Once a professional indemnity insurer has paid an indemnity to its insured, the insurer generally acquires the right to step into the insured's shoes and pursue any third party whose conduct contributed to the loss. That right is called subrogation, and it is one of the oldest doctrines in English insurance law, set out in Castellain v Preston (1883) 11 QBD 380. What subrogation looks like in practice — who runs the litigation, whose name is on the writ, and how any recovery is split — is not always well understood by insureds who have just been indemnified. This entry sets out how a subrogated recovery in a PI claim typically unfolds under English law.
The starting point, and one that surprises many insureds, is that subrogated recovery proceedings are issued in the name of the insured, not the insurer. The insurer is the beneficial owner of the cause of action, but the legal title remains with the insured firm. The standard PI policy wording captures this expressly: "the Insurer may take over and conduct in the name of the Insured any proceedings for its own benefit". The firm's letterhead is on the pleadings; the firm's directors may need to give witness statements and, if the matter reaches trial, evidence in the box. The insurer directs the litigation from behind the scenes.
How the proceeds of any recovery are divided between insurer and insured is governed by the House of Lords decision in Napier v Hunter [1993] AC 713, which confirmed that the insurer holds an equitable lien over sums recovered. The accounting order most PI policies follow — and which reflects the default position at common law where the retention sits below the indemnity — is broadly this. The insured's retention or excess is recovered first, from the top of the pot. The insurer is then reimbursed up to the amount it has paid out under the policy. Anything remaining, which would only arise where the recovery exceeded the total loss, goes back to the insured. See also Yorkshire Insurance v Nisbet Shipping [1962] 2 QB 330 on the mechanics of accounting between the parties.
Because the recovery action is nominally the insured's, and because the insured retains a real financial interest in the outcome (the retention, uninsured heads of loss, reputational exposure to being named as claimant), the insurer conducting the subrogated proceedings owes a duty of good faith to the insured in how it runs them. That duty overlaps with the insurer's fair-treatment obligations under ICOBS 8.1. The insurer cannot, for example, settle in a way that leaves the insured exposed to counterclaim, or run the case in a manner that damages the firm's ongoing commercial relationships without properly considering the insured's position.
The other side of that coin is the insured's duty to cooperate. Almost every PI wording obliges the insured to preserve documents, provide witness statements, make employees available, and — critically — not to prejudice the insurer's recovery rights. Waiver-of-subrogation clauses in the insured's client engagement terms, joint venture agreements, or sub-contractor arrangements can defeat a recovery entirely. Insureds should resist waivers at the point of contracting, not after the loss has occurred.
Subject to policy provisions and the good-faith duty above, the insurer decides whether and when to settle the subrogated claim. Insureds are entitled to be consulted but do not usually have a veto. Recoveries fail, or shrink, for predictable reasons: the third-party firm has been dissolved or is uninsured; files have been destroyed under a retention policy that pre-dated the claim; a waiver clause in a retainer or collaboration agreement bites; or the evidence needed to prove contribution has decayed with time.
A solicitors' firm has a PI claim settled by its insurer for £500,000. The policy retention is £25,000, so the insurer's net outlay is £475,000. Investigation reveals that a sub-contractor conveyancer, engaged by the firm to handle part of a residential transaction, contributed roughly 60% of the loss. Subrogated proceedings are issued in the solicitors' firm's name against the sub-contractor. Eighteen months later the matter settles for £280,000.
Applying the Napier v Hunter accounting order, the firm's £25,000 retention comes off the top and is recovered in full. The remaining £255,000 is applied to the insurer's £475,000 net outlay, giving the insurer a 53.7% recovery on its net loss. Neither party is made whole, but the insured firm's retention has been returned and the insurer's exposure has been materially reduced. Numbers are illustrative and every policy and factual matrix is different.
For foundational principles see Subrogation in PI insurance: foundational principles. For how waiver clauses in commercial contracts can defeat recovery, see Waiver of subrogation in PI contracts. Profession-specific context is available in Apex's solicitors' PI guide and accountants' PI guide.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.