Page 36 - The Insurance Times February 2026

must be explained by reference to insurance layers, not by or the average clause, but the underlying core principle
the insured's overall net loss. Where the insured, by way of establishes that subrogation follows the allocation of risk
a contract, agrees to bear an excess, they become a co- under the insurance contract. Any part of the loss that the
insurer for that layer and are not allowed to use third-party insured has agreed to, or is deemed to, bear under a
recoveries to recoup it first. contractual obligation will be treated as self-insurance/co-
insurance, and the insurer cannot be subrogated to that
Lord Templeman explained " the best way to analyse the portion.
loss was to imagine three different policies of insurance
covering the total amount of the loss: the first for up to Author's Insight -
£25,000; the second for anything above £25,000 up to The Napier V. Hunter judgment is cited in many decisions.
£125,000; and the third for anything above £125,000 up to But the House of Lords gave insurers a proprietary right (an
£160,000." Thus, if an insured suffers a £160,000 loss with equitable lien) even though the insurers had merely paid
a £25,000 excess and £100,000 stop-loss cover, and later under a contract and had not bargained for any security.
recovers £130,000 from the wrongdoer, the recovery is
By granting proprietary rights, there is a strong chance that
applied top-down: £35,000 goes to the insured (the uninsured
other unsecured creditors of the insured will receive less,
upper layer), £95,000 goes to the insurer (the insured layer),
disturbing the pari passu principle. Paying a claim is a
and nothing is applied to the excess which the insured
contractual obligation; An excess is a deliberate risk
agreed to bear. It is clear here that the insured can't recover
retention, compensated by a premium discount.
the excess amount of £25,000.
Underinsurance similarly penalises the insured through
Equitable lien average. In neither case does recovery from the wrongdoer
create enrichment or duplicate indemnity. The insured is not
The House of Lords protected an insurer's right of seeking payment from the insurer for these amounts, only
subrogation by an equitable lien over the proceeds of the restitution from the tortfeasor. Treating the insured as a
insured's claim against the third party. Concerns abound "co-insurer" does not justify diverting such recoveries to
over whether insurers could recover under a stop-loss policy the insurer.
if the court did not impose an equitable lien. An equitable
lien is a right recognised by equity or fairness that requires Critically, subrogation operates only after the insured is fully
it to be shared fairly, without enriching anyone unfairly. indemnified for his actual loss. Policy limits, excess, and
underinsurance restrict the insurer's liability; they do not
Equity, therefore, considers the recovery aligned to
proprietary charge in favour of the insurer to the extent of reduce the insured's loss.
its subrogated interest, preventing the insured from
It may be noted here that the insurer must pay a
retaining or wasting that portion of the recovery,
legitimate claim even when the subrogation right is not
particularly in cases of insolvency. This decision firmly protected. Insurance is just one way the insured can
recognised that subrogation is an equitable principle, not
mitigate risk. He will definitely look into other resources
merely a contractual inference, and that equity will
intervene to prevent unjust enrichment and double recovery to mitigate his losses. Subrogation is his legal right and
while respecting the contractual apportionment of risk remedy of recovery against the negligent wrongdoer to
between insurer and insured. the extent of his actual loss. Any amount over and above
his actual loss should be paid to the insurer, to the extent
In the context of the case referred to above, the stop-loss of the loss it has paid.
insurer pays the insured (in this case, Lloyd's Name) for part
of a loss. In a separate case, later, the insured recovers I leave it here, looking forward to your valued
damages from a negligent third party- the reinsurer here. If suggestions.
left unattended, the insured could retain the full amount
recovered, and the insurer might never recover its subrogated Reference :
share, especially if the insured becomes insolvent. 1. https://en.wikipedia.org/wiki/
Lord_Napier_and_Ettrick_v_Hunter
Effect of the Lord Napier v Hunter judgement 2. Principle of Risk Management and Insurance - 10th
on an average clause or under-insurance Edition -George E. Rejda
The above judgment didn't directly address underinsurance 3. Insurance Law MO5 -Chartered Insurance Institute

32 February 2026 The Insurance Times