In Kenya, material damage claims are claims seeking compensation for physical loss or destruction of property.
Material damage claims can be brought under the guise of the tort of negligence. In this regard, insurance companies institute such claims for compensation, but in order to succeed at such a claim, they must bring the claim under the doctrine of subrogation.
By definition, to subrogate means to ‘put in place of another, with regard to a legal right or a claim’. In other words, one party is substituted for another in respect of an insurance claim, and consequently ‘transfers’ or ‘donates’ their right or entitlement to compensation to the substituting party.
WHAT ARE THE ELEMENTS TO BE FULFILLED FOR THE DOCTRINE OF SUBROGATION TO APPLY?
The principles were set out in Kenya Power & Lighting Company v Julius Wambale & another (2019) eKLR where the court stated as follows;
“The parameters within which the principle of subrogation applies are now well settled. The doctrine applies where there is a contract of insurance and, following crystallization of the risk insured, the insurer had compensated its insured for financial loss occasioned thereby usually by a third party.
Under this doctrine, the insurer is in law entitled to step into the shoes of the insured and enjoy all the rights, privileges and remedies accruing to the insured including the right to seek indemnity from a third party. The action must however be instituted in the name of the insured with his consent and must relate to the subject of the contract of insurance.”
Therefore, for an insurance company to institute a suit against a third party, the insured risk which is the subject of the insurance contract must have occurred, necessitating compensation or payment by the insurance company to the insured. Ideally, compensation of an insured by its insurer follows the principle of indemnity whose rationale is to restore the insured as close as possible, to the financial position they would have been, save the occasioned loss. It allows for compensation for losses only up to the agreed amount. Arguably, it is undisputed that there must be a contract of insurance whose risk has crystallized. However, courts have pronounced themselves differently on the subsequent aspects of compensation and institution of the claim in courts of law.
1. COMPENSATION
On whether the insurer must have compensated the insured, the High Court in KPLC v Wambale (Supra) opined as follows;
“It is not disputed that the insurance company has not yet settled the decretal amount on behalf of the applicant who is its insured. It therefore follows that its right under the doctrine of subrogation has not yet crystallized and even if it had, its recourse would only lie in the filing of a suit against the third party blamed for the occurrence of the risk in question for recovery of the sums expended on its insured […]”
However, the Court of Appeal sitting at Nyeri pronounced itself with finality in Nkuene Dairy Farmers Co-op Society Ltd & James Kimathi v Ngacha Ndeiya (2010) eKLR where the court stated as follows;
“In our view special damages in a material damage claim need not be shown to have actually been incurred. The claimant is only required to show the extent of the damage and what it would cost to restore the damaged item to as near as possible the condition it was in before the damage complained of.”
It followed that the court allowed the assessor’s unchallenged report and the court was convinced that the value assigned for repair by the assessor was given with some degree of certainty because it was convinced the assessor was in fact, an expert.
2. INSTITUTION OF SUIT
In Egypt Air Corporation v Suffish International Food Processors (U) Ltd and another (1999) 1 EA 69, the court had this to say on the doctrine of subrogation;
“The whole basis of subrogation doctrine is founded on a binding and operative contract of indemnity and it derives its life from the original contract of indemnity; and gains its operative force from payment under the contract.
The essence of the matter is that subrogation springs not from payment only but from actual payment conjointly with the fact that it is made pursuant to the basic and original contract of indemnity. If there is no contract of indemnity, then there is no juristic scope for the operation of the principle of subrogation.”
It is important to highlight the Court of Appeal’s observations that “the right to subrogate does not create a privity of contract between the insurance company and third parties. All that it gives an insurance company is the right to take over the rights and privileges of the insured under an insurance policy but if the insurance company wishes to exercise against third parties the rights and privileges so taken over from the insured, then it (the insurance company) can only do so on behalf of and in the name of the insured.”
Why is it Important to Institute the Suit for Recovery in the Insured’s name?
In Malindi High Court Civil Case No. 92 of 2012, African Merchant Assurance Company indemnified its insured against damages caused by a fire and instituted a suit against the Defendant, Kenya Power and Lighting Company. However, the Defendant company contended that the Plaintiff insurer lacked capacity to institute the claim as some of the insurance policies were not only invalid, but also that the company instituted the suit without the written authority from the policy holders.
It is worthwhile to note that when the original Plaint was filed, 11 insured were joined as the 2nd to 13th defendants, but through an amendment to the Plaint, were consequently removed as parties to the suit.
One of the issues for determination by the court was ‘whether the suit was properly filed under the principle of subrogation.’ The court in its judgment, found that the fire was caused by electrical sparks from the Defendant’s electrical pole, and deemed the defendant company 100% liable. Surprisingly, the court found that the suit was properly filed under the principle of Subrogation of rights. Hon. Justice Chitembwe stated that under the principle of subrogation, the insurance company that settles the claim is allowed to take up the role of the insured.
The court continued to state that the principle precluding an insurer from directly instituting proceedings against third parties also allowed an insured to assign his right against the third party to the insurer. Upon assignment, the court held the insurer takes up the role of the insured and could sue in its own name. The court placed its reliance on clause 6 of the policy agreement that read:
“… every right of the insured accrued or to accrue will, by way of subrogation, pass to and absolutely vest in the insurer to the extent that the loss or damage insured by this policy may be ultimately made good or diminished thereby.”
At the Court of Appeal:
The Defendant company, aggrieved by the decision of the High Court, approached the Court of Appeal. Among its grounds of appeal, the appellant Kenya Power and Lighting Company, contended that the learned judge erred in finding that the suit was properly before him without considering that the Respondent, African Merchant Assurance Company, had no capacity to institute the suit. The court addressed this issue by determining whether or not the Respondent company possessed the requisite locus standi. The court held that the general rule is that an insurer may only pursue those rights in the name of the insured.
However, the court added that the only exception to this general rule is where an insured formally assigns their rights of action to the insurer. It concluded that clause 6 which the High Court relied upon ‘merely set out the rights of the insurer under the doctrine of subrogation, but did not have the effect of assigning the right to institute the suit.’ The court added that the fact that the insured were, initially, parties to the suit did not remedy the lack of standing “as the insured ceased to be parties subsequent to the amendment by the insurer.”
At the Supreme Court:
Aggrieved by the decision of the Court of Appeal, the Respondent insurance company sought certification in the first instance by the very same court to appeal its judgment, citing issues of public importance that needed to be addressed with finality. The Court applied the Hermanus Principles and held that the determination of the question as to whether an insurer could sue in its own name under the doctrine of subrogation transcended the interests of the parties. However, the court still felt that the question had been settled and thus, there was no need for further input by the Supreme Court.
This decision to deny certification to appeal to the Supreme Court further aggrieved the Respondent who appealed the Ruling of the Court of Appeal on grounds that, among others, the issue on the Appellant’s locus standi (or lack thereof), involved general public importance in that the court’s decision would affect majority of insurance practitioners as well as the general insurance sector.
Therefore, the only issue for determination by the Supreme Court in KESC Civil Appeal No. 37 of 2018 was whether the matter in respect for which certification was sought was one of general public importance. In determining the question, the Supreme Court considered whether the issue transcended the particular circumstances of the case; and whether its determination would have significant bearing on the public interest.
The Supreme Court concurred with the Court of Appeal, stating that the Applicant insurance company did not demonstrate that the law on this question is “in such a state of flax that this court must intervene.” In particular, the court stated that the Applicant had not placed before it any inconsistent precedents specifically from the Court of Appeal regarding the question on standing. As such, the application for certification to appeal to the Supreme Court in the second instance was disallowed.
In conclusion, in order to institute a suit for recovery under the doctrine of subrogation;
- There must be an existing contact of insurance between the insurance provider and its insured;
- The risk which forms basis of the insurance contract must have occurred;
- The insurer need not have indemnified the insured, although failure to do so may motivate the insured to withhold the consent required in instituting the suit in their name;
- The suit must be instituted in the insured’s name, except where consent to seek recovery has been expressly given by the insured.
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