Types of Subrogation

Subrogation rights can arise in three distinct ways: equitably, contractually, and statutorily. 

Types of Subrogation

Equitable Subrogation

Equitable subrogation arises as a result of the equities between the parties, and is awarded as a matter of equity, not by right. Equitable subrogation is not a matter of contract or statute and does not arise from any contractual relationship between the parties or statutory provision. Rather, it takes place as a matter of equity and arises through the legal consequences of the acts and relationships of the parties. Thus, the doctrine of equitable subrogation requires no writing or agreement in most instances. Since it is a creature of equity and depends upon the equities of the parties rather than a contract, it arises by operation of law.   

The right to equitable subrogation occurs when one party meets its obligation to make payment to a party who has suffered a loss, where the loss was caused by a third party who would have legal responsibility and, in all fairness, should have paid the party who suffered the loss. Texas courts have held the two key elements of equitable subrogation are 1) that the party on whose behalf the claimant discharged a debt was primarily liable on the debt, and 2) that the claimant paid the debt involuntarily. Equitable subrogation includes every instance in which one person, not acting voluntarily, has paid a debt for which another was primarily liable, and which in equity and good conscience should have been discharged by the latter.

Although subrogation rights may arise from the equities existing between the parties, they can also arise, or be extinguished, by statute or agreement.

Statutory Subrogation

Statutory subrogation, as its name suggests, arises by an act of the legislature that vests a right of subrogation with a party or category of parties. For example, the Texas Labor Code specifically authorizes subrogation in Texas workers’ compensation law. Statutory subrogation is governed by the terms of the statute under which the claim is made, rather than equitable principles or contractual terms. Statutory subrogation is generally more straightforward than contractual or equitable subrogation, therefore disputes involving contractual and equitable subrogation rights are substantially more common than disputes involving statutory subrogation rights.

Contractual Subrogation

Unlike equitable subrogation, contractual or conventional subrogation arises directly from an express agreement between the parties and is governed by general contract law principles. In clarifying the differences between contractual and equitable subrogation, the Texas Supreme Court has recognized that while the two concepts rest on common principles and are related, they are separate and distinct rights independent of each other. However, independent does not mean co-equal; equitable doctrines must conform to contractual agreements and statutory mandates, not the other way around. 

Where a valid contract prescribes particular remedies or imposes particular obligations, equity generally must yield unless the contract violates positive law or offends public policy. It is well established that subrogation clauses do not violate Texas public policy, and both statutory and regulatory law in Texas suggest approval.

Texas courts have traditionally been particularly hospitable to the right of subrogation, especially express subrogation agreements, and have been at the forefront of upholding subrogation rights. Texas courts are not alone in holding that contractual subrogation clauses express the parties' intent that reimbursement should be controlled by agreed contract terms rather than external rules imposed by the courts. The United States Supreme Court has held that equitable defenses are not applicable when subrogation claims arose by written agreement. The Fifth Circuit adopted the same position, holding that the plain language of thepolicy in question, rather than an equitable principle, governed in a subrogation dispute. Further, the Texas Supreme Court noted that leading insurance law treatises also recognize that specific policy terms generally override equitable principles. The Court, in agreement with the above cases and secondary sources, held that contract-based subrogation rights should be governed by the parties' express agreement and not invalidated by equitable considerations that might otherwise control by default in the absence of an agreement.

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