As you are aware that a contract of General Insurance is generally a contract of indemnity, it means an insured will not receive from insurance company more than the loss he /she suffered. Further an insured is not allowed to gain more than, what he suffered due to insured peril from the insurance company.
“Indemnity” means security or protection against financial loss. It is a protection against possible damage or loss, especially a promise of payment, or the money paid if there is such damage or loss, it means that insurance company promises to pay the insure in case of any loss due to insured peril of the subject insured in lieu of a small payment called “ Premium”.
An insurance policy issued to the insured by the insurance company is a contract between them and any claim of loss will be payable according to the terms and conditions agreed between the parties and mentioned in the contract.
COROLLARIES OF INDEMNITY
There are two corollaries to the principle of Indemnity and these are Subrogation and Contribution. We are going to consider and discuss here only SUBROGATION.
SUBROGATION It has already been established that the purpose of Indemnity is to ensure that the Insured does not make a profit or gain in any way as a consequence of an accident. He is placed in the same financial position, which he had occupied immediately before the loss occurred.
As an off shoot of the above it is also fair that the insurer having indemnified the insured for damage caused by another (A Third Party) should have the right to recover from that party the amount of damages or part of the amount he has paid as indemnity.
This right to recover damages usually lies with the bereaved or injured party but the law recognises that if another has already paid the bereaved or injured party then the person who has paid the compensation has the right to recover damages.
1. LET’S CONSIDER WHY SUBROGATION IS CONSIDERED A COROLLARY OF INDEMNITY
Why Subrogation is called a corollary of Indemnity and not treated as a separate basic Principle of Insurance can be traced to the judgement given in the case of Casletlan V Preston (1883) in U.K. “That doctrine (Subrogation) does not arise upon any terms of the contract of Insurance, it is only the other proposition, which has been adopted for the purpose of carrying out the fundamental rule i.e. indemnity. Which I (Judge) have mentioned “it is a doctrine in favour of the underwriters or insurers, in order to prevent the insured from recovering more than a full indemnity; it has been adopted solely for that reason.”
Subrogation does not apply to life and personal accidents as these are not contracts of Indemnity. In case death of a person is caused by the negligence of another than the legal heirs of the deceased can initiate proceedings to recover from the guilty party in addition to the policy proceeds.
If the insured is not allowed to make profit the insurer is also not allowed to make a profit and he can only recover to the extent he has indemnified the Insured.
In case the insured after having received indemnity also recovers losses from another then he shall be in a position of gain which is not correct and this amount recovered from another shall be held in trust for the insurer who have already given indemnity.
Subrogation may be defined as the transfer of legal rights of the insured to recover, to the Insurer.
| Subrogation can arise in 4 ways
(i) Tort (ii) Contract (iii) Statute (iv) Subject matter of Insurance (I) TORT: When an insured has suffered a loss due to a negligent act of another then the Insurer having indemnified the loss is entitled to recover the amount of indemnity paid from the wrongdoer. The Insured has a right in Tort to recover the damages from the individuals involved. The Insurers assume these rights and take action in the name of the insured and take his permission before starting legal proceedings. Another reason for seeking permission of the insured is that the Insured may be having another claim which was not insured arising from the same incident which he may wish to include because the law allows one to sue a person only once for any single event. (II) CONTRACT: This can arise when a person has a contractual right to compensation regardless of a fault then the Insurer will assume the benefits of this right. Where the Act or Law permits, the insurer can recover the damages from Government agencies, it gives the right to insurers to recover damages from the concerned authorities in respect of the property damaged in Riots which has been indemnified by them. |
2. LET’S CONSIDER ASSIGNMENT OF AN INSURANCE POLICIES
“ Assignment” means a complete transfer of ownership rights of the policy to some other person, it may be third person or the insurance company ,which has issued the insurance policy.
Assignment is governed by Section 38 of the Insurance Act 1938 in India. Assignment can also be done in favour of a close relative when the policyholder wishes to give a gift to that relative. Such an assignment is done for “natural love and affection”.
When a policyholder assign a policy, he loses all control on the policy. It is no longer his property. It is now the assignee’s property whether the policyholder is alive or dead, the assignee alone will get the policy money from the insurance company.
If the assignee dies, then his (assignee’s) legal heirs will be entitled to the policy money.
Please Note That : Assignment can be made in favour of a minor person. But it would be advisable to appoint a guardian to receive the policy money if it becomes due during the minority of the assignee.
When a policy is assigned normally, the assignee should pay the premium, because the policy is now his property. In practice, however, premium is paid by the assignor (policyholder) himself. When a bank gives a loan and takes the assignment of a policy a security, it will ask the assignor himself to pay the premium and keep it in force. In the case of an assignment as a gift, the assignor would like to pay the premium because he has gifted the policy.
3. LET’S CONSIDER DIFFERENCE BETWEEN SUBROGATION & ASSIGNMENT
As “ Assignment “ refers to a transfer of a right by an instrument for consideration . When there is an absolute assignment ,the assignor is left with no title or interest in the property or right , which is subject matter of the assignment.
(i) The difference between Assignment and Subrogation was state in Insurance Law by Mac Gillivray & Prkington “ thus:
“ Both subrogation and assignement permit one party to enjoy the rights of another, but it is well established that subrogation is not a species of assignment. Rights of subrogation vest by operation of law rather than as the product of express agreement. Whereas rights of subrogation can be enjoyed by the insurer as soon as payment in made , as assignment requires an agreement that the rights of the assured be assigned to the insurer. The insurer cannot require the assured to assign to him his rights against third parties as a condition of payment unless there is a special clause in the policy obliging the assured to do so. This distinction is of some importance, since in certain circumstances and insurer might prefer to take an assignment of an assured’s right rather than rely upon his rights subrogation.
If ,for example ,there was any prospect of the insured being able to recover more than his actual loss from a third party , an insurer ,who had taken assignment of the assured’s rights ,would be able to recover the extra money for himself, whereas an insurer who was confined to rights of subrogation would have to allow the assured to retain the excess.
Another distinction lies in the procedure of enforcing the rights acquired by virtue of the two doctrines. An insurer exercising the rights of subrogation against third parties must do so in the name of the insured. An insurer who has taken legal assignment of his insured’s rights under the statue may proceeds to sue third parties in his own name.”
(ii) James Nelson & Sons. Ltd. Vs. Nelson Line( Liverpool) Ltd. 1906(2) KB 217- in this case also the difference between Subrogation and Assignment has been highlighted as follows;
“ The way in which the underwriters come in is only by way of subrogation to the rights of the assured. Their right in not that of assignees of the cause of action……Therefore ,they could only be entitled by way of subrogation to the plantiffs’ rights. What is the nature of their right by way of subrogation ? It is the right to stand in the shoes of the persons whom they have indemnified , and to put in force the right of action of those persons , but it remains the plantiff’s right of action ,although the underwriters are entitled to deduct from my sum recovered the amount to which they have indemnified the plaintiffs ,and although they have provided the means of conducting the action to a termination. It is not a case in high one person is using the name of another merely as a nominal plaintiff for the purpose of bringing an action in which he alone is really interested , for the plaintiffs here have real and substantial interest of their own in the action.”
(iii) Vasudeva Mudaliar Vs. Caledonian Insurance Company [AIR 1965 Madras 159]-
The Madras High Court explained the difference between Subrogation and Assignment ,while delivering its judgment as follows;
“ In other words arising out of the nature of a contract of indemnity, the insurer, when he has indemnified the assured, is subrogated to his rights and remedies against the third parties ,who have occasioned the loss. The right of the insurer to subrogation or to get into the shoes of the assured as it were, need not necessarily flow from the terms of the insurance policy , but is inherent in and springs from the principal of indemnity.
Where, therefore ,an insurer is subrogated to the rights and remedies of the assured, the former is to be more or less in the same position as assured in respect of the third parties and his claim against them founded on tortuous liabilities in case of accident.
But is should be noted that the fact that an insurer is subrogated to the rights and remedies of the assured does not ipso Jure enable him to sue third parties in his own name. It will only entitle the insurer to sue in the name of assured, it being an obligation of the assured to lend his name and assistance t such an action.
By subrogation , the insurer gets no better rights or no different remedies than the assured himself. Subrogation and its effect are therefore , not to be mixed up with those of a transfer or any assignment by the assured of his rights and remedies to the insurer.
An assignment transfer implies something more than subrogation , and vets in the insurer the assured’s interest, rights and remedies in respect of subject matter and sub a stance of the insurance. In such a case, therefore , the insurer ,by virtue of transfer or assignment in his favour , will be in a position maintain a suit in his own name against third parties.”
Court Further Explain that – Subrogation, as 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 reimbursement of the entire loss suffered by the insured. It need not be evidenced by any writing. But where an insurer does not settle the claim of the insured fully , by reimbursement of thje entire loss, then there will be no equitable assignment of the claim enabling the insurer to stand in the shoes of the insured, but only a right to recover from the insured ,any amount remaining out of the compensation received by the insured from the third parties or wrongdoers , after the insured fully recovers his loss.
Court Further Explain that – the insurance companies to void any dispute with the insured as to the right of subrogation and extent of its rights usually reduced the terms of subrogation in writing in the form of “ Letter of Subrogation” ,which enables and authorises the insurer to recover the amount settled and paid from third parties wrongdoers are Subrogee-cum-Attorney. When an insurer obtains and instrument from the insured on settlement of the claim ,whether it will bee Deed of Subrogation or Subrogation-cum-Assignment ,would depend upon intention of the parties as evidence from the wordings of the document. The title or caption of the document , by itself may not be conclusive. It is possible that the document may be styled as. “ Subrogation” but the may contain in addition an assignment in regard to 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 Leroy show that the intention was to have only subrogation, use of words “assign ,transfer and abandon in favour of “ would in the context be construed as referring to subrogation and nothing more.”
Please Note That
i) In its literal sense, subrogation is the substitution of one person for another. The doctrine of subrogation confers upon the insurer the right to receive the benefit of such rights and remedied as the assured has against the third parties in related to loss to the extent that the insurer has indemnified the loss ans made it good. The insurer is, therefore, entitled to exercise whatever the rights assured possesses to recover to the extent of compensation for the loss, but it must do so in the name of the assured.
ii) If an insurer has assignment or transfer of rights of assured ,through a valid agreement, then he has rights to sue the third parties liable for loss to the assured in its own name.
ASSIGNMENT LINKED WITH SUBROGATION
If letter of subrogation containing term of assignment is to be treated on as an assignment by ignoring the subrogation , there may be the anger of document itself becoming invalid and unenforceable , having regards to the bar contained in Section 6 of the Transfer of Property Act, 1882 , provides that property of any kind may be transferred except as otherwise provided by the Act or by any other law for time being in force.
| SECTION 3 -DEFINES ACTIONABLE CLAIM- as
(i) Any debt (other than a debt secured by mortgage of immovable property or by hypothecation or pledge or immovable property); or (ii) Any beneficial interest in movable property not in possession ,either actual or constructive of the claimant, which the civil court recognises as affording grounds for relief. SECTION 6 IN THE TRANSFER OF PROPERTY ACT, 1882 6. What may be transferred.—Property of any kind may be transferred, except as otherwise provided by this Act or by any other law for the time being in force,— (a) The chance of an heir-apparent succeeding to an estate, the chance of a relation obtaining a legacy on the death of a kinsman, or any other mere possibility of a like nature, cannot be transferred; (b) A mere right of re-entry for breach of a condition subsequent cannot be transferred to any one except the owner of the property affected thereby; (c) An easement cannot be transferred apart from the dominant heritage; (d) All interest in property restricted in its enjoyment to the owner personally cannot be transferred by him; 1[(dd) A right to future maintenance, in whatsoever manner arising, secured or determined, cannot be transferred;] (e) A mere right to sue [***] cannot be transferred; (f) A public office cannot be transferred, nor can the salary of a public officer, whether before or after it has become payable; (g) Stipends allowed to military naval, air-force and civil pensioners of the Government and political pensions cannot be transferred; (h) No transfer can be made (1) in so far as it is opposed to the nature of the interest affected thereby, or (2) for an unlawful object or consideration within the meaning of section 23 of the Indian Contract Act, 1872 (9 of 1872), or (3) to a person legally disqualified to be transferee; (i) Nothing in this section shall be deemed to authorise a tenant having an untransferable right of occupancy, the farmer of an estate in respect of which default has been made in paying revenue, or the lessee of an estate, under the management of a Court of Wards, to assign his interest as such tenant, farmer or lessee. SECTION 130 OF TRANSFER OF PROPERTY ACT,1882- Transfer of actionable claim.— (1) The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent,shall be complete and effectual upon the execution of such instruments, and thereupon all the rights and remedies of the transferor, whether by way of damages or otherwise, shall vest in the transferee, whether such notice of the transfer as is hereinafter provided be given or not: Provided that every dealing with the debt or other actionable claim by the debtor or other person from or against whom the transferor would, but for such instrument of transfer as aforesaid, have been entitled to recover or enforce such debt or other actionable claim, shall (save where the debtor or other person is a party to the transfer or has received express notice thereof as hereinafter provided) be valid as against such transfer. (2) The transferee of an actionable claim may, upon the execution of such instrument of transfer as aforesaid, sue or institute proceedings for the same in his own name without obtaining the transferor’s consent to such suit or proceeding and without making him a party thereto. (Exception) —Nothing in this section applies to the transfer of a marine or fire policy of insurance or affects the provisions of section 38 of the Insurance Act, 1938 (4 of 1938). Illustrations (i) A owes money to B, who transfers the debt to C. B then demands the debt from A, who, not having received notice of the transfer, as prescribed in section 131, pays B. The payment is valid, and C cannot sue A for the debt. (ii) A effects a policy on his own life with an Insurance Company and assigns it to a Bank for securing the payment of an existing or future debt. If A dies, the Bank is entitled to receive the amount of the policy and to sue on it without the concurrence of A’s executor, subject to the proviso in sub-section (1) of section 130 and to provisions of section 132. |
Please Note that Section 6(e ) of the Transfer of Property Act,1882-specifically provides that right to sue cannot be transferred. A transfer or assignment of a mere right to sue for compensation will be invalid having regard to Section 6(e) of Transfer of Property Act, 1882.
But when a “ Letter of Subrogation-cum-assignment” is executed the assignment is interlinked with subrogation , and not being an assignment of mere right to sue, will be valid and enforceable as held in [Ecomonic Transport Organisation Vs. Charan Sppinning Mill (P) Ltd. 2010 ACJ 2288].
PLEASE NOTE THAT- The assured has not 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 wrongdoers ,he will first appropriate the same, to recover the balance of loss. The assured will also refuse to execute subrogation-cum-assignment in favour of insurer, because this instrument takes away his right to receive the loss in recoveries from the wrongdoers.
once a subrogation is reduced to writing, the rights inter-sue between the assured and insurer will be regulated by the terms agreed, which is a matter of negotiations between the assured and the insurer.
PLEASE NOTE THAT
i) Whether document executed by the assured in favour of the insurer is a subrogation simplicitor or a Subrogation-cum assignment is relevant only in a dispute between the assured and the insurer. It may not affect the maintainability of complaint against the third parties or wrongdoers.
ii) If the complaint is filed by the assured ( who is a consumer) , or the assured represented by the insurer as its attorney holder, or by the assured and the insurer jointly is complainants , the complaint will be maintainable, if the presence of insurer is explained as being subrogee. Whether amount claimed is the total loss or only the amount for which the claim was settled would make no difference for the maintainability f the complaint, so long as the assured(the consumer) is the complainant( either personally or represented by the attorney holder) or is a co-complainant along with his subrogee( the insurer). On the other hand if the assured(the consumer ) is not the complainant, and the insurer alone files the complaint in its own name, the complaint will not be maintainable , as the insurer is not a consumer , nor a person who are included in the definition of “ Complainant” under the Consumer Protection Act.
iii) The fact that it seeks to recover from the third parties (service providers) only the amount paid to the assured and not any amount in excess of what was paid to the assured will also not make any difference, if the assured is not the complainant or co-complainant.
iv) The complaint will not be maintainable unless the requirements of the Consumer Protection Act has been fulfilled.
v) So for any complaint to be filed before Consumer Forums for recovery of any sum by the insurer to the insured to indemnified him against loss occurred due to act of third parties (wrongdoers) will be maintainable only ,when insured ( the consumer) will be a party to the complaint or he singly or as a co-complainant along with insurer lodge the complaint.
CONCLUSION: from above discussion we conclude that subrogation is an inherent right of insurer to claim amount paid to indemnify the assured against loss occurred. An insured cannot deny the right of subrogation of an insurer ,whether there is an instrument in writing or not or claim is settled by the insurer partly or fully. On the other hand an assignment is transfer of rights of the insured to the insurer or third party in the insurance policy and after assignment the insured has left nothing in the insurance policy. In case of subrogation an insurer file complaint or sue the wrongdoers in the name of the insured only and on other hand in assignment insurer can sue in its name. Since Section 6(e ) of the Transfer of Property Act, 1882 provides that a mere right to sue cannot be transferred, then the validity of transfer will depend upon the nature and wording of documents entered between the insured and the insurance company. If there is an Subrogation-cum -assignment agreement then it will be covered by Section 130 of the Transfer of Property Act, 1882 and valid. It will be noted that for filing any complaint in consumer forums ,it is necessary to have insured as a party, since insured is the ultimate consumer and considered as “ Complainant”.
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DISCLAIMER the article produced here is only for information and knowledge of readers. The article has been prepared on the basis of available details and information at the time of preparation. The views expressed here are the personal views of the author and same will not be considered as professional advice. It is advisable to take professional advise in case of necessity .
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