Napier and Ettrick (Lord) v Hunter
| Jurisdiction | England & Wales |
| Judge | Lord Templeman,Lord Goff of Chieveley,Lord Jauncey of Tullichettle,Lord Browne-Wilkinson,Lord Slynn of Hadley |
| Judgment Date | 10 December 1992 |
| Judgment citation (vLex) | [1992] UKHL J1210-2 |
| Date | 10 December 1992 |
| Court | House of Lords |
[1992] UKHL J1210-2
Lord Templeman
Lord Goff of Chieveley
Lord Jauncey of Tullichettle
Lord Browne-Wilkinson
Lord Slynn of Hadley
House of Lords
My Lords,
When an insured person suffers a loss he will be entitled to the insurance money and may also be entitled to sue for damages anyone responsible for the loss. For example, if a house is insured for £100,000 against fire and is damaged by fire to an extent exceeding £100,000, the insurance company will pay £100,000. If the fire has been caused by a negligent builder or some other contractual or tortious wrongdoer, the insured person will sue the wrongdoer for damages. If the house has been damaged to the extent of £160,000, the insured person will receive damages from the wrongdoer of £160,000. At that stage the insured person will have made a profit since he will have only suffered a loss of £160,000 but will have collected a total of £260,000 from the insurance company and the wrongdoer. A policy of insurance is however a contract of indemnity and by the doctrine of subrogation the insured person must pay back to the insurer the sum of £100,000. The insured person will then have made neither a loss nor a profit. This appeal requires consideration of the principles and application of the doctrine of subrogation.
The persons insured are 246 members of the Outhwaite Syndicate 317/661 of Lloyd's ("the Names"). The wrongdoer was the managing agent of the syndicate ("Outhwaite") who negligently wrote large numbers of policies on behalf of the Names in respect of asbestosis claims without adequate reinsurance cover. The insurers are the appellants ("the Stop-Loss Insurers").
As members of the Outhwaite Syndicate the Names were entitled to share the nett premiums and personally liable to pay claims received under policies issued by Outhwaite on their behalf in the year of account 1982. The Names were desirous of insuring themselves against part of any loss they might incur as members of the syndicate. Each Name therefore paid a premium to Stop-Loss Insurers for a policy whereby the Stop-Loss Insurers agreed to:-
"Indemnify the Assured for the amount by which the Assured's overall ascertained nett underwriting loss as hereinafter defined for the Underwriting Year(s) of Account shown in the Schedule exceeds the amount stated as 'Excess' in the schedule."
The Policy contained a definition of "nett underwriting loss" in the following terms:-
"The Underwriters' liability hereunder shall not exceed the amount stated as "Limit" in the Schedule
The "Limit" and "Excess" shall apply separately to each Underwriting Year of Account covered hereunder
The term "overall ascertained nett underwriting loss" shall mean:-
(a) such sums with which the Assured shall be debited by any of his/her Underwriting Agents in respect of his/her Underwriting results being the disclosed loss as per the Underwriting Accounts as at the end of the 36th month of each separate Underwriting Year of Account
less
(b) such sums as the Assured shall be credited from any of his/her Underwriting results as shown in the account as at the end of the 36th month of each separate Underwriting Year of Account."
One of the underwriting years of account was 1982. The limit and the excess varied from policy to policy.
For purposes of illustration, the arguments in the courts below and in this House assume that for the 1982 year of account a particular hypothetical Name suffered a nett underwriting loss of £160,000, that the Excess was £25,000, and that the Limit was £100,000. On these figures the Stop-loss Insurers paid to the Name £100,000 being the fixed amount of the Limit (£100,000) which exceeded the excess (£25,000). The Names together with other Names sued Outhwaite for damages for negligence and breach of duty in respect of, inter alia, the 1982 year of account. Those proceedings were compromised on payment by Outhwaite of £116 million to the respondents Richards Butler as solicitors for the plaintiffs in the action. For the purposes of the illustration it is assumed that included in the sum of £116 million Richards Butler hold £130,000 attributable to the overall ascertained nett loss of £160,000 suffered by the hypothetical Name for the 1982 year of account.
On these assumptions two problems arise, first how much is payable to the Stop-loss Insurers by way of subrogation? Secondly are the Stop-loss Insurers entitled to be paid the amounts found due to them by way of subrogation out of the damages now held by Richards Butler?
At first instance Saville J. decided that the hypothetical Name would be entitled to be fully indemnified for his loss of £160,000. He received £100,000 from the Stop-Loss Insurers. He will receive £130,000 from Outhwaite. He will keep £60,000 and pay £70,000 to the Stop-Loss Insurers. In the result the Name will have fully recouped his loss of £160,000. This analysis however ignores the fact that the Name agreed to bear the first £25,000 Excess of any loss.
The problem must, in my opinion, be solved by assuming that the Name insured the first £25,000 of any loss and also insured the Excess over £125,000 as well as insuring the £100,000 payable under his policy with the Stop-Loss Insurers. There would then be three insurance policies as follows:—
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(1) A policy for the payment of the first £25,000 of any loss
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(2) A policy for payment of the next £100,000 of any loss
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(3) A policy for payment of any loss in excess of £125,000.
When the Name suffered a loss of £160,000 the Name received £25,000 under the first policy, £100,000 under the second policy and £35,000 under the third policy. The damages payable by Outhwaite were £130,000. The third insurer is entitled to be the first to be subrogated because he only agreed to pay if the first two insurances did not cover the total loss; accordingly the third insurer must be paid £35,000. The second insurer is entitled to be the second to be subrogated because he only agreed to pay if the first insurance cover proved insufficient; accordingly the second insurer must be paid £95,000. The sum of £35,000 payable by way of subrogation to the third insurer and the sum of £95,000 payable by way of subrogation to the second insurer exhausts the damages of £130,000 received by the Name from Outhwaite. There is nothing left to recoup to the second insurer the balance of £5,000 out of the £100,000 he paid under his policy. There is nothing left by way of subrogation for the first insurer in respect of the first £25,000 which he agreed to bear.
Under the Stop-Loss Insurance the Name agreed to bear the first £25,000 loss and any loss in excess of £125,000. In my opinion the Name is not entitled to be in a better position than he would have been if he had taken out the three insurances I have mentioned. The Name in fact acts as his own insurer for the first £25,000 loss and acts as his own insurer for any loss in excess of £125,000. So the Name must pay £95,000 to the Stop-Loss Insurers just as he would have been liable to pay £95,000 to the second insurer if he had taken out three policies. In the result, out of the loss of £160,000, the Name will have borne the first £25,000 because he agreed with the Stop-Loss Insurers that he would bear that loss. The Stop-Loss Insurers having paid £100,000 under the policy will receive back £95,000 by way of subrogation.
Saville J. reached a different conclusion. He found that the Name was entitled to retain from the damages he received the whole of the loss he had sustained before recouping the Stop-Loss Insurers. Accordingly, the Name who suffered a loss of £160,000 and received £100,000 under the policy with the Stop-Loss Insurers and a further £130,000 from Outhwaite was entitled to retain £60,000 and to recoup to the Stop-Loss Insurers the sum of £70,000 and no more. Thus the Name covered all his loss notwithstanding that he had agreed to bear the first £25,000 of the loss. For his conclusion Saville J. relied on the following passage from the judgment of Brett L.J. in Castellain v. Preston (1883) 11 Q.B.D. 380 at 386:-
"The very foundation, in my opinion, of every rule which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, and that this contract means that the assured, in case of a loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully indemnified. That is the fundamental principle of insurance, and if ever a proposition is brought forward which is at variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity, or which will give to the assured more than a full indemnity, that proposition must certainly be wrong."
Saville J. therefore concluded that the Name would be entitled to indemnify himself against the first £25,000 loss even though he had expressly contracted with the Stop-Loss Insurers that he would bear that loss. I do not consider that the case of Castellain v. Preston (1883) 11 Q.B.D. 380 is helpful in deciding whether a Name who promised the Stop-Loss Insurers to bear the first £25,000 loss is entitled to be put in the same position as an insured person who makes no such promise. When Brett L.J. delivered his judgment upon which Saville J. relies, he was not concerned with competing claims to subrogation or with any problem arising from underinsurance or partial insurance or layers of insurance. In Castellain v. Preston (1883) 11 Q.B.D. 380, a vendor after insuring his property against fire contracted to sell the property for...
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