Opinion ID: 1212872
Heading Depth: 1
Heading Rank: 10

Heading: Conventional (Contractual) Subrogation Its Characteristics

Text: At 73 Am.Jur.2d, Subrogation, § 9, Conventional Subrogation, p. 604, the encyclopedia says: Conventional subrogation, as the term implies, is founded on some understanding or agreement, express or implied, and without which there is no `convention.' Conventional subrogation can take effect only by agreement and has been said to be synonymous with assignment. It occurs where one having no interest or any relation to the matter pays the debt of another, and by agreement is entitled to the rights and securities of the creditor so paid. .. . (Emphasis supplied.) Speaking of the value of the agreement, the text goes on to say in the same section, ... the so-called agreement being of value only as showing a situation where the doctrine of subrogation should be applied in order to do justice and as evidence that the lender was not a volunteer. ... (Emphasis supplied.) It is said in § 9, at page 605 of the same text: The contract right of subrogation is somewhat broader than legal subrogation, for the right is granted irrespective of whether the payment was necessary for the protection of the person seeking subrogation. How do these concepts apply to the matter here for consideration? First we must look to see what contract provisions are available. The only one applicable is Subrogation Paragraph 2, supra, which we here requote for easy reference: In the event of any payment under this policy the Company shall be subrogated to all the insured's right of recovery therefor against any person or organization... . The question is: Did the company make a payment under the policy within the contemplation of subrogation law or not? We have seen that the theory of conventional subrogation is utilized for various purposes  one of which is to determine that the party who pays the debt is not a volunteer. 73 Am.Jur.2d, supra, § 8, p. 604. Unless saved by the contract (i.e., the Paragraph 2 Subrogation clause), there is no question but that the insurance company was a mere volunteer since it was neither compelled to pay the claim nor did it have an interest which it was required to protect through payment. Where is the language, then, that gives the company subrogation rights as a stranger to the transaction? There is no such contractual authority. A vital difference between legal and conventional subrogation is that in the former there must exist compulsion or the reasonable belief that there is an interest to protect in order to claim right to subrogation, while in the latter there need be only an assignment of interest and the assignee may exercise his right of subrogation under the assignment even though the elements of compulsion or protectable interest are not present. But there must, in fact, be such an assignment in existence and the assignor (insured) must be possessed of such an assignable interest as will confer rights of subrogation upon the assignee (insurance company). In other words, the assignable right of subrogation may not be so restricted by its own terms as to prevent the assignee's exercise of it under the applicable facts and circumstances. To say it still another way  in conventional subrogation  the effectiveness of the assignment of subrogation rights is dependent upon its own terms. In this case, the assignor-insured can effectively assign its subrogation rights only if it can be concluded that payment has been made under the policy. As has been set out above  when a company pays a loss for which it is not liable [it] thereby becomes a mere volunteer, and is not entitled to subrogation, in the absence of an agreement therefor. Couch, supra, § 61:52. and at § 61:54, the author says: Where the harm for which the insurer has indemnified the insured is not covered by the policy, the making of such payment to the insured is deemed `voluntary,' and no right of subrogation arises.... Therefore, the insurance company conferred the benefits upon the insured as a stranger without the required assignment or assignable interest necessary in conventional subrogation. The insurer, therefore, remains a mere volunteer without the right of subrogation. We conclude by holding that, under the doctrine of legal subrogation the insurance company has no cause of action because it did not pay the insured under compulsion and did not, as a matter of law, have a legally protectable interest when payment was made. We further hold that the law of conventional subrogation will not rescue the company from becoming a mere volunteer because its subrogation assignment was limited by the condition that payment must have been made under the policy. This did not occur in view of the fact that insurance companies will be regarded as mere volunteers where payment has been made for a harm not covered. Affirmed.