogation rights may arise under:

• tort;
• breach of contract; or
• statute. Reference copy for CII Face to Face Training

D1 Tort

In common law, everyone has a duty to act in a reasonable way towards others. A breach of this duty is
called a tort and the person who has suffered damage or injury is entitled to compensation.
A breach of this duty may arise in a number of ways, for example:
• a truck driver negligently loses control of their vehicle and crashes through someone’s wall;
• a neighbour, practising golf shots, hits a ball into a neighbouring garden and smashes a greenhouse;
or
• a workman knocks over a road sign, causing a car to machinery used to flatten roads.
In each of these examples, an individual has damaged property and it is possible to arrange a policy to Chapter
cater for each of these events. As well as the indemnity which insurers provide, the policyholder has a 8
right (in tort) to financial compensation from the individuals involved in the wrongdoing. The insurers
assume the rights of the policyholder and attempt to recover their outlay from the wrongdoer.

Question 8.4
Your car is damaged by the negligent act of another motorist. As well as the repairs involved, you claim for the cost
of hiring another car in order to carry on working. Your insurer pays only for the repairs to your car and sues in your
name for recovery of the paid claim.
As a person can only be sued once for one event, how can you recover your costs for hiring the car
(an uninsured loss)?

D2 Breach of contract

Under certain contracts, a breach entitles the aggrieved party to compensation, regardless of fault.
Insurers can assume the benefits of these rights.