AuthorDenis Boivin
A policyholder may have more than one avenue of redress once an in-
sured risk materi alizes. If the losse s were caused by the negligence
of someone else, the insured may have a cause of action against this
person for damages. The same is tr ue if the losses were the result of
someone else’s breach of contract or breach of a f‌iduciary duty. When-
ever the insured has an alternative right of recovery, two fundamental
goals of our legal system — compensation and deterrence — appear to
be headed for an inevitable collision. On the one hand, t he indemnity
principle could be jeopardized if an i nsured were allowed to supple-
ment an insurance policy w ith legal remedies that covered the same
loss. On the other hand, the incentives of tort law, contract law, and
f‌iduciary law could be lost if an insured were forced to rely exclusively
on f‌irst-party insurance for compensation.
The doctrine of subrogation resolves this sta lemate. Subrogation
arises when the policyholder has a right of recovery against someone
other than her insu rer — a right that would allow the insured to recover
the losses caused by the peril, in part or in their entirety. The doctrine
of subrogation allows the insurer to enforce this right, in the name of
the insured, and to w ithhold from the resulting award the equivalent of
any indemnity paid under the insurance contract. In addition, subroga-
tion allows the insurer to seek reimbursement from the insured or to
make a deduction from her claim if she has already enforced the right
Subrogation 487
of recovery and received compensation from the thi rd party. However,
the insurer is not discharged from its responsibilitie s. On the contrary,
f‌irst-party insur ance remains the principa l avenue of redress for the
policyholder. Insurance is quick, comprehensive, and usually applies
irrespective of fault. The doctrine of subrogation merely allows the in-
surer to share its legal burden with other debtors, while preserving the
indemnity principle. Through subrogation, everyone is held account-
able: the person who is legally responsible for the loss, the per son who
promised to indemnif y, and the person who suffered the damage.1
The doctrine of subrogation involves a number of general principles. As
usual, these pr inciples are subject to legislation and to the will of the
parties — the topics addre ssed in Sections C and D, below in this ch ap-
ter. But we start at the beginning, with the common law.
1) R a ti ona le
Two English Court of Appeal cases illustrate the fundamental reason for
subrogation. Rayner v Preston2 and Castellain v Preston3 stem from the
same factual background. The defendants are the same in both case s.
They sold a piece of real estate for £3,100 to the plaintiffs in the Rayner
decision. The contract of sale specif‌ied that the purchasers would pay
the full amount on closing, irre spective of the condition of the house
that was located on the land. The building was insured with t he plain-
tiff in the Castellain decision, but the contract of sale did not mention the
insurance policy, and the policy did not mention the purchas ers. Before
the date of closing, a f‌ire caused damage to the house. The vendors
made a claim under their propert y insurance and received the sum of
£330 for their losses. In due course, the purcha sers paid the promised
amount and took possession of the land and dwelling. The vendors re-
fused to hand over the £330 to the purchasers and they refused to u se
the money to repair the damages.
1 See Somersall v Fried man, 2002 SCC 59 at para 50: “it is import ant to keep in
mind the underly ing objectives of the doctr ine of subrogation which are to en-
sure (i) that the insu red receives no more and no less th an a full indemnity, and
(ii) that the loss fal ls on the person who is legally re sponsible for causing it.”
2 (1881), 18 Ch D 1 (CA) [Rayner].
3 (1883), 11 QBD 380 (CA) [Castellain].
In Rayner, the purchasers were suing the vendors in order to re-
cover the indemnity paid to the defendant s by their insurer. The plain-
tiffs had purchased the subject matter insured. Were they entitled
to the indemnity? Unlike Keefer v The Phoenix Company of Hartford,4
a case reviewed in Chapter 4, Section D(2), this is not a situation in
which the vendors insured both their interests in the dwelling and
the interests of the purcha sers. Indeed, the defendants never intended
to insure beyond their own personal interests.5 Having said this, the
Court of Appeal dismi ssed the plaintiff s’ claim. As noted by the major-
ity, an insurance contract is a personal contract between the insured
and the insurer. The object of the contract is the payment of a sum of
money, upon the happening of an event, and not the land and building
themselves. Hence, the contract does not follow the insured object into
the hands of subsequent owners. As Brett LJ eloquently put it: “The
contract of insurance does not run with the land; it is a mere personal
contract, and unless it is assigned no suit or action can be maintained
upon it except between the original pa rties to it.6 Stated differently, an
insurance contract is not a tr ansferable warranty with respect to the
insured object; it is a personal undertaking given to someone who has
an insurable interest in t he subject matter insured.7 Thus, unless this
undertaking i s assigned to a third par ty, only the parties to the agree-
ment can enforce the obligations set out in the contract.8 In dis sent,
Lord James invoked the concept of trust to correct what he perceived
as an inequitable sit uation.9 In his view, the vendors held the proceeds
of the insurance in trust for the purchasers, because the parties were
involved in a f‌iduciary relationship when they concluded their agree-
ment. The majority rejected this argument.10 According to Brett LJ, the
fact that a decree of specif‌ic performance may be obtained to enforce
4 (1901), 31 SCR 144.
5 This is a condition for in suring beyond one’s personal i nterests: see Chapter 4,
Sec tion D(2).
6 Rayner, above note 2 at 11.
7 See Springf‌ield Fire & Marin e Insurance Co v Maxim, [1946] SCR 604 at 618,
Rand J: “It is now beyond controver sy that [a contract of insura nce] is a per-
sonal contract of i ndemnity against loss or d amage to the interest of the in sured
in specif‌ied prop erty.
8 An assignment is the volunt ary transfer of a legal r ight. The vendors could have
transfer red their interests in t he insurance contract to t he purchasers, but this
was not done in the cir cumstances of this c ase: Rayner, above note 2 at 10. See
Chapter 13, Section B(3) for a discus sion of assignment.
9 Rayner, ibid at 13.
10 Ibid at 10 –11.

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