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Subrogation: Can An Insurer Seek Punitive Damages Through The Use Of A Loan Receipt?

Volume 20, No. 115 January 2008

Brian Moore
bmoore@deflaw.com

A “loan receipt” between an insured and an insurer creates a legal fiction whereby an insurer “loans” the insured money in response to a claim to establish subrogation rights.  See American Chain & Cable Co., Inc. v. Brunson, 157 Ga. App. 833, 278 S.E.2d 719 (1981).  The basis for the “loan receipt” is the insured’s claim under an existing policy with the insurer which provides coverage for the claim.  Many insurers use “loan receipts” because they permit an insurer to file a subrogation suit against a third party in the name of the insured.  Thus, the loan receipt is a valid method of keeping the insurer from being a named party to the litigation, removing any potential prejudice that may result.  United States Fire Ins. Co. v. Farris, 146 Ga. App. 177, 178, 245 S.E.2d 868 (1978); see also Luckenbach v. McCahan Sugar Ref. Co., 248 U.S. 139, 146 (1918)(United States Supreme Court approved the use of “loan receipts” as a means of obtaining prompt settlement for a loss, “which is essential to actual indemnity and demanded in the interest of commerce”).

In Georgia, as in most states, the rights to punitive damages are not assignable.  However, Georgia Courts have held that a “loan receipt” is not an assignment.  Powers v. Latime, 215 Ga. App. 245, 450 S.E.2d 295 (1994);  Chapman v. Clark, 272 Ga. App. 667, 613 S.E.2d 184 (2005).   The reasoning is that unlike an assignment, a “loan receipt” allows the insured to remain the plaintiff.  United States Fire Ins. Co., 146 Ga. App. 177, 178, 245 S.E.2d 868 (1978).  Accordingly, the argument can be made that the plaintiff should have the same rights as any other plaintiff in Georgia, which includes pursuing punitive damages.  Unfortunately, there are no decisions in Georgia that have settled this issue and the law relating to whether an insurer can pursue punitive damages through the use of a “loan receipt” remains unsettled.