Subrogation – the Le Bonheur case

In our previous article, we discussed Rand Mutual v The Road Accident Fund 2008, which is still sending ripples across the judicial system. This segment will introduce us to one of these ripples: the recent Le Bonheur case.

As indicated in our previous article, the issue centres on the legal doctrine of subrogation. For example: Assume drivers A and B each own motor vehicles. Driver A negligently collides with Driver B, causing damage of R250,000 to each vehicle. Both drivers are insured through their respective insurers: Insurer X covers A, and Insurer Y covers B.

What happens next? Both A and B contact their insurance brokers, complete claim forms, and submit them to their insurers. Both vehicles are repaired and life continues. Insurance provides an efficient solution to what would otherwise be a difficult problem of drivers suing each other directly.

However, a different problem then arises. At year-end, both insurers will increase the drivers’ premiums, and both drivers will lose their no-claim bonuses. These premium increases could last several years. Driver B, who is “innocent”, may be unhappy with this outcome.

When Driver B’s insurer examines the claim form and concludes that Driver A caused the accident, what happens next? As we indicated previously, insurers developed a solution to this problem approximately 400 years ago, which the UK courts accepted. This solution is called subrogation. Under this doctrine, when an insurer indemnifies the insured and determines that another party (in this case, A) is responsible for the accident, the insurer acquires the right to sue that third party. Crucially, however, the insurer does so in the name of the insured – standing, so to speak, in the insured’s shoes.

In our example, Insurer Y will appoint an attorney who sends a letter of demand to Driver A – but in the name of Driver B. The letter doesn’t bear the insurer’s name, nor does it indicate that an insurer is involved. The documentation appears to come directly from B. When Driver A receives the letter, he forwards it via his broker to Insurer X. 

Most likely, Insurers X and Y will discuss the matter and settle it between themselves. If they agree that A was responsible, Insurer X will accept liability, and A’s no-claim bonus can be restored. Until recently, insurers handled this routinely under the knock-for-knock agreement, which was abandoned several years ago.

Legal process

If the matter cannot be settled, it proceeds to court. The UK method of handling insurance claims was first accepted in South Africa in the Free State in 1918 in Ackerman v Loubser. In this case, the third party, realising that the insured person’s damage had already been paid by the insurer, argued that he could not be liable for damages since the insured had suffered no loss once the damage was repaired.

The court ruled that the fact that an insurer had paid for the damages was legally irrelevant to the case and therefore could not be raised as a defence. Some find this ruling problematic, arguing that when a person is sued, the identity of the true plaintiff should be revealed. However, since this fact is irrelevant to the legal basis of the case, it cannot be included in court documents – only fundamentally relevant facts may be pleaded. 

Changes are taking place

This system has operated without significant problems for approximately 400 years. Now, however, things are changing. As we saw in 2008, the Supreme Court of Appeal ruled – without a compelling reason – that insurers could, if they chose, sue in their own names. In the nearly 20 years since this ruling, insurers do not appear to have accepted this invitation. Should an insurer attempt to do so, it would immediately encounter several procedural problems that lawyers would prefer to avoid.

It is procedurally complex for insurers to sue in their own names. While we need not discuss these issues in detail, it’s worth noting that laws divide into two categories: (1) substantive law and (2) adjectival (or procedural) law. When the public thinks of laws, it typically considers substantive laws – such as prohibitions against murder or theft. How these violations are processed falls under adjectival law.

Historically, the public need not concern itself with adjectival law, as attorneys, advocates, magistrates, and judges handle these matters. They are well-versed in procedural law, and historically, it has remained in safe, experienced hands. Judges are typically appointed from the ranks of senior advocates.

Several key points about adjectival law bear noting. First, rights secured by substantive law cannot be lost due to procedural law. Second, if someone lacks a right under substantive law, that right cannot be created through procedural law. Third, adjectival law falls under the judge’s control – court procedures can be adapted to ensure that no rights are lost or gained inappropriately in any specific case.

Regarding subrogation, after 400 years of practice, we can say that an insurer – having paid a claim and indemnified the insured – acquires a substantive right to sue the third party who may have caused the original loss. Under procedural law, the insurer exercises this right in the name of the insured, standing in the insured’s shoes.

With this background established, what happened in the Le Bonheur case?

The Le Bonheur case

Initially, everything proceeded normally. The insured, Le Bonheur, had suffered a fire that caused approximately R13 million in damages. The insurer, Hollard, paid the claim, investigated it, and concluded that a third party was responsible for the damages. 

Following standard procedure, Hollard sent a letter of demand to the third party in Le Bonheur’s name. When no agreement could be reached, Hollard decided to pursue the matter in court. 

Hollard possessed a substantive right to sue the third party, with the procedure governed by adjectival law as set out in the Uniform Rules of Court. Hollard instructed attorneys – in this case, Clyde & Co – who in turn instructed an advocate (a senior counsel assisted by junior counsel). Hollard set out its case in the Particulars of Claim, which must contain the relevant factual allegations supporting the case.

Courts have consistently ruled that the fact that an insurer is suing in the name of the insured is irrelevant to the proceedings. Therefore, Hollard could not include this information in its Particulars of Claim. The third party responded with its Plea, after which Hollard would set out its legal arguments in its Heads of Argument. With pleadings closed, a court date was assigned, a judge allocated, and court days reserved. The case was ready to proceed – all routine matters.

The arrival of a third legal team

Days before the appointed court date, matters became hectic. The third party served a notice of dismissal, alleging that circumstances existed that warranted dismissing the case entirely. Within 24 hours, over 200 pages of documents were passed between the two legal teams. On the appointed day, both legal teams appeared in court, no doubt somewhat exhausted but ready to proceed.

To everyone’s surprise, a third team appeared. The first team represented Hollard: attorneys from Clyde & Co and their advocates. The second team represented the third party: their attorneys and advocates. The third team submitted a notice of substitution to the court, arguing that they were there to replace the Hollard team and would represent Le Bonheur directly.

In the 400-year history of subrogation cases before the courts, this appears unprecedented. It is extraordinary. The Hollard team requested a postponement to properly address this unexpected development, but the judge declined and allowed the case to proceed.

The outcome of this matter will be discussed in our next article.