Subrogation claims: fighting in the middle

Publication March 2018


2017 Informa plc. This article first appeared in Maritime Risk International, November 2017,

As a result of the ever increasing volumes of goods and commodities traded and transported around the globe, it is not uncommon that insurers find themselves dealing with subrogated claims impacted by more than one legal system. South Africa and China are a good example of this. There is a rapidly growing trading relationship between the two countries but there are some striking differences between the law of subrogation established by the two legal systems. It is of vital importance for all those involved to know the differences, in order to avoid the consequences of an injudicious step in this legal minefield.

South Africa law

Following English law, South Africa law recognises that the right of subrogation allows the insurer to use the insured’s name to sue any third party legally liable for the insured loss. The right or rights of the insured are not ceded or assigned to the insurer, unless the parties specifically agree to do so.

South Africa does not have a dedicated marine insurance act. Unless stated otherwise in the policy, a South African court will apply the Roman-Dutch law of marine insurance to any marine insurance claim.

The general rule is that the insurer will only be entitled to rights of subrogation once the insured has been indemnified “in full” for its insured loss. On payment of indemnity, subrogation happens without the need for any formalities. However, it is usual for the insurer to request that the insured sign a letter of subrogation, confirming not only that the insurer may proceed in the name of the insured, but also undertaking to provide such assistance to the insurer as may be required. Care must be taken, though, not to demand of the insured anything that exceeds the insured’s obligations under common law, or which might otherwise have been undertaken in the contract of insurance. If the insured refuses to permit the insurer to use his name in a claim against the third party, the insurer can bring proceedings to compel him to do so, by bringing an action against both the insured and the third party.

The insurer is obliged to recover all losses suffered by the insured, not just the insured losses. This often leads to issues regarding who is to bear the costs of any subrogated recovery action, and how any settlement proceeds should be apportioned. Under South African law, the insured will have the first take of any settlement proceeds, up to the point where its losses have been fully indemnified. In practice, however, the insured and the insurer will agree on the apportioning of both the costs of recovery and the recovery itself – usually on a pro-rated basis.

Under South Africa law, the right of subrogation is a substantive issue which should be governed by the law of the insurance contract. This is where Chinese law will normally kick in if the insurance contract is subject to Chinese law. It is worth noting that some Chinese insurance policies incorporating the commonly used Institute Clauses (which state that “this insurance” is subject to English law and practice) does not necessarily mean that the insurance contract is governed by English law – English law and practice will only apply to the terms of the Institute Clauses. This issue remains unresolved. It is therefore imperative that insurance policies clearly set out the choice of law issues.

Chinese law

The right of subrogation is prescribed both in the Chinese Insurance Act and in the Chinese Special Maritime Procedural Code. As a result, it is submitted that it is both a substantive and a procedural issue. Chinese law requires that subrogated claims be issued in the name of the insurers rather than the insured to the extent of the indemnity they paid to the insured. This means that if the insurers are a consortium of insurers, each of them will need to participate in the proceedings as joint claimants. This also means that if the insured was only indemnified for part of its loss by the insurers, it will need to proceed in its own name against the third party legally liable for the uninsured part of its loss as joint claimant with the insurers.

The unique nature of subrogation under Chinese law gives rise to problems where a subrogated claim under a South African law or English law governed insurance policy is brought before Chinese courts - for example, in situations where the recovery target is domiciled in China or the tortious act occurred in China. Chinese law being the law of the forum will dictate that Chinese law should apply in treating subrogation as a procedural issue notwithstanding that the policy may be subject to South African law or English law.

On the other hand, if the subrogated claim under a Chinese law governed insurance policy is brought before the South African courts, it is arguable that Chinese law (being the governing law of the insurance contract) should apply to the right of subrogation. In those circumstances, it is questionable whether any subrogated claim is valid if the insurers refuse to participate in the South African proceedings as a matter of Chinese law or whether South African law should apply instead. This could be even more complicated when the insurance claim is settled by way of a settlement agreement governed by Chinese law.

Parallel proceedings

It is not uncommon that potential parallel proceedings will be issued in both China and South Africa or another country by the subrogated insurers and the insured respectively. Judging from our experience, Chinese insurers will be reluctant to enter proceedings in an overseas forum such as South Africa, where rules on disclosure and legal costs are totally different from China. Instead they will probably take a “wait and see” approach and let the insured pursue the recovery on its own. This tends to happen particularly in the event of underinsurance where the insured had self-insured part of its loss and had an strong incentive to recover as much as possible from the third party. In this type of case, the insured will usually have no choice but to issue proceedings in its own name in the South African courts which will entertain the claim as the court first seized. It is debatable whether the South African courts will apply Chinese law and require the Chinese insurers to join the proceedings in substitution for, or in addition to the insured as claimants.

Under Chinese law, the juridical basis of the right of subrogation is less clear. It is generally submitted that it is a form of statutory assignment which automatically arises upon insurer’s payment of indemnity. It happens without the need for any formalities. Effectively the insured assigns its rights and defences against the third party to the insurers upon receipt of the insurance indemnity. It is however less settled where the insurer only indemnifies part of the loss and the insured retains the right to join the insurers as co-claimants to sue the third party for its uninsured loss. If it happens, it is arguable whether the third party has a complete or partial defence to the subrogated claim if either the insurer or the insured does not participate in the proceedings of the subrogated claim.

Watch the clock

Time limitation periods in China are generally much shorter than those in the common law jurisdictions. Under South African law, for example, and in the absence of any contractually agreed and valid time periods, a claimant has three years within which to bring its action against the liable third party. Under Chinese law, given the insurers need to issue the proceedings in their own names, it is a problem if the insurance claim takes years to settle, until after the time limitation expires. To address this problem, the Chinese Supreme People’s Court has recently clarified in its second Interpretations on Insurance Law that the limitation period for subrogated claims starts from the date the insurers have obtained the right of subrogation - i.e. the date they have paid the insurance proceeds. However, there is still debate on whether recovery claims arising out of carriage of goods by sea contracts, such as bills of lading contracts should be exempted. It is submitted that such claims have a short one year time limit under Chinese law in line with Hague-Visby Rules. If the start of the one year time limit is delayed until the time the subrogated insurer has obtained its right of subrogation, this will effectively deprive the ocean carriers of the benefits of the short time limit and leave them in an uncertain and potentially vulnerable position. The position is untested in Chinese courts. Where possible, it would be advisable for insurers to urge their insured to issue proceedings in the insured’s own name as soon as the loss occurred and before the insurance claim is paid.


The striking differences between China and South Africa on the law of subrogation present challenges to all those involved in the subrogation claims. Insurers should consider and state which system of law will govern the insurance contract in express terms from the outset. In the event of a conflict of laws, it is possible that both South African and Chinese law will be engaged no matter whether the claim is brought before the Chinese courts or South African courts. It is useful to bear these key differences in mind and map out at any early stage in the case a strategy to reflect the intricacies of the respective legal systems concerned.

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