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Conditions of Subrogation

Subrogation is the legal doctrine of substituting one creditor for another.  For example, when an insurance company pays the insured amount to the insured, the company is subrogated to the cause of action of the insured against the one who is responsible for the damage for which the insurance company has made payment.  The right of subrogation arises once the subrogee makes payment to its insured[i].  Subrogation is used as a method whereby one who has involuntarily paid a debt or claim of another succeeds to the rights of the other with respect to the claim or debt so paid.  One who asserts a right of subrogation must step into the shoes of, or be substituted for, the one whose claim or debt s/he has paid.  Such a person can only enforce those rights which the latter could enforce[ii].

Subrogation does not flow from any fixed rule of law.  The principle to be derived from the doctrine of subrogation is that it is a product of equity.  Subrogation results from the natural justice of placing the burden where it ought to rest.  Like other equitable doctrines, subrogation depends upon the facts and circumstances of each particular case.  Moreover, it is a device adopted or invented by equity to compel the ultimate discharge of a debt or obligation the person who in good conscience ought to pay the debt[iii].

A person claiming to be equitably subrogated to the rights of a secured creditor must satisfy certain prerequisites or conditions.  The conditions are[iv]:

  • Payment must be made by the subrogee to protect his own interest;
  • The subrogee must not have acted as a volunteer;
  • The debt paid must be one for which the subrogee was not primarily liable;
  • The entire debt must have been paid; and
  • Subrogation must not work any injustice to the rights of others.

The purpose of equitable subrogation is to place the burden for a loss on the party ultimately liable or responsible for debt.  The burden must be on the person who should have discharged the debt.  Moreover, subrogation relieves entirely the insurer or surety who indemnified the loss and who is not primarily liable for the debt[v].

Subrogation is allowed only in favor of parties who pay the debt of another.  There can be no right of subrogation when one pays a debt which s/he is obligated to pay[vi].  A volunteer, stranger, or intermeddler is one who thrusts himself into a situation on his own initiative.  The doctrine of subrogation is not applied for the mere stranger or volunteer who has paid the debt of another[vii].  The volunteer making payment has no right or interest of his/her own to protect.  A volunteer cannot invoke the aid of subrogation, for such a person cannot establish equity.  A volunteer makes payment upon request or as a surety, or under some compulsion made necessary by the adequate protection of his own right.  Payment by a volunteer operates as an absolute discharge of the debt.  Additionally, a person discharging an incumbrance upon property in which s/he has no interest in having relieved is not subrogated to the rights of the holder of the incumbrance.  Moreover, loaning of money to discharge a lien does not subrogate the lender to the rights of the lien holder[viii].

There are three distinct kinds of subrogation[ix]:

  • Legal;
  • Statutory; and
  • Conventional.

Legal subrogation arises by operation of law and applies when one person is subrogated to the certain rights of another.  Through legal subrogation, one person is substituted in the place of the other and succeeds to the rights of the other person. Statutory subrogation is a right that exists only against a wrongdoer.  Conventional subrogation arises on the contractual obligations of the parties.  The contract can be express or implied.  The focus of conventional subrogation is the agreement of the parties.

To entitle a party to subrogation, s/he must pay a debt for which another is primarily responsible.  A subrogee stands in the shoes of a subrogor only to the extent subrogee has made payments.  A surety liable only for part of the debt does not become subrogated to collateral.  Such a surety cannot seek remedies available to the creditor until s/he pays the whole debt.  It is not necessary that the debt itself is satisfied.  Satisfaction can be through the other modes also[x].

[i] Commercial Union Ins. Co. v. Minnesota Sch. Bd. Ass’n, 600 N.W.2d 475 (Minn. Ct. App. 1999)

[ii] Corley v. Wichita Elec. Co., 163 F.R.D. 12, 13 (D. Kan. 1995)

[iii] Home Owners’ Loan Corp. v. Parker, 181 Okla. 234, 235 (Okla. 1937)

[iv] Morgan Creek Residential v. Kemp, 153 Cal. App. 4th 675, 690 (Cal. App. 3d Dist. 2007)

[v] Morgan Creek Residential v. Kemp, 153 Cal. App. 4th 675, 695 (Cal. App. 3d Dist. 2007)

[vi] Bank of Marlinton v. McLaughlin, 123 W. Va. 608 (W. Va. 1941)

[vii] BMW Fin. Servs., NA, LLC v. Bill Heard Enters. (In re Bill Heard Enters.), 423 B.R. 771, 783 (Bankr. N.D. Ala. 2010)

[viii] Campbell v. Foster Home Ass’n, 163 Pa. 609 (Pa. 1894)

[ix] Johnson v. Progressive Ins. Co., 1999 Ohio App. LEXIS 6258 (Ohio Ct. App., Lake County Dec. 23, 1999)

[x] National Surety Corp. v. Cherokee County Bank, 57 F. Supp. 370, 372 (D. Ala. 1944)

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