Castellain v. Preston

It is the leading authority on subrogation and the clearest demonstration of its width. Most students think of subrogation as the insurer suing the wrongdoer in the insured's name. Castellain v. Preston shows that it reaches very much further: it reaches anything which reduces the insured's loss, whatever its source.

A agreed to sell his house to B, who agreed to pay the price unconditionally. The house, which was insured by A, was destroyed by fire before completion. The insurance company paid A for the total loss. B then paid the purchase price as well, being contractually bound to do so.

A had therefore been paid twice for the same house: once by his insurer and once by his purchaser.

Was the insurer entitled to recover from A what it had paid, out of the purchase price A had received?

Yes. The insurance company was entitled to recover the total loss it had paid.

A contract of fire insurance is a contract of indemnity and nothing more. The insured is entitled to be restored to the position he was in before the loss, and is not entitled to be put in a better one. Once the purchaser paid the full price notwithstanding the fire, the vendor had suffered no loss at all; the money he had received from his insurer was therefore money he was not entitled to keep.

The right of subrogation is the machinery by which the law enforces that. It gives the insurer the benefit of every right and every receipt of the insured which diminishes the loss — whether it arises in contract, in tort, in property, or from some other source altogether. On the same reasoning, gifts received by the insured in consequence of the loss may be the subject-matter of subrogation.

1. Payment first. The right springs from the actual payment of the loss to the insured. Until the insurer has paid, it has nothing to be subrogated to. Section 79(1) of the Marine Insurance Act 1963 says the same thing statutorily: the right arises on payment for a total loss, and the insurer is subrogated from the time of the casualty causing the loss.
2. No more than it paid. The insurer recovers what it has paid out and no more. Yorkshire Insurance Co v. Nisbet Shipping Co is the illustration: the insurer paid £72,000 for a vessel lost in a collision with a Canadian Government vessel; the owner later recovered £127,000 from the Government because of currency movements; the insurer was held entitled to £72,000 only. Subrogation enforces indemnity; it does not let the insurer profit either.

A third limit follows from good faith: the insured must not renounce or compromise his rights against third parties so as to defeat the insurer's rights.

Only to contracts of indemnity. It has no application to life insurance or to personal accident and sickness cover, because those are contracts for a fixed benefit. Cite Dalby for that.

Section 79(2) of the Marine Insurance Act 1963 completes the picture for partial losses: on payment for a partial loss the insurer acquires no title to the subject-matter, but is subrogated to the assured's rights in so far as the assured has been indemnified. Learn the contrast between s. 79(1) and s. 79(2) — title on a total loss, rights only on a partial one.