THE CHANGING CONTOURS OF THE DOCTRINE: FROM SIMPSON TO PRESTON

Simpson v. Thomson

The Doctrine of Subrogation was a doctrine which was, historically, developed in the
domain of guarantee contracts and predominantly applied in insurance contracts and cases of
unjust enrichment.1The Doctrine was limited to rights of action in torts and contract.2In the
seminal case of Simpson v. Thomson3, Lord Cairns understood the doctrine in the following
terms—

“On payment the insurers are entitled to enforce all the remedies, whether in
contract or in tort, which the insured has against third parties, whereby the insured
can compel such parties to make good the loss insured against.”

In Simpson, the respondents were underwriters who paid Burrell for the loss of his ship as total
loss after it was abandoned. The ship collided with another ship, the Fitzmaurice, due to the
negligence of the master of Fitzmaurice. However, interestingly Burrell owned both the ships.
The question in this case was whether the underwriters had a claim from Burrell due to him
owning the Fitzmaurice and the negligence of its master. The Court of Sessions found that a
“fresh right” was created in the underwriter’s favour and the underwriter would be entitled to
payment from Burrell. However, the House of Lords, on appeal, rejected this formulation and
held that the underwriters could only claim subrogation.

Since, in that case Burrell could not have claimed from himself, there was no right or action to
which Burrell could be subrogated.4The Court distinguished subrogation as a “transfer of a right
of action”5from the Court of Session’s “fresh right created”. The Court, clearly and, in our
opinion, rightly distinguished subrogation from equity. Authors have vehemently criticized the
judgment for being unjust for not applying equity, while maintaining the distinction between
subrogation and equity.6

1
Mitchell C, 'Subrogation, Unjust Enrichment and Remedial Flexibility.' (1998) 6 RLR 144.
2
Chitty J., quoted in Castellain v. Preston.
3
Simpson v. Thomson, (1877) 3 App.Cas. 279.
4
ibid.
5
Ibid at 293.
6
Philip S. James, ‘The Fallacies of Simpson v. Thomson’, 34 The Modern Law Review 150 (1971).
Castellain v. Preston: Doctrine of Subrogation to enforce the fundamental rule

A notable divergence from Simpson was seen in the Queen’s Bench judgment in Castellain. As
noted above, Simpson was criticized for not meting justice to the underwriters in the case. In a
case where subrogation, as formulated by Simpson, does not apply, it was felt that an equitable
relief must be granted. The Courts were competent to do so. However, Castellain took a very
different approach.

In Castellain, the Chairman of Liverpool and London and Globe Insurance Company (Insurer)
issued a policy against the insured’s building. The insured entered into a separate sale agreement
with the purchasers after issuing the policy. Later, a fire broke out in the insured building. The
insurer paid a sum of 330 Pounds pursuant to the policy. The purchase agreement was
completed after the settlement, without taking the loss due to fire into account. It was claimed
by the insurer that, due to the purchase agreement the insured incurred profit, which was against
the principle of an insurance contract. As noted above, Chitty J., in the first instance, denied the
insurer’s claim by relying on the formulation of subrogation in Simpson.

On Appeal, however, this position was reversed. Brett L.J.’s pithy exposition of the law in the
judgment is quite accurate in the formative part where he lays down two fundamental rules of
insurance law7—

1. A Contract of insurance in a marine or fire policy is a contract of indemnity.

2. In case of loss, against which the policy is made, the assured is entitled to full
indemnity, but never more.

It is, thus, clear from the above formulation that the court had to prevent unjust enrichment in
an insurance contract. This consideration further guided the Court to reformulate the doctrine

7
Brett L.J. captures this rule in a single proposition stating— “The very foundation, in my opinion, of every rule
which has been applied to insurance law is this, namely, that the contract of insurance contained in a marine or fire
policy is a contract of indemnity, and of indemnity only and that this contract means that the assured, in case of a
loss against which the policy has been made, shall be fully indemnified, but shall never be more than fully
indemnified.”
 of subrogation. Brett L.J. noted that that earlier the doctrine of subrogation was not applicable
to insurance contracts as underwriters were not sureties, as in contracts of guarantee or
indemnity. However, Brett L.J. noted that the doctrine of subrogation is a necessary doctrine to
enforce the fundamental rule. The question, then, was whether the doctrine was limited to
enforcement of tort and contractual remedies only.
Of course, if the doctrine as formulated in Simpson were to be followed, there was no right to be

subrogated for in Castellain. The insured would have certainly profited from the sale agreement,

and consequently breached the fundamental rule. This, in our opinion, was the guiding principle

behind Castellain. Due to this, Brett L.J. considerably extended the application of the Doctrine to

include equitable rights within it. Brett L.J.’s final formulation of the doctrine has been stated in

the preceding part of this chapter. As a result, the doctrine of subrogation is now understood as

including accrued as well as exercised rights, legal or equitable”.