Profits in Subrogation: An Insurer\u27s Claim to Be More Than Indemnified

“[I]f the assured is not entitled to retain an excess against the insurer, and the insurer … is not entitle to receive the excess from the assured, what happens to the excess?” This question, posed by Lord Justice Megaw in L. Lucas Ltd. v. Export Credits Guarantee Department, is bred by the juxtaposition of two subrogation rules. The right to subrogation, being in nature like restitution, entitles the holder of the right only to reimbursement and, under a contract of insurance, “the assured … shall be fully indemnified, but shall never be more than fully indemnified.” The confusion that distribution of windfall profits in subrogation has brought to American and English courts derives from both the difficulty of the question and its rarity. Because insurance agreements are contracts of indemnity, the issue of which party is entitled to any possible excess once both the insurer and the insured have been indemnified has seldom been litigated. This comment will evaluate a subrogee’s right to recover more than it paid to the subrogor. The purpose of subrogation and insurance will be outlined, focusing on those few recent cases in England and the United States dealing with the profit-in-subrogation issue. Next, this Comment will examine the circumstances under which a windfall might accrue to the insurer and the possible justifications and consequences of such a windfall award. A flexible approach for courts confronted with allocating a windfall in an equitable subrogation suit will then be proposed. Finally the implications of choosing a flexible approach to windfalls in subrogation will be contrasted with the view that the windfall be awarded strictly to either the insured or the insurer