In a recent 2025 judgment, the Council of State (hereinafter, the “CE”) decided an appeal in the context of a contractual dispute.

The case arose from the performance of an inter-administrative agreement, under which a municipality neither invested nor returned the full amount of funds provided by a public entity for a project. This contractual relationship was covered by a performance bond, with the contributing entity as the insured party. Upon the breach, the insured declared the occurrence of the loss and requested payment of the indemnity from the insurer under the performance coverage.

The insurer paid the indemnity and subsequently assigned to a third party its recovery rights against the defaulting municipality. This third party brought an action against the municipality, invoking the subrogation action provided for in Article 1096 of the Colombian Commercial Code, and obtained a judgment against the municipality at first instance.

The municipality appealed, and the CE reversed the decision, holding that the necessary requirements for the exercise of subrogation had not been established. In particular, the CE noted:

1. Nature of subrogation in insurance
   
   Subrogation in an insurance contract allows the insurer, once the indemnity has been paid, to assume the same legal position of the insured against the party responsible for the loss, acquiring the insured’s rights, actions, and limitations. In this case, the assignee of the insurer sought to exercise the same action that would have corresponded to the insured against the municipality.
    
2. Requirements for admissibility
   
   For subrogation to be admissible, the following requirements must be met: (i) the existence of a valid property insurance contract at the time of the loss; (ii) effective payment of the indemnity; (iii) a loss covered under the insurance; (iv) the loss attributable to a liable third party; and (v) the absence of legal restrictions on subrogation.
   
   The CE held that it had not been proven that the loss was covered by the insurance, nor that all the requirements were satisfied; therefore, the action was inadmissible.
    
3. Proper procedural way
   
   The action exercised by the insurer (or its assignee) is identical to that which the insured could have pursued against the party responsible for the loss, both in terms of the procedural route and its legal grounds.
    
4. Burden of proof
   
   The CE reiterated that the party bringing the subrogation action must prove the existence and coverage of the insurance, the payment of the indemnity, and the causal chain with the loss.
   
   Since it was not established that the loss was covered under the insurance, the court declared a lack of standing to sue, thereby preventing recovery against the municipality.