Subrogation - Third party recoveries and underinsurance

(Kuwait Airways Corporation v Kuwait Insurance Co SAK (No 2), forthcoming in [2000] Lloyd’s Rep IR)

The doctrine of subrogation, which is often described as a consequence of the indemnity principle, operates to ensure that the assured receives no more than an indemnity. Once the assured has been fully compensated for his loss by insurers, any rights which the assured possesses against – and any recoveries which the assured makes from – a third party are held by the assured for the insurers. If the assured is not insured for the full value of the subject matter lost, he may make up any shortfall in the insurance moneys by recovering from the third party for the uninsured loss: only the surplus of any recovery can go to the insurers by way of subrogation. However, if the policy allocates an agreed value to the insured subject matter, that agreed value is deemed to be the amount of the assured’s loss, so that if the insurers have paid the agreed value the assured is deemed to have been fully indemnified and subrogation rights attach to any recovery from the third party even though, in pure market value terms, the assured has suffered a clear loss. The main problem in Kuwait Airways Corporation v Kuwait Insurance Co SAK (No 2), forthcoming in [2000] Lloyd’s Rep IR , was whether the assured under a valued policy had in fact been fully indemnified by the insurers.