Doctrine of Subrogation- Article explains Meaning of Subrogation, Concept of Subrogation, Principal of Indemnity, Categories of Subrogation, Subrogation by Equitable Assignment, Subrogation by Contract, Subrogation-cum-assignment and Principals of Subrogation.
DOCTRINE OF “SUBROGATION”
“SUBROGATION” means substitution of a person or group by another in respect of a debt in insurance claim, accompanies by the transfer of any associated rights and duties.
Investopedia: “Subrogation is a term describing a legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured. This is done in order to recover the amount of the claim paid by the insurance carrier to the insured for the loss.”
The term ‘Subrogation’ in the context of Insurance, has been defined in Black’s Law Dictionary as:
“The Principal 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”.
“Subrogation” also defined in Dan B. Dobb’s Law of Contract, which reads as follows;
“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 owned by the defendant.”
“Subrogation” also defined in Laurence P. Simpson’s Handbook of Law of Suretyship, which reads as follows;
“Subrogation is equitable to assignment. The right comes into existence when surety becomes obligated, and this is important as affecting priorities, but such right of subrogation dose not become a cause of action until debt is duly paid. Subrogation entitles the surety to use any remedy against the principal which the creditor could have used , and in general to enjoy the benefit of any advantage that the creditor had, such as a mortgage , lien, power to confess judgement , to follow trust funds, to proceed against third person, who has promised either the principal or the creditor to pay the debts.”
it was explained by Chancellor Boyd in National Fire Insurance Co. Vs. McLaren;
“The doctrine of subrogation is a creature of equity not founded on contract, but arising out of relations of the parties. In cases of insurance ,where third party is liable to make good the loss, the right of subrogation depends upon and is regulated by the broad underlying principal of securing full indemnity to the insured, on the one hand ,and on the other of holding him accountable as trustees for any advantage he may obtain over and above compensation for his loss. Being equitable rights, it partakes of all the ordinary incidents of such rights, one of which is that in administering relief the Court will regard not so much the form as the substance of transaction. The primary consideration is to see that the insured gets full compensation for the property destroyed and the expenses incurred in making good his loss. The next thing is to see that he holds any surplus for the benefit of the insurance company.”
As we know that the Contract of Fire Insurance is like a Contract of Indemnity. It means that the insured, in case of loss covered by the Insurance Policy, shall be fully indemnified but shall never be more than fully indemnified. The insured shall never be more than fully indemnified, that gives rise to “Doctrine of Subrogation”. The right of subrogation is a necessary corollary of the Principal of Indemnity and it is necessary for its preservation.
Thus, 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 assured.
we may classify it as follows;
This type of subrogation is not evidence by document, but is based on insurer policy and receipt issued by the assured acknowledging full settlement of claim relating to loss. Where the insurer has paid full loss incurred by the assured, it can sue in the name of the assured for the amount paid to the assured.
Let’s consider an example, Mr. A has lodged a claim on insurance company X Ltd, against his fire insurance policy of Rs. 10.00 Lakhs. In real case the fire broke due to mistake or negligence of Mr. B, neighbour of Mr. A. The insurance company X Ltd., has paid Rs. 10.00 Lakhs to Mr. A and acquired right to sue Mr. B on behalf of Mr. A for his negligence. If any amount received from Mr. B to Mr. A, Mr. A should return it to the X Ltd.
In another case if X Ltd, has paid only Rs. 5.00 Lakhs and Mr. A received from Mr. B Rs.6.00 Lakhs then he has to return X Ltd., Rs. 1.00 Lakh.
In this category, Subrogation is evidenced by an Instrument. To avoid any dispute about right to claim reimbursement , or to settle the priority of inter-se claims or confirm the quantum of reimbursement in pursuant of subrogation , and to ensure cooperation of assured in suing the wrongdoer , the insurer usually obtains a Letter of Subrogation in writing , specifying its rights vis-vis the assured. Letter of Subrogation is a contractual arrangement, which specifies the rights of insurer and the assured. Through this insurer get the rights to sue the wrongdoers on behalf of assured and recovered the amount paid by it the assured under insurance policy to the extent excess of the loss incurred by the assured.
In this case assured executes a Letter of Subrogation-cum-assignment enabling the insurer retain entire amount recovered (even if it is more than, what was paid by insurer to the assured) and giving an option to sue in the name of assured or to sue on its own name.
In all above three cases an insurer asks assured to sue the third party(wrongdoer) and can join as co-plaintiff or an insurer may obtain a Special Power of Attorney from the assured and sue the wrongdoer as attorney of the assured.
1. Equitable right of subrogation arises when insurer settles the claim of the assured, for the entire loss. When there is equitable subrogation in favour of the insurer, then the insurer entitles to stand in shoes of the assured and sue the wrongdoer;
2. Subrogation not terminate the rights of assured to sue the wrongdoer and recover loss. The Subrogation only gives rights to the insurer to sue the wrongdoer on behalf of assured;
3. Where assured has issued a Letter of Subrogation, reducing the terms of subrogation, the rights of insurer vis-vis the assured will be governed by the terms of Letter of Subrogation;
4. 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 insurer as co-plaintiff or co-complainants.
5. Where assured has issued a Letter of Subrogation-cum-assignment in favour of insurer, the assured has left no right or interest. The assured in this case no longer entitle to sue wrongdoer, on its own account and for its own benefit. In this case the insure become entitle to the whole amount recovered from the third party or wrongdoer, even though it has paid less amount than the amount recovered to the assured to settle the claim.
The rights of subrogation only arise when the policy is a valid contract of insurance. In order to bring into existence, the insurer’s rights of subrogation, it is necessary that the claim of the insured under the policy actually to him, and it arises upon payment of partial as well as full claim of loss. The rights of insurer to subrogation must be understood with this limitation, which is the right must be incidental or attached to the ownership of the thing, insured. The insurer is entitled to every benefit to which the assured is entitled in respect of the thing to which the contract of insurance relates, but to nothing more.