Subrogation - tips and tricks for proving loss

In brief - Review loss adjuster reports for reasonableness

When pursuing a subrogated claim, insurers should be aware that the loss adjuster's report may not always be sufficient to prove loss. Insurers should consider carefully the amounts for which they are indemnifying the insured and apply a reasonableness test to all reports.

Subrogation - what is it?

Subrogation is a legal principle that allows a person who indemnifies another for loss caused by a third party to pursue the third party to recover the amount of the indemnity.

In the context of insurance, subrogation is often used by insurers as a means of recovering amounts paid to an insured from third parties.

Often, when an insured makes a claim upon their policy, an insurer will retain a loss adjuster to investigate the circumstances and cause of the loss claimed and then attempt to quantify the loss.

The insurer will indemnify the insured for losses suffered within the limits of cover afforded by the policy. The insurer can then enter into an agreement with the insured in final satisfaction of the claim.

Key things to consider in a subrogation agreement

As well as containing releases, the agreement should consider subrogation and include:

1. Co-operation - Insurers should consider how to practically obtain the insured's co-operation when launching a subrogated action, including contact with the insured's personnel and access to the insured's documents and stored data.
2. Uninsured losses - Claims against third parties are once and for all. You should consult an insured about whether it wishes to recover uninsured losses (including the deductible). The Insurance Contracts Act 1984 deals with recoveries and the risk of shortfall. It can be quite complex and any agreed position should be recorded somewhere.
3. Payment mechanics - Insurers should also consider stipulating the calculation and any distribution of recovery monies or settlement offers from a third party in a Settlement Deed.

Once the subrogation agreement is signed and the claim paid, the insurer can use the insured's name to take legal action against the third party who caused or contributed to the loss.

What can an insurer recover under subrogation?

In a subrogated claim against a third party, the insurer stands in the shoes of the insured.

The insurer must prove that a loss was actually suffered by the insured and prove the amount of that loss before a claim will succeed.

The recovery is limited to rights the insured had against the third party, i.e. the claim is not for the amount paid over to the insured by the insurer.

Proving loss - loss adjusters' reports must be based on sound evidence and reasoning to prove loss

When proving loss in a subrogated claim, the report of an experienced loss adjuster is generally viewed as persuasive evidence of the existence and amount of a loss. Such a report generally requires a sound evidentiary foundation to displace it.

However, this is not always the case.

In the English case of Brit Inns Limited & Ors v BDW Trading Limited [2012] EWHC 2143, the loss adjuster's report was not sufficient to prove a loss.

Brit Inns had contracted the construction of a basement restaurant. The construction was completed at the end of 2006, but the restaurant was flooded as a result of the negligence of Thames Water.

The damage was rectified and the restaurant reopened, only to be flooded again in early 2007 as a result of the negligence of the original construction contractor.

The restaurant was re-opened a second time but other setbacks occurred, including two "odour incidents" which were duly remedied. The restaurant was closed by Brit Inns in 2008.

Amount indemnified found to be far greater than loss actually suffered

Britt Inns made a claim on its policy of insurance for material damage and business interruption expense (from the second flood incident) totalling over £2.5 million. The claim was adjusted downwards and payment of £665,000 was made to Brit Inns.

Unfortunately, when a subrogated claim was brought against the construction contractor by the insurer, only about £170,000 was recovered.

The loss adjuster's report was viewed as unreasonable and not based on sound evidence or reasoning. The insurer was found to have indemnified the insured for a far greater amount than the loss it actually suffered and was consequently unable to recover a large portion of this amount from the third party.

Tips when reviewing loss adjuster reports - reasonableness is key

It is important to consider the reasonableness and logic of an assessment and ensure that it is directly referable to the loss at hand. It is unwise simply to sub-contract the task of proving loss to the adjuster with no critical oversight.

When preparing or reviewing a report, consider the following:

1. Rectification and repair works - has a record of work completed been maintained and receipts and invoices kept for any rectification or repair work carried out in response to a loss? The report should be able to show that the work carried out was reasonable and directly referable to the rectification of loss or damage suffered.
2. Loss of profits - are the loss of profit projections based on realistic assumptions and on the business in question? Any calculations of lost profits should generally be based on the actual figures and past performance of the business in question and not the financials of a similar business or industry data.
3. Causal link - losses outlined in a loss adjuster's report must be causally linked or be seen to flow naturally from the incident causing the loss. If losses claimed appear too remote and unrelated to the cause of the claim, they are likely not to be recoverable.
4. Evidence - sufficient evidence must be presented by the loss adjuster to prove all amounts claimed. Keep all receipts for payments, invoices, reports and correspondence to substantiate amounts claimed.
5. Reasonableness - above all, the assumptions, calculations and conclusions in respect of the loss suffered should pass the "reasonableness test" - do the losses outlined in the report appear reasonable? If the figures outlined are well in excess of what was originally anticipated or what has been paid in similar claims, further review should be undertaken.

Review all reports for reasonableness - if in doubt, ask!

When entering into a settlement and subrogation agreement, it is essential that you are comfortable with the amount for which you are indemnifying the insured. If the amount is based on unreasonable assumptions and figures, or you are in fact mistaken about the loss suffered, the insured amount may not be recoverable in any subrogation claim.