Doctrine of subrogation is one of the most important ingredient and essential features of the principles of Indemnity, which, distinguish an ordinary commercial contract from an insurance contract. This is one of the additional features of contract of indemnity not found in other contracts.
A contract of insurance is a contract of indemnity. Each and every contract of indemnity had the elements of subrogation, which is based on the fundamental principle that in case of loss, the insured shall be indemnified to the extent of loss and nothing beyond the loss.
Thus, the doctrine of subrogation is an automatic, inbuilt, inherent, implied and incidental to the principles of indemnity, applicable to all property and liability insurance but not applicable to personal accident and life insurance policies, since these are not contract of indemnity. Every rule of insurance law is adapted to carry out this fundamental rule.
Property and liability insurance are based on the principle of indemnity-an insured should not be allowed to profit from his losses. If an insured could sue and collect damages for a loss and collect insurance for the same loss, then the insured would profit from the loss.
Subrogation prevents this. Subrogation in insurance is the substitution of the insurer as a claimant for a loss suffered by the insured. Thus, the right to sue for the losses sustained by the insured is transferred to the insurance company, which can seek reimbursement for the payment to the insured from the party who caused the loss.
The loss/damage to the goods covered by a policy of insurance, may be caused either due to an act for which the owner (assured) may not have a remedy against any third party (as for example when the loss is on account of an act of God) or due to a wrongful act of a third party, for which he may have a remedy against such third party (as for example where the loss is on account of negligence of the third party).
In both cases, the assured can obtain reimbursement of the loss, from the insurer. In the first case, neither the assured, nor the insurer can make any claim against any third party. But where the damage is on account of negligence of a third party, the assured will have the right to sue the wrongdoer for damages; and where the assured has obtained the value of the goods lost from the insurer in pursuance of the contract of insurance, the law of insurance recognizes as an equitable corollary of the principle of indemnity that the rights and remedies of the assured against the wrong-doer stand transferred to and vested in the insurer. The equitable assignment of the rights and remedies of the assured in favour of the insurer, implied in a contract of indemnity, known as `subrogation’, is based on two basic principles of equity:
- No tort-feasor should escape liability for his wrong;
- No unjust enrichment for the injured, by recovery of compensation for the same loss, from more than one source.
The doctrine of subrogation will thus enable the insurer, to step into the shoes of the assured, and enforce the rights and remedies available to the assured.
The term subrogation is derived from latin term sub (under) and rogare (to ask). The denovative sense has been transmuted from an asking under to a substitution or succession with respect to the right of payment.
While, Universal Dictionary, provides the meaning of the word subrogation as ‘The substitution of one person for another especially for one creditor for another’, Legal & Commercial Dictionary, by A. N. Saha, 5th Edition, Eastern Law House provides the same as ‘The substitution of another person in place of a creditor to whose rights he succeeds in relation to the debt.’
“Subrogation simply means substitution of one person for another; that is, one person is allowed to stand in the shoes of another and assert that person’s rights against the defendant. Factually, the case arises because, for some justifiable reason, the subrogation plaintiff has paid a debt owed by the defendant.”
Dan B. Dobb’s Law of Contract (2nd Edn. – # 4.3 at 404)
Thus, in its literal sense, subrogation is the substitution of one person for another, however, so far as the insurer is concerned Subrogation means ‘acquirement by underwriters on settling a loss of their rights and remedies of the insured in the thing insured. The term really means “standing in the shoes of another’.
Business terms and phrases and Abbreviations by D. W. Fiddes, 14th Edition, Pitman Publishing
The term `subrogation’ in the context of insurance, has been defined in Black’s Law Dictionary thus :
“The principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy.”
The doctrine of subrogation confers upon the insurer the right to receive the benefit of such rights and remedies as the assured has against third parties in regard to the loss to the extent that the insurer has indemnified the loss and made it good. The insurer is, therefore, entitled to exercise whatever rights the assured possesses to recover to that extent compensation for the loss, but it must do so in the name of the assured.
Subrogation as defined under marine insurance act, 1963
Right of Subrogation’ is statutorily recognized and described in section 79 of the Marine Insurance Act, 1963 as follows:
- Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject- matter insured, the thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.
- Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured and in respect of the subject 1 matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss”.
The characteristics of subrogation are aligned with the principle and purpose of insurance, which is to cover losses suffered by the insured.
Every contract of Marine or Fire insurance is a contract of indemnity and of indemnity only, the meaning of which is that the assured in case of lose is to receive a full indemnity but is never to receive more. Every rule of Insurance Law is adapted in order to carry out this fundamental rule and if ever any proposition is brought forward the affect of which is adoptedÂ in order to carry out this fundamental rule and if ever any proposition is brought forward the effect of which is opposed to this fundamental rule, it will be found to be wrongâ€¦â€¦. The doctrine in Marine Insurance Law of Constructive Total Loss is adopted solely in order to carry out the fundamental rule. It is a doctrine which is in favour of the assured, because where the loss is not an actual total loss but in what as a matter of business treated as equivalent to a total loss, this rule is adopted to carry out the fundamental doctrine and give the assured a full indemnity.
Grafted on this doctrine came the doctrine of abandonment, which is only applicable to cases of CTL and is introduces in favour of the underwriter so that they may have to pay no more than an indemnity. So it appears that these two doctrine were introduced in order to carry out the two limits of the fundamental doctrine, namely that the assured shall get a full indemnity and that he shall got no more. Castellain vs. Preston and others : (1881-5) All ER Rep 483Â : (1883) 11 QBD 380CA
An assured under a policy insuring him against loss or damage to a chattel on being indemnified by his insurers for a loss he has sustained does not thereby loss his right of action against the wrongdoer who caused the loss. Under the doctrine of subrogation he must bring an action against the wrongdoer if he is called on by his insurer to do so and is indemnified against the cost. But it is his own cause of action not that of his insurer that he sue on as against the wrongdoer the insurer has no cause of action of his own. Hobbs vs. Marlowe (1977) 2-241 HL
Subrogation is an equitable assignment, is inherent, incidental and collateral to a contract of indemnity, which occurs automatically, when the insurer settles the claim under the policy, by reimbursing the entire loss suffered by the assured.
It need not be evidenced by any writing. But in practice, to avoid any dispute with the assured as to the right of subrogation and extent of its rights, the insurer usually reduce the terms of subrogation into writingÂ in the form of a letter of subrogation which enables and authorizes the insurer to recover the amount settled and paid by the insurer, from the third party wrong-doer as a subrogee-cum-attorney.
In India, insurance companies statutory corporations and banks use standardized forms to cover all types of situations and circumstances and several of the clauses in such forms may be wholly inapplicable to the transaction intended to be covered by the document. As a result of which many a times the subrogation is construed as an assignment of actionable claim.
Law is well settled to the effect that, when the insurer obtains an instrument from the assured on settlement of the claim, whether it will be a deed of subrogation, or subrogation-cum-assignment, would depend upon the intention of parties as evidenced by the wording of the document.
The title or caption of the document, by itself mayÂ not be conclusive. It is possible that the document may be styled as subrogation but may contain in addition an assignment in regard to the balance of the claim in which event it will be a deed of subrogation-cum-assignment.
It may be a pure and simple subrogation but may inadvertently or by way of excessive caution use words more appropriate to an assignment. If the terms clearly show that the intention was to have only a subrogation, use the words “assign” transfer and abandon in favour of wouldÂ in the context be construed as referring to subrogation and nothing more.
In view of the foregoing, subrogation can be broadly classified into three categories:
- subrogation by equitable assignment;
- subrogation by contract; and
- subrogation-cum- assignment.
In the first category, the subrogation is not evidenced by any document, but is based on the insurance policy and the receipt issued by the assured acknowledging the full settlement of the claim relating to the loss.
Where the insurer has reimbursed the entire loss incurred by the assured, it can sue in the name of the assured for the amount paid by it to the assured. But where the insurer has reimbursed only a part of the loss, in settling the insurance claim, the insurer has to wait for the assured to sue and recover compensation from the wrongdoer; and when the assured recovers compensation, the assured is entitled to first appropriate the same towards the balance of his loss (which was not received from the insurer) so that he gets full reimbursement of his loss and the cost, if any, incurred by him for such recovery. The insurer will be entitled only to whatever balance remaining, for reimbursement of what it paid to the assured.
In the second category, the subrogation is evidenced by an instrument. To avoid any dispute about the right to claim reimbursement, or to settle the priority of inter-se claims or to confirm the quantum of reimbursement in pursuance of the subrogation, and to ensure co-operation by the assured in suing the wrongdoer, the insurer usually obtains a letter of subrogation in writing, specifying its rights vis-`-vis the assured. The letter of subrogation is a contractual arrangement which crystallizes the rights of the insurer vis-`-vis the assignee. On execution of a letter of subrogation, the insurer becomes entitled to recover in terms of it, a sum not exceeding what was paid by it under the contract of insurance by suing in the name of the assured.
Even where the insurer had settled only a part of the loss incurred by the assured, on recovery of the claim from the wrongdoer, the insurer may, if the letter of subrogation so authorizes, first appropriate what it had paid to the assured and pay only the balance, if any, to the assured.
The third category is where the assured executes a letter of subrogation-cum-assignment enabling the insurer retain the entire amount recovered (even if it is more thanÂ what was paid to the assured) and giving an option to sue in the name of the assured or to sue in its own name.
In all three types of subrogation, the insurer can sue the wrongdoer in the name of the assured. This means that the insurer requests the assured to file the suit/complaint and has the option of joining as co-plaintiff. Alternatively the insurer can obtain a special power of Attorney from the assured and then to sue the wrongdoer in the name of the assured as his attorney.
The assured has no right to deny the equitable right of subrogation of the insurer in accordance with law, even whether there is no writing to support it. But the assured whose claim is settled by the insurer, only in respect of a part of the loss may insist that when compensation is recovered from the wrongdoer he will first appropriate the same, to recover the balance of his loss.
The assured can also refuse to execute a subrogation-cum-assignment which has the effect of taking away his right to receive the balance of the loss. But once a subrogation is reduced to writing, the rights inter-se between the assured and insurer will be regulated by the terms agreed, which is a matter of negotiation between the assured and insurer.
For illustration, when the loss to the assured is Rs.1,00,000/-. Â Â The insurer settles the claim of the assured for Rs.75,000/-. Â Â Â Â Â The wrong-doer is sued for recovery of Rs.1,00,000/-.
- If the suit filed for recovery of Rs.100,000/- is decreed as prayed, and the said sum of Rs.1,00,000/- is recovered, the assured would appropriate Rs. 25,000/- to recover the entire loss of Rs. 100,000/- and the doctrine of subrogation would enable the insurer to claim and receive the balance of Rs.75,000.
- If the suit filed for recovery of Rs.100,000/- is decreed as prayed for, but the assured is able to recover only Rs.50,000/- from the Judgment-Debtor (wrong-doer), the assured will be entitled to appropriate Rs.25,000/- (which is the shortfall to make up Rs.100,000/- being the loss) and the insurer will be entitled to receive only the balance of Rs. 25,000/- even though it had paid Rs. 75,000/- to the assured.
- Where, the suit is filed for recovery of Rs.100,000/- but the court assesses the loss actually suffered by the assured as only Rs.75,000/- (as against the claim of the assured that the value of goods lost is Rs.100,000/-) and then awards Rs.75,000/- plus costs, the insurer will be entitled to claim and receive the entire amount of Rs.75,000/- in view of the doctrine of subrogation. Where the assured executes a letter of subrogation entitling the insurer to recover Rs. 75,000/- (The suit is filed in the name of the assured or jointly by the assured and insurer).
- If the suit is filed for recovery of Rs.1,00,000/-, and if the court grants Rs.1,00,000/-, the insurer will take Rs.75,000/- and the assured will take Rs.25,000/-.
- If the insurer sues in the name of the assured for Rs.75,000/- and recovers Rs.75,000/-, the insurer will retain the entire sum of Rs.75,000/- in pursuance of the Letter of Subrogation, even if the assured has not recovered the entire loss of Rs.1,00,000/-. If the assured wants to recover the balance of the loss of Rs.25,000/- as he had received only Rs. 75,000/- from the insurer, the assured should ensure that the claim is made against the wrongdoer for the entire sum of Rs.100,000/- by bearing the proportionate expense. Otherwise the insurer will sue in the name of the assured for only for Rs. 75,000;/-.
- If the letter of subrogation executed by the assured when the insurer settles the claim of the assured uses the words that the “assured assigns, transfers and abandons 3 unto the insurer, the right to get Rs.75,000/- from the wrong-doer”, the document will be a `subrogation’ in spite of the use of words `transfers, assigns and abandons’. This is because the insurer has settled the claim for Rs.75,000/- and the instrument merely entitles the insurer to receive the said sum of Rs.75,000/- which he had paid to the assured, and nothing more.Â Where the assured executes a letter of subrogation-cum- assignment for Rs.100,000/- .
- If the document executed by the assured in favour of the insured provides that in consideration of the settlement of the claim for Rs.75,000/-, the assured has transferred and assigned by way of subrogation and assignment, the right to recover the entire value of the goods lost and retain the entire amount without being accountable to the assured for any excess recovered (over and above Rs.75,000/-) and provides that the insurer may sue in the name of the assured or sue in its own name without reference to the assured, the instrument is a subrogation-cum-assignment and the insurer has the choice of either suing in the name of the assured or in its own name. Where the assured executes a letter of assignment in favour of a third party to sue and recover from the carrier, the value of the consignment.
- If the assured, having received Rs.75,000/- from the insurer, executes an instrument in favour of a third party (not being the insurer) assigning the right to sue 3 and recover from the carrier, damages for loss of the consignment, such a document will be an Assignment. The assignee cannot file a complaint before the consumer fora, as he is not a `consumer’. Further, such a document being a transfer of a mere right to sue, will be void and unenforceable, having regard to section 6(e) of Transfer of Property Act, 1882. It is well settled that a right to sue for unliquidated damages for breach of contract or for tort, not being a right connected with the ownership of any property, nor being a right to sue for a debt or actionable claim, is a mere right to sue and is incapable of being transferred.
The principles relating to subrogation can therefore be summarized thus :
- Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire loss. When there is an equitable subrogation in favour of the insurer, the insurer is allowed to stand in the shoes of the assured and enforce the rights of the assured against the wrong- doer.
- Subrogation does not terminate nor puts an end to the right of the assured to sue the wrong-doer and recover the damages for the loss. Subrogation only entitles the insurer to receive back the amount paid to the assured, in terms of the principles of subrogation.
- Where the assured executes a Letter of Subrogation, reducing the terms of subrogation, the rights of the insurer vis-`-vis the assured will be governed by the terms of the Letter of Subrogation.
- A subrogation enables the insurer to exercise the rights of the assured against third parties in the name of the assured. Consequently, any plaint, complaint or petition for recovery of compensation can be filed in the name of the assured, or by the assured represented by the insurer as subrogee-cum-attorney, or by the assured and the insurer as co-plaintiffs or co-complainants.
- Where the assured executed a subrogation-cum- assignment in favour of the insurer (as contrasted from a subrogation), the assured is left with no right or interest. Consequently, the assured will no longer be entitled to sue the wrongdoer on its own account and for its own benefit. But as the instrument is a subrogation- cum-assignment, and not a mere assignment, the insurer has 3 the choice of suing in its own name, or in the name of the assured, if the instrument so provides. The insured becomes entitled to the entire amount recovered from the wrong- doer, that is, not only the amount that the insured had paid to the assured, but also any amount received in excess of what was paid by it to the assured, if the instrument so provides.
It should be borne in mind, that a document should be transaction-specific. Or at least an effort should be made to delete or exclude inapplicable or irrelevant clauses. But where a large number of documentation is required to be done by officers not- conversant with the nuances of drafting, use of standard forms with several choices or alternative provisions is found necessary.
The person preparing the document is required to delete the terms/clauses which are inapplicable. But that is seldom done. The result is that the documents executed in standard forms will have several irrelevant clauses.
Computerisation and large legal departments should have enabled insurance companies, banks and financial institutions to (i) improve their documentation processes and omit unnecessary and repetitive clauses; (ii) avoid incorporation of other documents by vague references; and (iii) discontinue pasting or annexing of slips. But that is seldom done. If documents are clear, 4 specific and self-contained, disputes and litigations will be considerably reduced.
By: M. K. DAS, B.A.Hon’s & Distinction, B.Ed, M. A., L.L.B., Dip in Cyber Law, Law Officer, New India Assurance Company Ltd., Â Mumbai, Published in â€œThe Insurance Timesâ€ October, 2012