THE ORIGINS OF SUBROGATION
BY JOHN J. O’BRIEN JD,CLU,CPCU
“It would be unconscionable for an insured not to let his insurance company share in any damages he recovers from a wrongdoer.” Lord Mansfield in Mason v. Sainsbury 1782.
Origins Of Insurance In America
There seems to be a tendency for writers who are not historians when entering into historical areas to take liberties with accuracy that they would not take if they were recording present day facts and events. I believe this phenomenon exists because these writers are satisfied with recreating or recording historical facts directly from the writings of others without questions. There is also a lowering of standards that occurs when non-historians report history because they assume that their readers will not subject their historic material to microscopic examination. Writers in the insurance history theater sometimes publish “historic facts”, which simply are not true. With each repetition of the alleged historic facts and with each higher level of authority that publish them uncorrected, they gain broader popular acceptance and become less susceptible to correction.
I am not a historian and so I offer the following material with the caveat set forth in the preceding paragraph with the hope that those writers who have gone before me are not too far off and that you have left your microscopes at home.
Let us begin by taking this opportunity to correct one of those “historic facts” before it becomes too cemented in the accepted history of insurance. Many of you have read or heard that the city of origin of the first fire insurance company in America is Philadelphia and that Benjamin Franklin was the founder of this insurance company.
Benjamin Franklin did form The Philadelphia Contributorship, which is the oldest insurance company in our country, which is still in existence. Over and over again you will hear that insurance began in America with The Philadelphia Contributorship.
Benjamin Franklin in his Pennsylvania Gazette announced on February 18, 1752:
“All persons inclined to subscribe to the articles of insurance
of house from fire, in and near the city, are desired to appear
at the court-house, where attendance will be given to take in
their subscriptions every seventh day of the week, in the afternoon,
until the thirteenth of April next, being the day appointed by said
articles for electing twelve directors and a treasurer.”
In fact The Philadelphia Contributorship was the second fire insurance company in America. The first fire insurance company was established a few blocks from my office here in Charleston, South Carolina. The name of the company was the Friendly Society and it was formed on January 18, 1732 in Charles Town (now Charleston) South Carolina. The South Carolina Gazette announced the formation of the company on that day:
“At a meeting Of sundry of the Freeholder, of the Town at the House of MR. Giguilliat, Proposals were offered for establishing an insurance office against FIRE…”
It was not until January 3, 1736 that Articles of Agreement were filed. Instrumental in the formation of this company were Charles C. Pinckney and Jacob Motte. Pinckney later became Chief Justice of South Carolina. Motte was Public Treasurer of the Province from 1743 until his death in 1770.
“We Therefore, whose names are hereunto subscribed, Freeholders and Owners of Houses, Messuages and Tenements in Charles Town taking the Premises into Consideration, Do by these presents freely and voluntarily, and for our mutual Benefit and Advantage, covenant, promise, conclude and agree for ourselves and our respective Heirs, Executors and Administrators, to and with each other of us, in manner and form following, that is to say, Imprimus, We do covenant, promise, conclude and agree, That we will, and we do by these presents form ourselves ( as far as by Law we may) into a Society for the mutual Insurance of our respective Massuages and Tenements in Charles Town (which shall be entered in Books of the Directors of Society to be insured) from Losses by Fire, and do name and call ourselves the Friendly Society.”
Many of the descendants of the founders and of this first insurance company are still engaged in the insurance business in South Carolina. However the Friendly Society did not have a long existence. One Tuesday, November 18th, 1740 a large part of waterfront Charles Town was destroyed by fire. Both Mott and Pinckney lost heavily in the fire. Approximately four hundred homes, businesses and public buildings were destroyed.
The fire was also responsible for the financial ruin of the Friendly Society. On the other hand the Philadelphia Contributorship is still in existence in Philadelphia making it the oldest existing fire insurance company in United States.
Charlestonians are a very proud lot and it is reported that we are known for our good manners and for our friendliness. Even our first insurance company used the term “friendly” in its name and we still are very friendly here despite the hardships of earthquakes, fires and hurricanes we have had to endure over the centuries. And as for our manners, let me take my hat off to Philadelphia and its Contributorship, the oldest existing fire insurance company in America, and congratulate it for its endurance. My apologies to them for these efforts to have Charleston take its proper place in the history of insurance. I hope that in its “brotherly love,” Philadelphia; my birthplace, will understand.
Origins Of Insurance In The History Of Man
Insurance as a concept and as an organized business around the world predated both Charleston’s Friendly Society and the city of brotherly love’s Contributorship by many centuries.
In fact, insurance has probably always been a part of human history because insurance in its purist form is nothing other than “risk sharing.” The posting of a sentry outside of a cave could be interpreted to be a form of insurance. The concept of hunting in pacts for prey rather than alone was a risk-sharing concept – a way that injury could be minimized among the tribe.
The inhabitants of Mesopotamia in 2,400 BC consisted of many cultures including Sumerians, Assyrians, Arcadians and Babylonians. The merchants of Mesopotamia formed pacts with each other and traveled together across deserts with many camels so that the replacement of camels that were lost on the journey would be guaranteed.
These practices were very early examples of mutual insurance where a group of people come together and share risks and responsibilities. The practiced reached a certain level of refinement in early Greece about 500 BC when Greek merchant marines would pool their resources in maritime undertakings and in the case of piracy or shipwreck, no single individual would have to shoulder the entire loss.
The first insurance policy was actually issued in Pisa, Italy in 1385. I always wonder if this policy contained the exclusion we find in today’s insurance policies for earth movement of any kind to exclude the tendency of buildings to sink and lean there as does the city’s famous leaning tower.
In 1629 Holland set up the East India Company. This company insured maritime transports, caravans, goods and warehouses against storms, pirates and fires.
The company charged large premiums and assumed responsibility for tremendous
losses.
After the great fire destroyed thousands of houses in London as well as St. Paul’s Cathedral and in response to this the first fire insurance company was formed in England in 1710.. Note the difference here. In England a catastrophic fire was the catalyst for the formation of the first fire insurance company there. By contrast in America a catastrophic fire ended the short life of the first fire insurance company – The Friendly Society.
A discussion of insurance history is incomplete without mention of Lloyd’s. Before the formation of Lloyd’s in England individuals underwrote marine contracts. Typically a broker would carry the policy insuring an insurance transaction or ship from one individual to another until the required number of shares was sold to insure the risk. The individuals who subscribed would sign their names at the bottom of the insurance policy and this led to the use of the term “underwriters”.
The establishment in London of coffeehouse changed this practice and with the coffeehouses the merchants, underwriters and mariners had a common place to meet. Edward Lloyd owned one of these coffeehouses and he began publishing Lloyd’s News and his coffeehouse became popular for the transaction of all kinds of maritime, insurance and other businesses.
In 1769 the underwriters at Lloyd’s organized themselves as a syndicate and began to conduct business under the name of Lloyd’s and moved to the Royal Exchange. From 1769 Lloyd’s became the underwriting center of London if not the world.
Today venerable Lloyd’s of London is actually a collection of individual underwriting groups know as “syndicates”. Lloyd’s is known today to insure almost anything if the price is right. i.e. Tina Turner’s legs. The syndicate managers let “names” invest in Lloyd’s operations and, until recent times, share in large profits. The unfortunate down side of being a “name” is that a “name” must pledge everything they own to make good on the debts of the syndicates. In the early nineties claims from hurricanes and asbestos class action law suits primarily in America caused losses to outrun profits at Lloyd’s and this resulted in many well attended estate sales in England as the “names” personal assets were sold to keep Lloyd’s a float.
The Origins Of Subrogation
The concept of subrogation began in ancient Rome. If Claudias paid Caesars debt to Brutus, then Claudia’s filled the shoes of Brodus as to his ability to recover from Caesar.
It wasn’t long after insurance companies began paying claims that insurance executives began to thing of ways to recoup some of the money that they had paid out
to their insureds and subrogation began to appear in insurance practice. Subrogation is firmly based in the concept of indemnity and a method where insurance can be made affordable. The gains achieved through subrogation are eventually passed on to the insurance buying public through lower insurance premiums.
In 18th century England, Lord Mansfield (the father of insurance) recognized subrogation in court cases. The underlying doctrine was to prevent a windfall to an individual insured. The Courts did not think it fair that a person could recover both against the insurance company that insured the loss as well as recovering against the person who caused the loss. The courts and the insurance companies felt that to allow the insured to recover twice would be a “windfall” to the insured. By the way as you may already know the King owned all the trees in England but the peasants could have the trees that fell or branches that came down when the wind blew – hence the origin of the term “windfall”.
There are actually two views as to how the doctrine of subrogation developed. The first view is that it developed as part of the English legal system known as equity. The equity side of the courts strove to right “wrongs” and to follow the natural law. They attempted to be fair. The idea is that double indemnity offends natural justice.
The other view is that the doctrine stems from the common law. Applying common law (law that is not written down as an ordinance or statute) courts implied that every insurance contract contained a term that gave the insurer the tacit permission of its policyholder to exercise any recovery rights that may exist against the party that caused the wrong even though that party is not a party to the contract. Hence we find the origins for the word subrogation, which means “substitution”. In these cases it means the substitution of the insurer for the insured.
The founding father of insurance law Lord Mansfield addressed the concept of subrogation in Mason vs. Sainsbury in 1782. He spoke in that case about the right of
the insurer to step into the shoes of its insured and recover its losses. In Mason vs. Sainsbury rioters ransacked Mr. Mason’s house and his insurance company paid the claim. At the time there was a Riot Act of 1714 that provided a means to recover damages against the local administrative district body. The insurance company pursued a recovery action against this administrative body in the name of its insured.
This case was predated by the case of Randall vs. Cochran 1748 where the insurer for an English ship taken by the Spanish was permitted to bring suit in the name of its insured against the administrators of a public prize found that was compiled by the British government from the sale of captured Spanish ships. The Lord Chancellor declared:
“…the plaintiffs had the plainest equity that could be. The person originally
sustaining the loss was the owner; but after satisfaction made to him, the
insurer…the asssured stands as trustee for the insurer, in proportion for
what he paid…”
One hundred years later came the case of Castellan vs. Preston, which is probably the leading case in England establishing the principal of Subrogation. In that case a house that the owner had agreed to sell was damaged by fire before it was sold. His insurers indemnified him for the value of the repairs. The buyer for the house paid full price for the house in its damaged condition. Subsequently, the insurers learn that there insured had received full price for the house without deduction for the insurance proceeds that it paid to its insured - the seller of the property. Lord Justice Rhett set forth the principal that has been followed in England and United States up until present time:
“… The contract of insurance contained in a marine or fire policy is a contract of indemnity, and of indemnity only, … the insured shall be fully indemnify, but shall never be more than fully indemnify. This is the fundamental principle of insurance, if ever a proposition is brought forward which is at variance with it, that proposition must certainly be wrong. ”
Subrogation In America
It is difficult to pinpoint one early case in the United States that can be said to mark the beginning of our court’s recognition of the doctrine of subrogation. Essentially subrogation as a doctrine was transferred from England over to this country as part of Anglo Saxon law and equity. It has always been accepted here. Cases in the late 19th-century contain descriptions of subrogation and represent a clear understanding and acceptance of the concept.
In 1888 the United States Supreme Court was asked to consider the subrogation claim of Aetna Life Insurance Company against the township of Middleport, Illinois. The town had issued bearer bonds to the Chicago, Danville & Vincennes Railroad Company to convince the railroad to construct a railroad through the township. Aetna purchased the bonds from the railroad. The railroad built the line but then went out of business and Aetna tried to collect on the bonds claiming that the railroad had acted and the line was a benefit for the town and that by virtue of equitable subrogation Aena stood in the place of the railroad. The court in its decision pointed out that equitable subrogation is a well recognized doctrine but that in this particular case, the court felt that Aetna had acted as a pure volunteer and that, therefore, the doctrine of equitable subrogation was not applicable..
A case decided on February 10, 1890 in Arkansas makes reference to an academic treatise on the subject, namely, Sheld on Subrogation and recites that:
“The right of the insurance company that has paid a loss to recover of the wrong-doer,
after payment of the loss does not depend upon contract, agreement, stipulation, or privity. Sheld. The right of subrogation is sometimes spoken of as an ‘equitable assignment,’ but that is only a convenient figure of speech. From the time of the insurance the insurer has a pecuniary interest in the thing insured, and he becomes entitled to a legal remedy whenever he suffers a loss by reason of that interest, and it appears that the loss has been occasioned by the wrongful act of another. Of course, he has no right of action until he has paid the loss to the insured, because until that time he has suffered no damage.”
So fairly uniformly American courts from colonial times have recognized with favor the principle of subrogation as it was stated as recently as 1999 in a case involving none other than Lloyds themselves:
“Subrogation has been equated to and interchanged with the word
substitution and the basic idea is that of substituting the insurance carrier
for the insured in the insured’s action against a third party. Subrogation is
an equitable doctrine and is applicable whenever a debt or obligation
is paid from the funds of one person although primarily payable from the
funds of another.” Prime Hospitality Corp. et al v. Underwriters at
Lloyd’s et al, Civil No 1997-91 United States District Court for the
District of the Virgin Islands, 1999 U.S. Dist. LEXIS 6725
Many of the earliest cases dealing with subrogation in this country are discussed throughout this education series and will help us develop a though knowledge of the evolution of subrogation up to the present century.
There are some writers and jurist who believe that subrogation is not an appropriate remedy because there is no actual proof that subrogation recoveries are passed on to the insurance buying public. These critics of subrogation view subrogation as nothing more than a windfall for the insurance industry.
At the present time there is at least one state that has legislation pending that would eliminate the insurance company’s right to subrogation. Ironically the basis of this legislation is that a claimant should be allowed to recover both against a wrongdoer and his insurance company? A legislator should not consider voting in favor of such legislation without studying and understanding the logic and thought given by Lord Mansfield and those jurist who came after him both here and in England. Over two centuries of thoughtful consideration and reasoned opinions should not be thrown aside in an unthinking reaction to purported “consumerism”. Where is Lord Mansfield when we need him?
Bibliography
Hasson, Subrogation in Insurance Law- A Critical Evaluation, 5 Oxford J. Legal Stud. 416, (1985).
Mitchell, Charles, Subrogation, Restitution and Indemnity- the Law of Subrogation, Oxford University Press, 1994.
Quinn, Michael Sean, Review of Subrogation, Restitution, and Indemnity, Texas Law Review, 74 Tex. L. Rev. 1361, May, 1996.
Stempel, Jeffery W. Interpretation of Insurance Contracts: Law and Strategy for Insurers and PolicyHolders. Boston Mass: Little Brown, (1994).
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