SAMANCOR v MUTUAL & FEDERAL INSURANCE COMPANY LIMITED & OTHERS

The Contributor who Subrogated and Lost

Having regard to the audience present, I am confident that there is a degree of familiarity with the concepts of contribution and subrogation. The somewhat flippant title of today’s post, is designed to draw attention to the consideration of these principles by the Supreme Court of Appeal in the recent decision of Samancor v Mutual & Federal Insurance Company Limited & others 2005 (4) SA 40 (SCA).

The case in question concerned a situation where an alternator belonging to the appellant, Samancor, was simultaneously insured in terms of a “Principal Controlled Construction Risks and Public Liability Insurance Policy” (“the Works Policy”) underwritten by Mutual & Federal leading a group of insurers, the respondents on appeal; and under an Assets All-Risks Policy underwritten by Westchester Insurance Company Limited. The alternator was damaged when its oil supply failed.

Samancor’s claim was paid in full by Westchester, which then sought to recover in a subrogated action from the other group of insurers. The key question was whether the subrogated action pursued by Westchester, in the name of Samancor, was appropriate or whether Westchester ought to have pursued a contribution action against the other insurers.

The respondent raised a special plea to the effect that, having been fully indemnified for their loss and damage by Westchester under the assets policy, Samancor could not seek an indemnity against the respondents under the works policy, as that would amount to a double indemnity. Samancor, it was contended, had no legal standing to institute action.

In considering the decision, I intend to focus on the following issues:- 

(a) What is contribution?

(b) What is subrogation?

(c) The Samancor case.

(d) The Supreme Court of Appeal's judgment.

(e) The significance of the judgment.

(a) Double Insurance / Contribution

Double insurance occurs when the insured insures the same risk on the same interest in the same property with two or more independent insurers. 1 Double insurance is to be distinguished from over-insurance which occurs when the aggregate of all the insurance is more than the total value of the insured’s interest.

The significance of double insurance is that where loss occurs, the insured may, in the absence of a pro-rata contribution clause, select any one or more of the insurers and recover from them the total amount of the loss.

There is nothing unlawful or objectionable about double insurance and there are sound commercial reasons why an insured may elect to arrange cover under more than one policy. What the insured cannot do is to recover more than its total loss from the various insurers. The insurer can opt to recover from one or more of the insurers and may claim proportionately amounts from each insurer. If the insured does not succeed against one insurer for its full loss, recovery against the others may be possible.

The right of contribution evolved in English law as a consequence of the recognition that it would be unfair for one out of several co-insurers, who pays first, to bear the whole loss. In terms of the doctrine of contribution, one insurer who has paid more than its rateable proportion of the loss has a right to recover the excess from the co-insurers. Reinecke in the standard South African text book General Principles of Insurance Law summarises the right of contribution in the following terms:

"The right to contribution is therefore a right of recourse by one insurer against another which has insured the same loss. The right is in substitution of any right to subrogation which the insurer could possibly have had to the proceeds of the insured’s right against the other insurers. It has been said that a right to contribution does not depend on contract but rests on principles of natural justice and equity. It may nevertheless be assumed that like a right to subrogation, a right to contribution is a naturale [implied terms] of the contract of indemnity insurance. It is therefore one of the legal consequences of such a contract of insurance as an insurer who has paid more than its rateable proportion of the loss, accedes to the rights of the insured against the other insurer(s), subject to the qualifications that only a rateable proportion may be recovered from each other insurer. According to this construction, transfer of the insured’s rights against the other insurers takes place by the operation of law in exchange for payment by the insurer." 2

The requirements for the exercise of a right of contribution are: 

1. The insurer claiming contribution must have discharged its liability to the insured.

2. The insurer must have paid more than its rateable proportion of the loss.

3. The insurer’s payment in respect of loss must be in respect of an interest which is the object of double insurance at the time of loss.

4. The double insurance in respect of the insured interest must have been for an amount in excess of the loss. 3

(b) Subrogation

The right of subrogation requires consideration given that the action pursued by Westchester in Samancor’s name was in pursuance of an alleged right of subrogation. In the context of insurance law, the doctrine or right of subrogation refers to the right of an insurer which has paid a loss to be put in the position of the insured so that the insurer can avail itself of any rights which the insured has against a third party to recover in full or in part the loss for which the insurer has indemnified the insured. The right of subrogation is linked to the fundamental of indemnity insurance, that an insured should not be able to recover more than its loss and thereby profit from the insurance. Reinecke describes subrogation as:

"... simply a process of settling-up between the insured and the insurer after the insured’s claims against third parties have turned out to be successful. It is concerned solely with the mutual rights and liabilities of the parties to the contract of insurance and confers no rights and imposes no liabilities on third parties." 4

The authors of Reinecke in debating the basis of the doctrine of subrogation distinguish between South African and English law. In English law the doctrine of subrogation has its origin in equity and is designed to avoid the unjust enrichment of the insured at the expense of the insurer. They suggest that in South Africa it is properly speaking an implied term (naturale) of a contract of indemnity insurance and as a consequence can be subject to special arrangements entered into between the parties.

The requirements for subrogation are: 

1. The existence of a valid insurance contract;

2. The insurer must have indemnified the insured;

3. The insured’s loss must have been fully compensated;

4. The insured must have a right against a third party that must be susceptible to subrogation which arises in the context of indemnity insurance. 5

(v) Samancor v Mutual & Federal 

Having indemnified Samancor in full for the loss of its alternator, Westchester, the underwriters of the Assets Policy, sought to exercise rights of subrogation by way of an action against Mutual & Federal and others, the underwriters of the Works Policy. The decision to pursue a subrogation action was based on the very specific wording contained in the relevant policies. In the first instance, Memorandum 4 of the Works Policy read:

"It is hereby declared and agreed that notwithstanding anything to the contrary stated in the policy and subject always to General Memorandum and subject to the Conditions of the Contract, this policy shall take precedence over any other insurance to be arranged by or on behalf of the Employer. In the event of loss or damage which may be insured under any other policy of insurance effected by the Employer, the insurers shall indemnify the insured as if this such other insurance did not exist. Unless otherwise agreed by the Employer, the insurers waive all rights of subrogation or action which they may have or acquire against any parties comprising the insured or their directors, agents or employees, or their insurers arising out of the occurrence on the contract site in respect of which any claim is admitted hereunder or which but for the application of the deductible mentioned in the schedule hereto would be made hereunder."

Clause 13 of the Westchester Assets Policy in turn provided: 

"If the Insured holds any other valid and collectable insurance or which, but for the application of any deductible, would have been collectable, with any other insurer covering a loss also covered by this policy, other than insurance that is specifically stated to be in excess of this policy or issued as a co-insurance of any peril insured hereby, the insurance afforded by this policy shall be in excess of, and shall not contribute with, such other insurance." 

The motivation of Westchester in pursuing a subrogated claim in the name of Samancor was that although there was ostensibly a position of double insurance and Samancor had been indemnified by Westchester this was legally irrelevant having regard to the specific contractual provisions quoted above. The express terms of the policy must prevail over any naturalia or terms implied by general principles of insurance law unless such terms are contrary to public policy or contrary to legislation. Samancor argued that the parties were entitled to create an hierarchy of liability between insurers particularly where such a hierarchy of liability made sound commercial sense. The Works Policy was primarily intended to indemnify the insured for construction risks and the Assets policy to cover against losses of, or damage to property arising from all causes not excepted.

The issue of summons by Samancor was met with a special plea denying legal standing. In due course, the case proceeded to trial by way of a stated case in the WLD. Malan J found for the defendants, Mutual & Federal, concluding that subrogation entitles an insurer to recover what it has paid from the third party which caused the loss. Where an insured is indemnified by one insurer, that insurer may exercise its rights of subrogation against a third party but not against another insurer. The rationale being that when a party obtains double insurance, payment by one insurer discharges all the rights of the insured against 
the other insurers.

On the question of the specific policy provisions, the Court concluded that the inclusion of a provision in the works policy in terms of which that policy would take precedence over other policies taken up by Samancor, would (according to the lower Court) not have the effect of varying this position. Payment under the provisions of one policy discharged the obligations of both insurers. The provisions related to the relative contribution rights of the insurers and not to any hierarchical positioning of such rights.

Malan J summed up the position in the following terms at p359 of his judgment:

"It follows that perhaps by way of fiction all insurance in the case of double insurances are treated as one so that the payment under one policy discharges all of the rights of the insured against other insurers. If the different policies are regarded as one, the rules as to double insurance and contribution could well “fit” into our law: the indemnity provided by one insurer discharges the other insurers (compare Reinecke et al 369 number 24) giving rise to their liability for a contribution based on unjustified enrichment (compare Caledonia North Sea Limited v London Bridge Engineering Limited 2000 SLT 1123 1138 FF). I need, however, express no view on the basis of the action for contribution which is said to rest on principles of natural justice and equity." 6

In reaching his conclusion, Malan introduced the concepts of primary and co-ordinate obligations. In situations of double insurance, the obligations of an insurer are generally co-ordinate making a claim for contribution the appropriate remedy. Malan rejected the contention of Samancor that the policies were specifically arranged so that the works policy insurer had primary liability and the assets policy insurer only had responsibility had the works policy not covered the loss. He concluded that:

"The indemnity obligations of the defendant insurers and of the plaintiff’s insurer under the Westchester policy are co-ordinate but secondary obligations, both being obligations to indemnify. The primary liability of the contractor in terms of the contractual indemnity in the Caledonia North Sea case, however, is different from the provisions of Memorandum 4 of the works policy on which the plaintiff relies. Insurance policies create secondary liability : there never was any question of the defendants being primarily liable in the sense set out above. The liabilities of Westchester and the defendants in this present matter do not arise from commercial contracts to indemnify as in Norton’s case: they are all insurers with only one role to play. Payment by the one discharges all the other insurers and the fact that one insurer may be first and the other last in line does not affect the discharge of all the insurers that follow on the policies regarded as being one."

Malan J in finding for the defendants commented that while English law no longer has a binding force in South African law, it has considerable persuasive influence and double insurance was one of those peculiar matters where the special rules developed in English law ought to apply.

(d) The Supreme Court of Appeal Judgment

Samancor took the matter on appeal to the Supreme Court of Appeal on the basis that Malan J had erred in the following respects:

1.He had failed to have sufficient regard to the express provision of the works and assets policies and in particular Memorandum 4. Samancor criticised his finding that insurance policies create secondary liability and there was never any question of the defendants being primarily liable, arguing that in Memorandum 4 it was agreed that the parties had expressly elected to disturb the normal arrangements where co-insurers have co-ordinate but secondary liability and had instead agreed to an arrangement which fixed the respondents with primary liability.

2. He erred in finding it to be a case of double insurance.

Samancor contended that this was not a situation of double insurance as Memorandum 4 expressly excluded double insurance. Double insurance did not exist merely because there was an overlap in the property insured and the relevant policies. The policies needed to be interpreted in conjunction with one another. Limitations imposed by the English Courts as to when an insurer could recover an indemnity from another insurer by way of subrogated action, are only of application where the obligations of the insurers are co-ordinate obligations. Samancor’s case was that the parties had expressly created a position of layered hierarchical liability where the respondents were to bear the primary risk of loss. 

The Appeal Court in a unanimous decision upheld Malan J’s decision. The Court reviewed the recent English authorities, apparently approving the distinction drawn in the case of Caledonian North Sea Limited v British Telecommunications PLC (Scotland) & Others [2002] 1 ER (Comm.321) (HL) at para 92 where Lord Hoffman states:

"Mr King deduces from this and other similar statements the general rule that when two or more persons have separately agreed to indemnify someone against the same risk, payment by one discharges the others … It is certainly a general principle, as he says, that a person who has more than one claim to indemnity is not entitled to be paid more than once. But there are different ways of giving effect to this principle. One is to say that the person who is paid is entitled to be subrogated to the rights against the other person liable. The other is to say that one payment discharges the liability. The authorities show that the law ordinarily adopts the first solution when the liability of the person who paid is secondary to the liability of the other party. It adopts the second solution when the liability of the party who paid was primary or the liabilities are equal and co-ordinate.

Proceeding from this distinction as to when subrogation would be competent as opposed to contribution, Conradie JA identifies a number of possible scenarios when a subrogated claim would be competent: 

1. Subrogation is an option when as against the insurer the third party contractual indemnifier has primary responsibility to indemnify the insured for the loss in question. In such a case payment to the insured by the insurer is res inter alios acta (legally irrelevant) as far as the indemnifier is concerned. 

2. Contribution is appropriate when the insurer and third party contractual indemnifier have co-ordinate obligations to indemnify for a loss because the insurer’s payment discharges the liability of the indemnifier and the insured no longer has a claim against the indemnifier to which the insurer may be subrogated.

3. The position is the same where the third party indemnifier is an insurer; the insurer cannot rely on subrogation as the insured no longer has a claim for indemnity.

Turning to Samancor’s reliance on the wording of Memorandum 4 as the basis for its contention that the liability of the respondent insurers is not co-ordinate and that what had been created through the policy wording was a hierarchy of liability between insurers, the Court was only prepared to accept that a sequence of liability had been created.

The Court went on to say that only secondary debtors had rights of subrogation and then only against debtors whose liability was not equal and co-ordinate. If Mutual and Federal were to renounce subrogation, as subrogation is generally a right that goes hand in hand with secondary liability, this would be a strong indicator that primary liability had been assumed. The Court expressed the view that as the waiver of subrogation extended only to “directors, agents or employees” it did not go far enough to establish that the respondents had “exceptionally for an insurer accepted primary esponsibility".

In dealing with Samancor’s contention that the respondents’ acceptance of primary responsibility was indicated by the use of the following phrases in General Memo 4 “This policy shall take precedence over any other insurance arranged by or on behalf of the employer” and “…the insurers shall indemnify the insured as if such other insurance did not exist”. The Court held that as the insured had the right to elect which co-insurer to sue in the absence of a pro-rata contribution clause, it was the insured who determined the precedence of insurers. Mutual & Federal would even in the absence of the provisions of Memorandum 4 not have been entitled to raise the existence of the Westchester assets policy as a defence. The Court concluded therefore that the phrase “as if such other insurance did not exist” could not be construed as meaning “as if the insured had not been indemnified by another insurer”. To do so, would offend against the basic tenant of insurance law that the insured cannot recover more than it has lost. The Court accordingly declined to accept that the abovementioned provisions were intended to introduce a departure from the common law.

The respondents had argued that contribution was the only remedy that Westchester had against them. Samancor countered this argument by contending that Westchester had no right to contribution as it had been contractually arranged that there would be no overlap between cover and therefore no double insurance.

The Court recognised that contractual exclusions of rights of contribution are valid. Referring to Clause 13 of the assets policy which is quoted earlier in this paper, the Court’s view was that “The indemnity scheme adopted by the parties was uncomplicated”. In its opinion, read together with Memorandum 4 and the works policy, Clause 13 of the assets policy served to emphasise that there was no question of an insured having to sue each insurer separately for its proportionate share and Clause 13 “did not register refusal to contribute to a claim paid by another insurer”. The Court was satisfied that Clause 13 of the assets policy clearly indicated that if Samancor had claimed from Mutual & Federal under the works policy they would have been liable up to their indemnity limit of R135 million without being entitled to a contribution from Westchester. The converse was not the case in the event of Samancor electing to recover from Westchester.

The Court went on to say that although contribution is an equitable remedy, the Court is entitled to have regard to the relevant insurance contract in determining what contribution a co-insurer who has paid in fairness should be allowed to recover. Conradie JA agreed with the lower Court that the precedence provisions and excess of loss clauses determined relative contribution rights and did not convert the liability of co-insurers to a liability that is not equal and co-ordinate with that of another co-insurer.

The Court rejected the contention that there was no double insurance concluding that because the loss was recoverable from either the respondent or Westchester, it was clear that the liability of Westchester and the respondent was equal and co-ordinate. As a result of this finding the payment by Westchester in terms of the asset policy discharged not only its liability to Samancor but also the respondents’ liability. As co-ordinate debtors Westchester should then have brought a claim for contribution rather than a subrogated claim.

(e) The Significance of the Judgment

What ris apparent from both the judgment of the Court a quo and the Supreme Court of Appeal is that the approach that the Courts are likely to adopt is that where there is more than one contract of insurance in place and the one insurer has indemnified the insured, insurers will be regarded as secondary and co-ordinate debtors and the remedy available to the insurer that has indemnified against the other insurer is one of contribution. While the Courts do not appear to have completely excluded the possibility that the contractual provisions might create a hierarchy of insurance, the wording of the respective policies were evidently not sufficiently clear for the Courts. Professor van Niekerk, one of the authors of the leading South African text book The General Principles of Insurance Law and who was a member of the appellants’ legal team has written a long and detailed analysis of the case in a recent edition of Juta’s Insurance Law edition. Not surprisingly he is highly critical of the decision. Time is not sufficient to do justice to his criticism. The conclusion to his commentary does however bear epetition:

CONCLUSION

"However in this regard, great care will now have to be exercised after the decision in Samancor Ltd v Mutual & Federal Insurance Company Ltd & Others if the clauses in question are to achieve their intended effect in our law and if a Court is not to “disturb” [what the parties may have thought was] the very clear apportionment of risk for which [they] have provided by their contract” (Caledonia North Sea Ltd v British Telecommunications plc (Scotland) & Others) [2002] 1 Lloyd’s Rep 553 (HL) at 559). Express and abundantly clear wording will have to employed to indicate that the two insurances are not intended to create co-existent liability for the two insurers, that they are not to be regarded as co-debtors on the same footing, and that the insurances are not to be treated as one so that payment by the second insurer releases the first insurer and leaves the paying insurer with nothing more than a claim for contribution. As Samancor and Westchester found out, it will not suffice merely for the second insurance to state that it is an excess of, and will not contribute with, the first insurance. And the clause, if any, in the first policy will have to do more than merely provide that the first insurance is to take precedence over the second insurer and that in the event of loss also being covered by the second insurance, the first insurer will indemnify the insured as if the second insurance did not exist." 7


Credit: The work was a class presentation based on the principles of insurances as archieved in the case samancor v Mutual & federal insurance company limited & another. it was presented by Elionorah Yamaha student at Moshi cooperative University