Insurance is intended to compensate (indemnify) the insured in the event of loss, but not to be enriched by or used as a commercial venture. To avoid such misuse by the insured and to protect the indemnity principle, English insurance law codified indemnity principle and its constituents (e.g., subrogation, double and under insurance) in the English Marine insurance Act 1906 (MIA 1906). Thus, the insured should not recover surplus nor any additional gains exceeding indemnity. For these reasons, insurance law also adopted the ‘unjust enrichment’ principle from equity and the ‘injurious behaviour’ rule from contract law, to further protect the indemnity principle. However, despite that protection, including the granting of limitations, modifications and exceptions to indemnity and subrogation, recovery of a surplus or excess indemnity (hereinafter ‘windfall’) by a fully compensated insured is persistent in common law courts. This raises related issues. Firstly, judicial failure to define windfall and its resort to use of alternative insurance concepts such as ‘profit’, ‘excess’ and ‘surplus’. Secondly, continued judicial permission of windfall retention by the insured unjustly enriches the insured, thereby contravening and undermining indemnity, the very essence of indemnity in insurance. This has not only created inconsistency of approach to judicial apportionment of windfall but also a contradiction with protection of indemnity. Although this contradiction is common to most insurance categories, it is paramount in marine and export credit guarantee insurance policies-hence the choice of title to this article. This English insurance law and practice was spread to Anglo-American and other common law jurisdictions.
This article re-examines this inconsistency and contradiction. It argues that: (a) failing to define windfall and instead using substitute terms for it is inappropriate and confusing; (b) permitting the insured’s retention of windfall contravenes the indemnity principle and subrogation doctrine, thereby undermining the very bedrock of insurance; and (c) the practice also erodes the continued justifications for the indemnity principle and subrogation doctrine respectively. In the process of its analysis, this article: (a) traces the relation between windfall, subrogation and indemnity; (b) defines and distinguishes windfall from other terms; (c) contextualises the continued illogicality of the insured’s entitlement thereto; and (d) analyses the interface between the various insurance doctrines, principles and rules intended to solve the persistent problem of windfall retention by a fully indemnified insured. Although windfall is common to all insurance categories, this article focuses on marine and export credit guarantee insurance case law, as they best demonstrate the nature and extent of the problem. While most of the decisions cited are from English law, reference is made to cases and examples from other leading common law jurisdictions. Against this background, this article questions the rationale for the continued justification of subrogation, and its apparent application to combat the persistent contradiction in windfall cases.