11.
Indemnity and its
Corollaries of Subrogation
and Contribution
11.1. Introduction
Although indemnity is a key insurance principle, it should be established at the very outset
that not all contracts of insurance are indemnity contract inasmuch as the doctrine will
apply to a certain level in almost all aspects of insurance. 150 An indemnity insurance policy
is one that is aimed at protecting the insured from quantifiable losses. In indemnity
therefore, a loss occasioned by the insured peril is made good by the insured.
In contracts of indemnity, so as to ensure that the person insured does not unduly benefit
from the occurrence of the peril, there are other corollary principles of subrogation and
contribution which shall be highlighted in this chapter.
11.2. Indemnity
Classically, indemnity means when a person promises to the save the other from loss
caused from the conduct of promisor himself or by the conduct of any other person.151
A contract of insurance by its nature is a contract of indemnity as it is basically a contract
by which a person promises to indemnify another, for a consideration called premium,
against losses that might happen as a result of the perils or events against which insurance
is taken. The assurer promises to make good to and for the insured in case of the happening
of the event against which the insurance was taken. In a contract of insurance, the insurer
therefore stands on the same footing as the insured with regard to the liability arising from
the injury or loss suffered.
In Joseph Kitheka v. Mitchel Nzioka& Another,152 after suffering injuries arising out of a
motor vehicle accident, the plaintiff sued and obtained orders from the driver. He did not
150
See chapter on Life Insurance.
151
See William Benecke, A Treatise on the Principles of Indemnity in Marine Insurance, Bottomry and
1
Respondentia, and on Their Practical Application in Effecting Those Contracts, and in the Adjustment of All
Claims Arising Out of Them for the Use of Underwriters, Merchants, and Lawyers (Baldwin, Cradock and
Joy, 1824) 498.
152
High Court at Nairobi, Civil Case 1966 of 2001, Judgement of 5th July, 2006 [2006] eKLR.
2
however make the insured, who was the owner of the motor vehicle, party to the suit. He
later sought to enforce these orders against an insurance company. It was held that “For the
insurer to be liable, there must be a judgment against the insured. In that suit the plaintiff
ought to have sued the driver as well as the registered owner of the said motor vehicle
which caused the accident.” Hence, since there was no judgment against the insured, the
plaintiff could not enforce the judgment against the insurer whom he contracted to
indemnify.
11.2.1. Contracts of Indemnity
Insurance contract may be classified as indemnity contract and non-indemnity contracts.
Some forms of life insurance are non-indemnity contract as the loss of life cannot be
valued and replaced.153
It is well settled that fire and marine insurance are contracts of indemnity. In Castelliain v.
Preston,154 Cotton LJ observed that marine policy is usually a contract to indemnify the
person for the loss which he has sustained in consequence of the peril insured against.
Strictly contract of indemnity mean:
(i) The insured will not be permitted to make profit in the transaction. For example,
if he recovers some amount from selling the damaged good, he has to account
this to the insurance company;
(ii) The insurer will pay only compensation that is the actual loss or damage;
(iii) The principle of subrogation is applied. E.g. if the insurer suffers loss that a third
party is responsible for and the insurer pays, the insurer gets the right to claim
from the 3rd party;
(iv) The principle of contribution is applied so that if the insured takes more than one
policy, the two policies will contribute to indemnify him so that he does not
recover from both policies the full amount;
153
Dalby v. India and London Assurance Co 1936 (1) KB 408. Some covers issued under the life insurance
3
class are however indemnity contracts. For instance, medicare and health insurance cover the expenses
incurred for treatment subject to the sum insured.
154
(1883) 11 QB 380.
4
(v) The principle of reinstatement is applied; the insurer has the option to reinstate
the insured property rather than pay money.
The principle that the insured cannot recover more than the loss suffered may be modified
by the express term of the policy. The parties may also estimate the value of the policy.
Also, the insured can only recover on the basis of the sum insured which may be less than
the amount of loss.
11.2.2. Methods of Indemnity
The insured may make good for the loss incurred by the insured in a number of ways.
11.2.2.1. Cash payment
The most common way in which insurers will make good to the insured for the loss
occasioned by the peril insured against in through cash payment. This is usually determined
by the sum insured and is measured pro-rata to the loss. 155 Under the Insurance Act, the
amount is calculated in the currency of Kenya unless the parties to the policy have agreed
otherwise.156
11.2.2.2. Repairs
This occurs where the insurer agrees to repair the item insured to, as practically possible,
the condition it was in at the time of destruction. Under the covers, if the subject-matter is
damaged or destroyed, the insurer pays the cost of repairing it.
There may, however, be some limits that may be applied under the policy. For instance,
certain items that become obsolete very quickly or items over a certain age may not qualify
for replacement value. There will also usually be an upper limit on what may be claimed.
This is usually subject to the sum insured.
11.2.2.3. Replacement
This occurs where the insurer agrees to replace a lost or destroyed item with a new one or
another which is as practically possible of the condition as that which was lost or
destroyed. This is usually subject to the sum insured and one cannot recover beyond the
sum insured.
5
155
It is given in proportion to the loss incurred.
156
Insurance Act 79.
6
11.2.2.4. Reinstatement
In reinstatement, usually, no depreciation is deducted. The settlement of claim is on “new
for old” basis. It will reflect the cost of replacing the existing asset by a new asset of
similar type, capacity and utility. The insured here will have least financial strain.157
11.2.3. Measure of Indemnity
An indemnity policy puts one back to the same financial position he/she was in prior to the
loss occurring. Persons insured should not be better or worse off than they were
immediately before the loss.
The settlement is based on the value of the item second-hand or the replacement cost of the
item less an allowance for depreciation arising from age and use. The indemnity value may
also be referred to as Market Value or Present day Value.
11.3. Subrogation
In insurance law and practice, subrogation is a doctrine founded on the indemnity principle
which provides that the insured has a right to be indemnified against his loss but cannot
make a profit from it by getting paid his insurance money as well as obtaining
compensation from a third party. Hence, it is a corollary principle of indemnity.
In Castellain v. Preston,158 it was aptly stated that if an insured vendor of a property suffers
fire damage between exchange and completion and is indemnified by his insurers, the
insured must then account back to insurers when the sale of the house is completed and he
receives the full purchase price to which he was entitled in spite of the fire. Per Brett LJ:
The very foundation, in my opinion, of every rule which has been applied to insurance law
is this, namely, that the contract of insurance contained in a marine or fire policy is a
contract of indemnity, and of indemnity only, and that this contract means that the assured,
in case of a loss against which the policy has been made, shall be fully indemnified, but
shall never be more than fully indemnified. That is the fundamental principle of insurance,
and if ever a proposition is brought forward which is at variance with it, that is to say,
which either will
157
See Robert Merkin ed., Insurance Law: An Introduction (CRC Press, 2014) 204.
158
[1883] 11 QBD 380.
7
prevent the assured from obtaining a full indemnity, or which will give to the assured more
than a full indemnity, that proposition must certainly be wrong.
Thus, subrogation is essential where one assumes the legal rights of a person for whom
expenses or a debt he has paid. In insurance, it occurs after an insurance company has paid
the insured for injuries and losses sustained by the insured. In this case, the insurer acquires
the right of the insured to claim against a party who was responsible for the injuries, losses
or damages to the insured. The insurers are also entitled to the salvaged part of the subject
matter if they pay full indemnity.
Conventionally, subrogation arises when an individual satisfies the debt of another as a
result of a contract which provides that any claims that exist as security for the debt be kept
alive for the benefit of the party who pays the debt.
The earliest known statement of the right of subrogation in the context of insurance came in
the middle of the 18th century in the case Randal v. Cockran,159 when the court recognized
the right of insurers to assert a right in the name of their insureds. That case arose out of a
decree by King George II allowing compensation to be paid to those that suffered losses in
a war with Spain. Some individuals had already been indemnified by their insurers for
these losses, and the insurers successfully sought to be subrogated to the rights of their
insureds to receive this compensation.
Subrogation does not have to be provided in writing and can be either express or implied.
11.3.1. Operation of Subrogation
The right of subrogation is not limited just to the law of insurance. It has its genesis on the
operation of equity and is essentially an equitable device used to avoid injustice. The
purpose is to compel the ultimate payment of a debt by the party who, in equity and good
conscience, should pay it. Hence, legal subrogation takes place as a matter of equity, with
or without the contract.
The ordinary equity maxims are applicable to subrogation, which is not permitted when
there is an adequate legal remedy. The plaintiff must come into court with clean hands,
and the
159
(1748), 27 E.R. 916.
8
159
(1748), 27 E.R. 916.
9
person who seeks equity must do equity. The remedy is not available when there are equal
or superior equities in other individuals who are in opposition to the party seeking
subrogation. The remedy is denied when the person seeking subrogation has interfered with
the rights of others, committed Fraud, or been negligent.
The remedy of subrogation is broad enough to include every instance in which one party,
who is not a mere volunteer,160 pays a debt for which a second party is primarily liable and
which, in equity and good conscience, should have been discharged by the second party.
Aside from equity, at common law, subrogation is basically modified or extinguished
through the contractual terms. It is necessary in this case that the agreement be supported
by consideration. Thus, equitable subrogation cannot be used to displace the contractual
terms agreed upon by the parties.
11.3.2. Extent of the Rights Accruing under Subrogation
The right to subrogation accrues upon payment of the debt. The subrogee is generally entitled
to all the creditor's rights, privileges, priorities, remedies, and judgments and is subject only
to whatever limitations and conditions were binding on the creditor.
11.3.3. Limitation on the Right of Subrogation
There are qualifications to the right of subrogation. Firstly, the insurer does not have any
more extensive rights than the creditor.
Secondly, insurers must, of course, agree to indemnify the insured in respect of costs
associated with bringing a subrogated claim.
Third, the insured has the right to retain any surplus sum received from a third party once it
has accounted to insurers. In Yorkshire Insurance Co. Ltd v Nisbet Shipping Co. Ltd,161 for
instance, the insurers had paid the insured for the total loss of his ship in a collision in
sterling pounds. The insured then sued the owner of the other ship responsible for the
collision and damages were recovered in Canadian dollars. By then, the sterling pound had
been devalued; as a result, the damages, when converted back to the sterling pound,
exceeded the insurance
161
[1962] 2 QB 330.
10
160
Under the maxim of equity that ‘equity does not aid a volunteer.’
161
[1962] 2 QB 330.
11
money paid. The High Court held that, once the insured reimbursed insurers in full, it was
entitled to retain any surplus.
Fourth, unless agreed otherwise, the insurers cannot pursue a claim in the name of their
insured until the insured has been fully indemnified. It is notable however that the majority
of policies will usually include an express term permitting the insurers to commence a
subrogated claim in the insured's name even if negotiations over the extent of the
entitlement to an indemnity have not been concluded.
Moreover, in the absence of express terms, if the insured has suffered a loss over and above
the amount for which they have been indemnified, the insured is entitled to sue and control
the proceedings and can settle the claim without reference to the insurer. The insured must,
however, still act in good faith. This implies that in the suits and compromises, the insured
must litigate on both the insured and uninsured losses and should not compromise any
claim the insurers may have when negotiating a settlement. Should the insurer's claim be
prejudiced, the insurer would be able to seek reimbursement from the insured. It is a settled
rule of law that only one claim for damages can be made arising from one cause of
action.162
Furthermore, subrogation, a gift from a third party, intended as extra compensation, will
not be taken into consideration when accounting to insurers.
If the insured no longer exists and cannot exercise its rights, then insurers cannot do so
either. In Smith (Plant Hire) Ltd v Mainwaring,163 insurers had issued subrogation
proceedings in their insured's name but later found out that the insured had been wound up
some time previously. No assignment of rights had been taken prior to the liquidation and
accordingly the Defendant was successful in getting the claim struck out as the claimant
simply did not exist.
If the insured's claim is out of time, either by way of a contractual provision or by virtue of
the operation of the law of limitation.
162
In Buckland v Palmer [1984] 1 WLR 1109 and in Hayler v. Chapman [1989] 1 Lloyds Rep 490,
unbeknownst to insurers, the policyholders had sued for their uninsured losses. The court refused later
163
[1982] 2 Lloyds Rep 244.
12
attempts by insurers to set aside the judgment or overturn the settlement so as to bring a subrogated claim for
the insured losses.
163
[1982] 2 Lloyds Rep 244.
13
If immunity may also be granted by the terms of the policy itself in the form of a waiver to
the right of subrogation.
11.3.4. Persons against Whom Subrogation Will Not Operate
There are a number of persons against whom the right of subrogation would not accrue to
the insurers.
Firstly, subrogation will not operate against the insured and the insurers have no right of
action against insured and the insurer as the insured has no right against himself. In
Simpson
v. Thompson,164 two ships in the ownership of the same insured collided. Having
indemnified the owner in respect of one ship, the insurers attempted to subrogate against
him by virtue of his ownership of the other vessel but the House of Lords dismissed the
claim as an insured has no right of action against himself.
Secondly, subrogation will not operate against the persons for whose benefit insurance has
been procured. It should be recalled that under a contractual arrangement, the insured may
have agreed that the insurance should enure to a third party's benefit. In Mark Rowlands
Ltd
v. Berni Inns Ltd,165 a landlord leased a building to a tenant. Under the lease, the landlord
was required to insure the premises against fire; the tenant was required to pay part of the
cost of the insurance taken out by the landlord; the tenant was required to keep the property
in good repair, but that obligation did not extend to repairing fire damage; and in the event
of a fire the landlord was required to use the insurance proceeds to repair the property. The
property was subsequently damaged by fire through the tenant's negligence. The issue then
arose whether a subrogated action could be brought against the tenant. The Court of Appeal
took the view that the contractual arrangements between landlord and tenant as
encapsulated in the lease were such that the landlord had taken out buildings insurance for
the benefit of himself and his tenant and that in the event of fire the landlord and tenant had
intended to look to the buildings insurers to cover the loss.
165
[1986] 1 QB 211.
14
164
[1877] 3 App Cas 279.
165
[1986] 1 QB 211.
15
Similarly, subrogation will not operate against co-assureds. Where more than one party is
insured, usually under a composite policy,166 and a loss is caused through the negligence of
one party, this will usually not render the insurers capable of acting against that party in
exercised of the right of subrogation.
This will depend on whether the persons are co-assured under the policy as there will
usually be risk allocation and insurance clauses. These clauses often require one party to
take out joint names insurance and the question which invariably arises is whether the
obligation on one of the parties to take out joint names insurance operates to exclude the
liability of the other parties.
The answer will usually be found by construing the true meaning and effect of the contract.
In Tyco Fire Solutions v Rolls-Royce Motor Cars Ltd,167 there was a coinsurance clause in a
construction contract which required the employer to maintain in the joint names of
himself, “the Construction Manager and others, including but not limited to, contractors,
insurance of existing structures… against… Specified Perils”. Construing the contract as a
whole, the Court held that the clause was not one under which the employer was required
to make the contractor a co-assured but was simply a promise by the employer that there
would be cover in place in respect of existing structures. The clause did not therefore
render the contractor a co-assured and therefore he was not immune from subrogation in
respect of the cause of the loss.
If, on the other hand, the effect of the joint names clause is to render the party in question a
co-assured, the question then is whether, properly construed, the co-insurance clause
operates to discharge that party from a liability they would otherwise have faced.
In Co-operative Retail Services v. Taylor Young Partnership Ltd,168 the Co-operative
engaged a contractor to construct new office premises for them and the contract required
the contractor to take out a joint names policy covering the employer, the main contractor
and the subcontractor against damage by fire to the contact works. The contract also
contained
166
Typically, composite policies as issuable to contractor and subcontractor, landlord and tenant, bailor and
bailee, etc.
167
[2008] EWCA Civ.286.
16
168
[1990] 48 BLR 108.
17
an indemnity by the main contractor to the Co-operative in respect of damage caused to
their property by negligence but that indemnity specifically absolved the main contractor
from responsibility for damage to the contract works caused by insured risks prior to
practical completion. On a proper construction of the contractual arrangements, the House
of Lords was satisfied that the effect was to exclude all liability to the Co-op for fire
damage and that any such damage was to be made good by the insurance.169
However, subrogation is excluded only where the co-assured has an insurable interest in
the damaged subject matter. In National Oilwell (UK) Ltd v. Davy Offshore Ltd,170 certain
works under construction were insured by the contractor and sub-contractors under a joint
names policy. All of the parties had an insurable interest in the entire works so that each
could have potentially insured the entire works. The contract between the contractor and
the relevant subcontractor obliged the contractor to insure only in respect of losses
occurring before goods had been delivered to the contractor by the sub-contractor. The
losses which actually occurred were post-delivery losses. As such, the High Court held that
the sub-contractor was a co-assured only in respect of pre-delivery losses and accordingly
was found not to be immune from subrogation in respect of post-delivery losses.
11.3.5. Statutory Right of Subrogation
The Marine Insurance Act provides for the right of subrogation as follows:
(1)Where the insurer pays for a total loss, either of the whole, or in the case of goods
of any apportionable part, of the subject-matter insured, he thereupon becomes
entitled to take over the interest of the assured in whatever may remain of the subject-
matter so paid for, and he is thereby subrogated to all the rights and remedies of the
assured in and in respect of that subject-matter as from the time of the casualty
causing the loss.171
Under the Act, it is further provided that where the insurer pays for a partial loss, he
acquires no title to the subject-matter insured, or such part of it as may remain, but he is
thereupon subrogated to all rights and remedies of the assured in and in respect of the
subject-matter insured as from the time of the casualty causing the loss, in so far as the
assured has been indemnified, according to this Act, by such payment for the loss.
169
See also Scottish & Newcastle plc v. G D Construction (St Albans) Ltd [2003] Lloyds Rep I.R. 821.
170
[1993] 2 Lloyds Rep 582.
171
Marine Insurance Act s. 79.
18
11.4. Contribution
Principle of Contribution is a corollary of the principle of indemnity. It applies to all
contracts of indemnity to avoid an insured individual seeking double indemnity from two
covers and thus making profit or from benefiting out of misstating the value of the subject
matter of insurance. It may arise either from double insurance or underinsurance.
11.4.1. Contribution from Double Insurance
This may arise when one takes two or more covers over the same subject matter. By way of
example, where Keith insures his property worth Ksh 10,000,000 with two insurers AIG
Ltd. for Ksh 8,000,000 and Jubilee Insurance Company for Ksh 6,000,000, there is double
insurance.
In the above example, if the value of Keith’s property that is destroyed after a fire guts it
down is worth 6,000,000, then Keith cannot claim full indemnity of 6,000,000 from the
two companies as he will be making a profit out of the peril. In this case, he may claim the
full loss of 6,000,000 either from AIG Ltd. or Jubilee Insurance Company. He can also
claim 3,000,000 from AIG Ltd. And 3,000,000 from Jubilee Insurance Company.
Hence, if the insured has taken out more than one policy on the same subject matter, he/she
can only claim the compensation to the extent of actual loss either from all insurers or from
any one insurer.
Contribution arises because, after one company indemnifies the other party, say AIG Ltd
pays the full compensation, then it is entitled to recover the proportionate contribution from
the other insurance company.
This is expressly provided under Marine Insurance Act, which provides that:
(1) Where two or more contracts of marine insurance are effected by or on behalf of
the assured on the same adventure and interest or any part thereof, and the sums insured
exceed the indemnity allowed by this Act, the assured is said to be over-insured by
double insurance.
(2) Where the assured insurance is over-insured by double:
(a) The assured, unless the policy otherwise provides, may claim payment from the
insurers in such order as he thinks fit, but he is not entitled to receive any sum in
excess of the indemnity allowed by this Act;
(b) Where the policy under which the assured claims is a valued policy, the assured
must give credit as against the valuation for any sum received by him under any other
policy without regard to the actual value of the subject-matter insured;
19
(c) Where the policy under which the assured claims is an unvalued policy he must
give credit, as against the full insurable value, for any sum received by him under any
other policy;
(d) Where the assured receives any sum in excess of the indemnity allowed by this
Act, he holds such sum in trust for the insurer, according to their right of contribution
among themselves.
The Marine Insurance Act also stipulates that:
(1) Where the assured is over-insured by double insurance, each insurer is bound, as
between himself and the other insurers, to contribute rateably to the loss in proportion
to the amount for which he is liable under his contract.
(2) If any insurer pays more than his proportion of the loss, he is entitled to maintain
an action for contribution against the other insurers, and is entitled to the like
remedies as a surety who has paid more than his proportion of the debt.172
11.4.2. Operation of the Principle of Contribution
arising from Under-Insurance
Underinsurance may occur under two circumstances. Firstly, where at the time of
calculation of the premium, the insured understates the value of his property so that he pays
less amount in premium, there is an under-insurance. There may also be a deliberate
underinsurance by agreement between the parties to insure the subject matter for a sum
bellow its actual value. The insurer may, for instance, want the owner of a sports car to be
more careful while driving and thus minimise the risk of loss. In such case, he may offer to
give a cover of up to, say 80% and the insured is them to assume the 20% of risk
remaining.
Where there is underinsurance – whether purposefully or otherwise, at common law, the
insured is deemed to have insured himself to the value of underinsurance. Thus, he will be
deemed to contribute in the indemnity to the value of underinsurance. The Marine
Insurance Act provides it thus:
Where the assured is insured for an amount less than the insurable value or, in the case of a
valued policy, for an amount less than the policy valuation, he is deemed to be his own
insurer in respect of the uninsured balance.173
172
Marine Insurance Act s. 80.
20
173
Marine Insurance Act s.81.
21
