By Harmony Eghwubare Esq., Associate Counsel – AAA Chambers
Madam Nora took a loan of
N10,000,000 (Ten Million Naira) from her bank in June 2018 and was supposed to have finished repaying the loan by January 2019. However, she had been defaulting in her payment and her outstanding indebtedness became N18,000,000 (Eighteen Million Naira). To this effect, she received demand letters from her bank and because she could not afford to pay the bank, she asked her friend Anna to loan her the N18,000,000 (Eighteen Million Naira). Anna responded and paid the outstanding debt owed the bank but Madam Nora has refused to pay Anna the money she borrowed. Now, Anna is considering exercising her right to subrogation by suing Madam Nora to get back her money.
WHAT IS SUBROGATION?
The word Subrogation is derived from a Latin word, “subrogare” which means to “choose as a substitute” or “ask in place of another.” According to Black’s Law Dictionary, Subrogation is the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.
Basically, subrogation is a remedy established by the English Court of Chancery to prevent unjust enrichment by allowing one party to step into the shoes of another party and assume the benefit of any rights that such a party may have in respect of liability; and this can arise in different situations, not just insurance as seen in the previous definition.
Castellain v. Preston (1883) 11 QBD 380
According to Brett L. J, the principle of subrogation was analyzed as:
“…to be applied merely for the purpose of preventing the assured from obtaining more than a full indemnity, the question is whether that doctrine as applied to insurance can in any way be limited… In order to apply the doctrine of subrogation, it seems to me that the full and absolute meaning of the word must be used. That is to say the insurer must be placed in the position of the Assured …as between the underwriter and the Assured, the underwriter is entitled to every right of the Assured whether such right consists in contract fulfilled or unfulfilled or in remedy for tort capable of being insisted on or already insisted on or in any other right whether by way of condition or otherwise legal or equitable…”
TYPES OF SUBROGATION:
Based on the means by which the right of subrogation might arise, there are three types, thus:
- Conventional or Contractual Subrogation; and
- Equitable subrogation
Statutory Right of Subrogation:
By virtue of Section 80 of the Maritime Insurance Act, 1961 the insurance company which is the subrogee has a right of subrogation against the party that caused the injury or the loss suffered.
This arises from a contract between the parties establishing an agreement that the party paying the debt will have the rights and remedies of the original creditor.
In the case of Boley v. Daniel, 72 So. 644, 645 (Fla. 1916) it was held that conventional subrogation arises when a party having no interest in the matter pays the debt of another and by agreement is entitled to the rights and securities of the creditor who has been paid.
Equitable means fair and impartial. An equitable remedy is applied in situations that the law does not provide for or adequately cover. A cause of action for equitable subrogation arises in the following situations:
- The subrogee made the payment to protect his or her own interest.
- The subrogee did not act as a volunteer.
- The subrogee was not primarily liable for the debt.
- The subrogee paid off the entire debt.
Circumstances Where Subrogation Rights May Arise
Subrogation typically arises in three-party situations. The circumstances in which subrogation will be available are open-ended and vary from jurisdiction to jurisdiction. However, some common situations where subrogation rights would arise are as follows:
- Indemnity insurance
- Surety or Guarantor’s Subrogation Rights
- Subrogation Rights against Trustees
- Lender’s Subrogation Rights
The right to subrogation arises only after the insurer has indemnified the insured against his loss. In British India General Insurance Co. Ltd v. Alhaji KaIla 1965 All NLR p 251, the Supreme Court held that the right of subrogation does not arise until the insurance has admitted its liability to the assured and has paid him the amount of loss.
Where the insured has already recovered payment from the third party and is also indemnified by the insurer for the same loss, the insurer is entitled to recover from the insured what he received from the third party.
In Oloruntunde v. Dandodo (1996) NWLR 117, it was held that an insured who recovers money in an action for a loss for which he has already been indemnified by the insurers holds the money in trust for the insurers. The insurer’s subrogation right is however restricted to the amount actually paid to the insured, where for instance there happens to be a surplus after the insurers have recovered their money, the insured is entitled to keep it.
The insurer’s right of subrogation accrues only when the insured has a right of action. In Simpson v. Thomson (1877) 3 App. Cas. at 294 the insured owned two ships that collided due to the negligence of one the masters. In order to compensate the parties involved, the insured was mandated to pay money into court in respect of the ship that was negligently sailed as compensation to the various parties involved. The insurers paid for the other ship and then claimed the right to use the insured’s name as owner of the ship to claim against the fund. It was held that the insurers had no such right as it would be tantamount to the insured suing himself as both ships belonged to and were controlled by the same person.
Surety or Guarantor Subrogation Rights
A surety is a person who is liable for the payment of another’s debt or the performance of another’s obligation. A guarantor is one who makes a guaranty or gives security for a debt.
A surety is liable to pay the debt of another whether or not that person can pay. A guarantor is liable only after the debtor defaults on the loan. The surety is primarily liable (liable as if he were the debtor). The guarantor is secondarily liable (liable only if the debtor defaults on the loan). CHAMI V U.B.A. PLC (2010) 6NWLR (PT. 1191) PG 474 at 479
Where a surety or a guarantor has paid the sum guaranteed or stood surety then he would have assumed the rights of the initial creditor with respect to the debt; then claim against the debtor the sum which he has paid the initial creditor.
Subrogation Rights Against Trustees
A trustee who enters into transactions for the benefit of the beneficiaries of the trust is generally entitled to be indemnified out of the trust assets; this is secured by way of an equitable lien or charge over the trust assets.
Trust creditors (that is, persons who have become creditors of the trustee qua trustee) may be entitled to be subrogated to the trustee’s lien. This is a particularly precarious ‘right’ of trust creditors: a trustee may not have a right of indemnity (for example, because the trustee has committed a breach of trust in incurring the liability to the creditor in question) or it may be limited (for example, where the trustee has committed an unrelated breach of trust and the clear accounts rule operates). It is possible for the trustee’s right of indemnity to be excluded altogether. In these cases, subrogation may be rendered worthless or impossible.
Lender’s Subrogation Rights
Where a lender lends money to a borrower to discharge the borrower’s debt to a third party or the lender pays directly to the third party to discharge the debt, the lender may be entitled to be subrogated to the third party’s former rights against the borrower to the extent of the debt discharged.
Mode of Commencement of Subrogation Claims
Before commencing a subrogation proceeding, the subrogee is required to first write a subrogation demand letter to the third party involved. Subrogation proceedings are initiated by the usual filing of a writ of summons and the statement of claim with all the necessary accompanying processes and documents.
For subrogation claims arising from insurance, the subrogor deposes to an affidavit stating the fact that he has been compensated for his loss and had donated to the subrogee his right to sue the third party.
The processes are filed at the High court of the state however for Maritime Insurance matters, the Federal High Court is seized with the jurisdiction (Sec. 80 Maritime Insurance Act) The proceedings take the usual form of civil proceedings as there is no special procedure and the judgment obtained can be enforced by means of the usual enforcement of monetary judgments.
What Can Make A Subrogation Claim fail?:
- Waiver of Subrogation Right: This is when the subrogor by way of contract/agreement waives his rights to donate his power/rights.
- Lapse of Time: The time within which to initiate subrogation proceedings is the same period as provided for contract, which is 6 (six) years. If a subrogation claim is not brought within the prescribed time then the action will fail.
- Bankruptcy of the Subrogee: The subrogee’s right against the third party is derived from that of the subrogor; therefore in the event of bankruptcy of the subrogor, the subrogee may lose the right of subrogation before or during litigation unless he is able and willing to restore the assured.
In my research for this presentation, I discovered that the only applicable statute in Nigeria that has contemplated the principle of Subrogation is the Maritime Insurance Act 1961; and even the Insurance Act, 2004 does not provide for Subrogation. However, the principles and their application can be gleaned from Nigerian case law. Nevertheless, it is my hope that proper provision, by way of amendments to the existing laws, will be made.