Upholding insurers’ right to subrogated recoveries: plan ahead or suffer the consequences!

By Chris Sacré

Navigating subrogated recoveries when an insurer and insured retain a significant interest in the proceeds is always a tricky exercise. The recent Federal Court decision in Technology Swiss Pty Ltd v AAI Limited trading as Vero Insurance [2021] FCA95 provides a perfect example of why both parties need to take care when finalising the underlying settlement. The Chief Justice provided this advice to insurers:

An insurer who wishes to maintain rights of subrogation or recoupment to sums paid to settle or compromise a dispute about coverage should identify what is paid by way of compromise or indemnity under the policy, even if disputed and in that sense ex gratia or compromised, and subject to reservation of rights. If this requires agreement with the insured, as a matter of mutual commercial interest, so be it. If no clarity is given to the matter, an insurer cannot expect guesswork or surrogate ex post facto negotiation for its benefit.’

The issue

The dispute concerned the characterisation of two payments made by marine cargo insurers to an insured following damage to a shipment of fog cannons carried from Melbourne to Bangkok. Having settled the dispute on the policy, the insured made a full recovery from the carriers – cost, insurance, freight interest and indemnity costs – which, in turn, gave rise to the question how much the insured was obliged to reimburse insurers.

The matter was complex with the equitable principles of subrogation discussed at length. For the purpose of this article, we summarise the legal question as this:

Was the payment made by the insurer mutually intended (whether from express words or inferred or implied from the circumstances) to be an indemnity for the insured loss and in that sense made under the policy?

If the answer to this question is ‘yes’ then a right of subrogation exists. If the answer to the question is ‘no’ then no such right exists.

If the payment made by the insurers is correctly categorised as a payment made to settle litigation, and so avoid the claim and the cost of such litigation, it will not give rise to a right of subrogation and insurers are not entitled to a recover[1].

The underlying insurance claim/dispute

Insurers had admitted liability under the policy but disputed quantum, denying that the cargo was a constructive total loss. The quantum dispute was the subject of earlier Federal Court proceedings.

Insurers made two payments in the process of resolving the claim on the policy and the proceedings. The first was an open payment of €127,500. His Honour had no difficultly in concluding that, although made after proceedings had been commenced, this was a payment made under the policy which gave rise to a right of subrogation.

The parties later engaged in mediation and then later still settled the claim by payment of a further AU$425,000 by insurers. The Deed of Release did not state how the settlement amount would be apportioned between amounts payable in respect of the cargo damage, storage charges (sue and labour) and the costs of the proceedings.

Relevantly, the Deed of Release:

  • identified the prior payment of €127,500 as an ‘Indemnity Payment’;
  • denied insurers’ liability for the claim in the proceedings except to the extent of the Indemnity Payment;
  • stated that the settlement moneys were in full and final settlement of the Insurance Claim, the Storage Costs Claim, the Proceedings and the dispute;
  • when addressing discontinuance in the proceedings, stated that the insured would ‘prepare and file a Notice of Discontinuance, discontinuing the proceedings on the basis that each party bear their own costs’;
  • preserved insurers’ rights of subrogation under the policy and at law.

The subrogation dispute

The insured maintained that the whole of the settlement sum could not be characterised as a payment by way of indemnity under the policy and relied on the decision in Wellington Insurance v Armac Diving Services (Wellington). In Wellington, the Court characterised a similar settlement as a payment for an agreement by the insured whereby it avoided a possible claim and the cost of litigation, not a payment under the policy.

The insurer maintained that the entire AU$425,000 payment ought to be considered as a payment for indemnity under the policy. The insurer noted that it had admitted liability under the policy and the obligation to indemnify, the dispute only concerned the quantum of the claim, and the payment had been made in good faith assuming that the payment was an indemnity under the policy. The insurer submitted that the Court should apply equitable principles and the principle of indemnity in circumstances where excluding the payment would necessarily leave the insured having recovered more than its loss.

The insurer raised a particular argument with regard the discontinuance clause which expressly provided for discontinuance with each party bearing its own costs. The insurer submitted that the clause must evidence an intention that none of the settlement amount related to the insured’s legal costs. However, His Honour rejected this argument and concluded that the clause was no more than a method to discontinue the proceedings without necessity for a costs order. His Honour noted that without such an agreement Rule 26.12(7) of the required the discontinuing party to pay the other party’s costs. The clause was simply an agreed mechanism of putting an end to the proceedings.

His Honour embarked upon the challenging exercise of trying to determine if the parties had intended that the settlement amount (or part of it) be a payment under the policy. His Honour noted that he was not restricted to the Deed of Release and could look to the surrounding circumstances to assist in the inference or implication of mutual intention.

However, his Honour was not going to determine what was the appropriate indemnity under the policy or embark on a post facto assessment of the insured’s costs in an attempt to apportion the settlement amount across principal and costs.

His Honour worked with what was known at the time of the settlement. The insureds’ total legal costs were AU$277,260.16 and the amount payable for storage was AU$33,113.07. If you deduct these amounts from the settlement amount you would be left with AU$116,770.06. This amount could only reasonably be categorised as a payment in respect of the cargo damage and as such a payment under the Policy. His Honour concluded that only this amount, plus the €127,500 Indemnity Payment, were sums in respect of which the insurer had a right of recoupment.


The judgment is a stark reminder to consider the intricacies of any subsequent recovery when settling an insurance claim particularly when the claim on the policy is subject to litigation.

If insurers wish to make a subrogated recovery, insurers should

  • state clearly that the settlement payment is an indemnity payment made under the policy;
  • make clear any amounts that relate to sue and labour or other payment under the policy;
  • state how much of the payment is in respect of costs. If both parties agree to bear their own costs, state clearly that none of the settlement amount relates to costs;
  • make sure that the above is stated in any settlement offer because if the offer is accepted there may not be an opportunity to agree on apportionment of the settlement amount thereafter; and
  • if the insured has a significant uninsured interest, seek to agree on terms for management of any recovery action prior to settlement with the insured.

[1] Wellington Insurance Co Ltd b Armac Diving Services Ltd (1987) 38 DLR (4th) 462


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