MARINE INSURERS CAN LOSE SUBROGATION RIGHTS

On Oct. 24, 1980, the American merchant vessel “SS Poet” sailed from Philadelphia bound for Egypt with a cargo of corn carried under a voyage charter party contract. Severe weather prevailed over the intended route, and the vessel was lost at sea. No trace of the ship, crew or cargo ever was found.

Admiralty actions then were commenced to resolve numerous claims associated with the casualty. On Jan. 14, in Gibbs v. Hawaiian (83 Civ. 2751), the United States Southern District Court of New York laid to rest the final claim arising from the fateful voyage. This action concerned the subrogation rights of marine insurance underwriters who paid a vessel owner $1.09 million for the loss of freight that was to be earned for carrying the cargo.

Under subrogation, an insurer who has paid a claim acquires all rights and remedies possessed by the insured and can pursue recovery from third parties responsible for the loss. However, defenses against the insured also are valid against the insurer.

When an insured releases a third party from liability, the insurer’s subrogation right may be destroyed. If the release defeats the insurer’s right to subrogation, the insured must return money paid on the policy. Many marine insurers have subrogation recovery departments to oversee these matters.

In the Gibbs case, the charter party provided for the payment of freight by charters to the shipowner upon the vessel’s arrival at the discharge port. Arrival was not required, however, if the shipowner could prove to the satisfaction of charterers that the non-arrival was due to force majeure, without its fault.

Underwriters paid the shipowner’s freight claim. The shipowner than attempted to recover freight from the charterers on behalf of underwriters. The charterers refused to pay because they were not convinced that the vessel’s non-arrival was without the fault of the shipowner.

Meanwhile, the charterers claimed against the shipowner for the cargo loss. This claim was settled by the shipowner, making payment to the charterers and delivering a release for claims the shipowner might have against the charterers. The release was issued without the approval or consent of underwriters. Later the vessel owner executed a subrogation receipt that the underwriters attempted to use to compel charterers to arbitrate the freight claim.

The underwriters’ petition to the court to compel arbitration was denied on the ground that their claim was extinguished by the release. The underwriters then commenced action against the shipowner to recover its insurance payment. The underwriters claimed that the release destroyed their subrogation rights. The district court agreed and held that the shipowner breached its duty to preserve the underwriters’ subrogation rights against the charters.

The shipowner contended before the Second Circuit Court of Appeals that teh release caused no prejudice, because the charterers were not satisfied that the non-arrival was without fault of the shipowner. The Second Circuit’s decision (1993 A.M.C. 43) remanded the case to the district court to determine if the release prejudiced the underwriters’ subrogation rights.

The district court found that the underwriterss could not dispute that the charterers were not satisfied that the loss occurred without the fault of the shipowner. Consequently, the shipowner had no freight claim against the charterers. It therefore was impossible for the insurer to have been prejudiced by the release. The underwriters’ action was dismissed.

While the circumstances of the Gibbs case are unique, it should serve to remind marine insurers and their insureds that there can be no right to subrogation when the insured has no valid claim against third parties for its loss.


[Back]