Subrogation and contractual indemnifiers

(Caledonia North Sea Ltd v London Bridge Engineering Co and Others, forthcoming in [2000] Lloyd’s Rep IR (April))

The doctrine of subrogation, whereby an insurer, having indemnified the assured, is entitled to take over the rights of the assured against any third party responsible for the assured’s loss, was regarded by the courts 250 years ago as an everyday occurrence. The doctrine has at its root the principle of indemnity, and rests upon twin propositions: that if the assured has been paid by the third party, the insurer is discharged from liability to that extent as the assured has suffered no loss; and that if the assured has recovered from his insurers such payment is to be disregarded in determining the third party’s liability to the assured. It is apparent that if the second of these propositions did not hold good, and that a payment by the insurer operated to diminish the assured’s loss, the effect would be to reduce the doctrine of subrogation to a very narrow ambit, as the assured would have no rights against the third party to which the insurer could be subrogated. Nevertheless, in Caledonia North Sea Ltd v London Bridge Engineering Co and Others (September 1997) Lord Caplan in the Outer House of the Court of Session in Scotland came very close to accepting this analysis. Insurers will doubtless breathe a huge sigh of relief following the reversal of his ruling by the Inner House of the Court of Session in December 1999 (forthcoming in [2000] Lloyd’s Rep IR (April)). Insurance Law Monthly is grateful to Clyde & Co for providing the full transcript of the decision of the Inner House.