The Insured's Duty Of Disclosure Of Limits On Subrogation
The Insured's Duty Of Disclosure Of Limits On Subrogation
The possibility that the insurer may successfully pursue a subrogated recovery action does not usually influence him sufficiently to temper his rates of premium or agree contractual terms more beneficial to the insured. Does the insured, then, have to disclose, prior to the conclusion of the contract of insurance, any possible constraints that may adversely impact upon the insurer's right to pursue subrogated recovery actions?
In Tate v. Hyslop (1885) 15 QBD 368 Ct of App, the insured had contracted with the lightermen that they should only be liable for loss when they had been negligent. He took out a marine policy which included the risk of loading and unloading goods from lighters.
It was held that the insured was aware that the insurers would view as significant, when assessing the premium, the existence of such contracts with the lightermen. As their existence had not been disclosed, the contract could be avoided by the insurers.
However, in any class of risk where the insurers are not known to consider subrogated rights of recovery as an element in risk computation, then it is unlikely that a duty will be imposed upon the insured to disclose the fact that third parties are protected from liability. The information is simply not material.
Insurers could overcome any doubt as to materiality by inserting a question into the proposal form, for example:
"Have you (the insured) incorporated or do you intend to incorporate any terms and conditions into agreements with third parties which may limit or prevent the exercise of your rights against such third parties?"
If such a question were incorporated within the proposal form and a clause added to the policy stating that the insured is required to refrain from entering into such agreements during the policy period, then this should prevent insurers from being surprised by limitations upon their rights to subrogate.
It should certainly be clear from the question that the underwriter does consider the information material and a failure to provide it would probably allow the insurer to avoid the policy. A breach of the clause forbidding the insured to enter into an agreement limiting or excluding rights of recovery would allow the insurer to claim damages, to the extent of any probable recovery against a third party. Alternatively, if the clause were drafted as a warranty the insurer would be entitled to reject any claims subsequent to the breach of that warranty.
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