Australia: Health insurer’s right of subrogation to recover payments against its insured

Introduction

The recent decision of the Supreme Court of Victoria in Bupa Australia Pty Ltd v Shaw and Walker (as joint executors of the estate of Norman Shaw) [2013] VSC 507, provides a timely reminder to insureds of the perils of settling claims in a manner which prejudices an insurer's rights of subrogation.

The court considered whether a health insurer could recover against the estate of its deceased insured, hospital and other medical expenses paid by it that were later the subject of personal injury litigation.

Background

In September 2005, Mr Shaw underwent surgery to remove a tumour of his oesophagus. His health insurer, Bupa Australia Pty Ltd (Bupa), paid hospital and other expenses, which ultimately amounted to nearly $340,000.

In September 2008, Mr Shaw commenced proceedings for damages for personal injuries against his surgeon, for alleged negligence in the treatment provided, where he sought, amongst other heads of damage, past and future care and medical expenses.

Mr Shaw died on 2 May 2010 but his estate maintained the claim against the surgeon. That claim was settled for $400,000 plus legal costs in December 2011, although Bupa was not notified of the settlement. The settlement, reflected in a deed of release, did not provide for any repayment to Bupa of the benefits paid by it.

Bupa was first made aware of Mr Shaw's claim against the surgeon in March 2010 when it received correspondence from Mr Shaw's solicitors requesting details of benefits paid to assist in quantifying the claim. Bupa informed Mr Shaw's solicitors of its interest in the claim and of recovery of the benefits it had paid to Mr Shaw. Unaware of the settlement, on 16 February 2012, Bupa sought an update as to the progress of Mr Shaw's claim. The estate's solicitors advised in reply that the negligence proceedings had settled and "as part of the terms of settlement, the insurer of the surgeon had agreed to indemnify the estate against repayment to Bupa".

Bupa instituted proceedings against Mr Shaw's estate seeking equitable compensation for the payments previously made to Mr Shaw.

The court was required to determine 3 issues:

• Did Bupa have a right of subrogation to the estate's indemnity claim against the surgeon's insurers in respect of its payments to Mr Shaw?
• If yes to question 1, was Bupa's right of subrogation prejudiced?
• If yes to question 1, was Bupa prevented from exercising its right of subrogation as a consequence of its own conduct?

Subrogation

There was no dispute that the policy was an indemnity policy which ordinarily gives an insurer rights of subrogation.²⁶ However, the estate's solicitors argued that the policy terms restricted Bupa's common law rights of subrogation, or alternatively, the payments by Bupa had been made in error so that there was no right of subrogation.

The estate submitted that the Fund Rules were effectively a code inconsistent with a right of subrogation. Detailed submissions were advanced in support of that proposition, for example, the rules provided that the insured was required to give an undertaking to repay where there was a claim for compensation for damages. Put another way, a strict construction of the rules could be that the obligation to indemnify was forestalled where a policy holder may have been "entitled to payment by way of compensation or damages".

The court held that construing the rules in a manner to deny indemnity until a claim for compensation against a third party was resolved would be impractical. A purposive and common sense construction of the policy was required, reflecting the fact insureds might not contemplate making a claim for compensation against a third party until fully recovered and well after claiming on their policy.

Even if the benefits paid to Mr Shaw were not strictly required, Bupa retained its rights of subrogation because the payments were made in good faith. The court applied King v Victoria Insurance Company Ltd²⁷ as authority for the proposition that where an insurer accepts a claim it is not strictly obliged to pay, the insurer nevertheless becomes entitled to rely on the doctrine of subrogation where those payments are made in good faith. It was accepted that Bupa intended to indemnify Mr Shaw under the policy in respect of costs incurred as a result of surgery and subsequent medical treatment. It was not unreasonable for Bupa to accede to the claims for benefits under the policy.

Notwithstanding the Fund Rules could have allowed Bupa to seek repayment once it was aware of the negligence proceedings against the surgeon, payments made after commencement of the proceedings were not to be treated differently from payments made in the absence of proceedings. Bupa was therefore entitled to exercise its rights of subrogation in respect of its payments.

The deed of release

It was clear under the deed of release that the estate released all rights of action that arose out of Mr Shaw's medical treatment by the surgeon, and extinguished Bupa's rights to stand in the shoes of Mr Shaw to recover payments it had made.

The deed also provided that it could be pleaded as a defence to further proceedings brought by "any person claiming on behalf or through the Plaintiff or the Estate of the Deceased in relation to the matters alleged in the court action".

It was therefore clear the deed prejudiced Bupa's rights of subrogation to stand in the shoes of Mr Shaw and attempt recovery against the surgeon.

The conduct of the insurer

The estate submitted that Bupa had through its conduct waived its rights of subrogation by taking no steps to intervene and take over conduct of the negligence proceedings. The estate also argued that Bupa had every opportunity to press its right of recovery and did not do so.

The court was persuaded by the fact that Bupa sought to be kept informed and expected repayment from the estate of benefits recovered from the surgeon. It was also relevant that Bupa did not have any forewarning of the pending mediation nor was notified of the outcome until months after settlement. It was only with the benefit of hindsight that it could be said that Bupa should have commenced proceedings to seek an injunction to prevent the settlement.

The court rejected the contention that, by its own conduct or inaction, Bupa was barred from exercising its rights of subrogation. The historical correspondence between Bupa and the solicitors acting for Mr Shaw (and later his estate) did not demonstrate any waiver and in fact Bupa had made it clear it expected the estate to account to it in respect of amounts recovered from the surgeon. The court also rejected the suggestion that Bupa should have taken over carriage of Mr Shaw's claim in circumstances where only part of the damages sought against the surgeon related to payments made by Bupa.

Conclusion

The decision is a timely reminder to insureds to be mindful of their insurer's rights of subrogation in the prosecution and settlement of litigation.

This decision also demonstrates that an insurer who makes payments in good faith under a policy of insurance, even where the policy may not strictly respond, retains a right of subrogation. The court reached that position by relying on British and Canadian authorities.

Insurers who are aware of proceedings brought by insureds should seek repayment as soon as practicable and in communications with insureds seek regular updates about the status of those proceedings.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.