Understanding Subrogation and Arbitration Clauses
Subrogation is a fundamental principle allowing insurers to recover the amounts paid out in claims from responsible third parties. By stepping into the shoes of their insured, insurers assume all legal rights and remedies available to the insured party against others responsible for the loss.
Arbitration clauses, on the other hand, mandate that disputes arising from contracts be resolved through arbitration rather than through traditional court litigation. These clauses are increasingly prevalent in commercial agreements, particularly in areas like construction, shipping, energy, and international trade, significantly altering the dispute resolution landscape.
Subrogation allows insurers to assume the legal rights of the insured after compensating them for a loss, thereby pursuing recovery from the responsible third party. Arbitration clauses require disputes arising under a contract to be resolved through arbitration instead of court litigation. Crucially, arbitration agreements typically bind only the parties who have expressly agreed to arbitrate, not third parties.
Jurisdictional Impact on Insurer Subrogation: Arbitration Clauses and Non-Signatory Insurers
A critical question arises when insurers pursue subrogation claims: Are insurers bound by arbitration clauses in contracts signed by their insured, or do they retain the right to litigate?
Insurers typically do not sign contracts between their insured and third parties. When those contracts include arbitration clauses, courts face a dilemma: Should insurers be compelled to arbitrate, or can they bypass arbitration in favour of litigation?
Case Law: Key Judgments Across Jurisdictions
Courts worldwide continue to grapple with whether insurers must arbitrate subrogation claims. Overall, across many jurisdictions, the principle is consistent:
A subrogated insurer is bound by the same contractual obligations — including arbitration clauses — as the insured. This means that third parties can often enforce arbitration agreements against subrogated insurers.
The English Law Position
English courts have long recognized the binding nature of arbitration clauses on subrogated insurers. In West Tankers Inc v Ras Riunione Adriatica di Sicurta SpA [2005], the Commercial Court found that insurers who had paid out on a marine insurance policy and sought recovery from a third party charterer were bound by the arbitration agreement in the original charterparty. The reasoning was straightforward: the insurer’s rights were derivative. They “stood in the shoes” of the insured, and could not cherry-pick which parts of the contract to accept or avoid. The House of Lords upheld the same reasoning, affirming that Justice Colman judgment which "decided that both in English and Italian law the right to the delictual claim which had been transferred to the insurers by subrogation was subject to the arbitration clause in the charterparty."
In a case heard by the California District Court, the insurer attempted to litigate the claim against the third party i.e. the insured's contracting party. Nationwide Agribusiness Ins. Co. v. Bühler Barth Gmbh. Nationwide claimed that the United States Federal Arbitration Act ("FAA") only mandates arbitration for parties who were signatories to an arbitration agreement. Because Nationwide was "not a party to and had no prior knowledge of[] any arbitration clause," Nationwide argues it has not elected to arbitrate this case and cannot be required to do so. Id. at 2-3. Nationwide contends that "it goes without saying that a contract cannot bind a nonparty." The judge vehmently rejected this argument., calling it "simply untrue" and point out thatthat Nationwide is not an unassociated third party but a subrogated insurer.
In 2022, Brazil’s Superior Court of Justice (Superior Tribunal de Justiça – STJ) addressed this issue in *REsp 1.938.867/SP*. A construction company’s contract with an insured party included an arbitration clause. After paying a claim, the insurer sought subrogation against the company in court. The STJ ruled that the insurer was bound by the arbitration clause, as subrogation transfers not only rights but also procedural obligations. The court emphasized that insurers “cannot enjoy the benefits of the contract while evading its burdens.” This aligns Brazil with jurisdictions like France and Germany, reinforcing the global trend of holding insurers to arbitration clauses in insureds’ contracts.
Similarly, French courts have upheld the enforceability of arbitration agreements in subrogation cases — particularly in maritime disputes involving bills of lading. German law, while less developed on this front, recognizes the theoretical basis for applying arbitration agreements to insurers acting through subrogation, especially under Section 86 of the German Insurance Contract Act.
Successful Arbitration Between Insurers and Third Parties
Arbitral Tribunals: A Consistent Approach
Although many arbitration awards remain confidential, reported cases and institutional commentaries (e.g. ICC, LCIA) confirm a consistent approach: tribunals routinely accept jurisdiction over disputes brought by or against subrogated insurers, even where the insurer is not a signatory. The key factor remains whether the insurer is exercising rights strictly under the insured’s contract.
There are cases where enforcement of awards has been challenged on the grounds that arbitration clause was not enforceable between the insurer and the
M/T Prestige Litigation: In this case, the English Court of Appeal held that non-signatory third parties, such as France and Spain, who were granted rights under Spanish law to claim against an insurer, were bound by the arbitration agreement in the insurance contract. The court emphasized that the rights conferred were subject to the terms of the contract, including the arbitration clause.
Practical Takeaways
For insurers, the message is clear: pursuing a subrogated claim based on a contract may also require accepting its dispute resolution framework, including arbitration. For third parties, arbitration clauses are not merely shields — they can be used offensively to require arbitration, even where the counterparty is a non-signatory insurer. Drafting contracts with this in mind is increasingly essential, particularly in cross-border, high-value commercial arrangements.
It is established law that where a non-contractual party i.e. an insurer acquires rights under a contract between two other parties, as in the case of contracts of insurance by way of subrogation. Where the contract contains an arbitration agreement, the non-contractual party can only pursue a claim in arbitration to the exclusion of other forums.
To avoid pitfalls, insurers should understand the practical implications:
- For Insurers: When pursuing subrogated claims, insurers should anticipate potential arbitration obligations inherited from the insured's contracts.
- For Third Parties: Entities facing claims from subrogated insurers can often compel arbitration, provided the original contract with the insured contained an arbitration clause.
- For Contract Drafters: Clearly articulating arbitration clauses and considering their applicability to successors and assigns can preempt jurisdictional disputes.
Final Thought
Arbitration agreements travel with the rights they govern. Where an insurer’s rights are derivative of the insured’s, those rights — and the arbitration obligations that come with them — can be enforced by and against third parties. As international arbitration continues to expand into insurance recovery disputes, these principles will only grow in importance.
In conclusion, while third parties may raise jurisdictional objections against subrogated insurers in arbitration proceedings, prevailing legal principles and case law across multiple jurisdictions support the enforceability of arbitration clauses in such contexts.
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