Subrogation & its Extent: A Tool in Insurance Law Clarified

 

Subrogation in Insurance:

The doctrine of subrogation lets one person to stand in another person's shoes and assert the rights of that person against the third party. In tort it is wrongdoing to another. In other words, it is a breach of duty owed to a third party. A person cannot do wrong to another thereby causing damage to another’s property or inflicting injury on the person of that another. If it is so done then a right of action accrues in favor of the wronged and to the detriment of the wrong-doer. Thus in Insurance Law according to Black’s Law dictionary, subrogation is “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 is rooted in the Principle of Indemnity and Equity. It is essential to ensure that the insured is indemnified completely, but not more than that. The Supreme Court in Krishna Pillai Rajasekharan Nair (D) by Lrs. v. Padmanabha Pillai (D) by Lrs. and Ors.,¹ has held:

“A subrogation rests upon the doctrine of equity and the principles of natural justice and not on the privity of contract. One of these principles is that a person, paying money which another is bound by law to pay, is entitled to be reimbursed by the other. This principle is enacted in Section 69 of the Contract Act, 1872. Another principle is found in equity: ‘he who seeks equity must do equity’.”

The Supreme Court in Economic Transport Organization v. Charan Spinning Mills (P) Ltd. and Ors.,² laid down the principles of subrogation as follows:

1. When an insurer settles an insured’s claim for the loss incurred by it, an equitable subrogation right arises in favour of the insurer. Equitable subrogation allows the insurer to assert rights against the third party or the wrong-doer who caused damage to the insured.

2. The doctrine of subrogation does not put an end to the rights and duties of the insured. It only allows the insurer to recover the claims paid by it to the insured from the third party. The insurer continues to enjoy the right to proceed with legal actions against the wrong-doer.

3. The insurer and the insured may exchange a letter of subrogation limiting the subrogation terms. In such a scenario, the letter of subrogation would govern the rights of the insurer vis-à-vis the insured.

4. The rule of subrogation gives the right to the insurer to take any legal action against the third party/ wrong-doer, but only in the name of the insured. Any complaint, petition or plaint filed in the court of law must be in the name of the insured. The insurer can also represent the insured as subrogee-cum-attorney or the two of them can be co-complainants or co-plaintiffs. In any case, the insurer cannot take legal action against the third party on its own.

5. In case the insured executes a subrogation-cum-assignment in favour of the insurer, the insurer becomes completely entitled to the amount recovered from the third party. The terms mentioned in the instrument would govern the rights and duties of the insurer and the insured. The insured may also have to give up all its rights and would no longer be able to sue to the wrong-doer on its own account.

Insurance companies must keep these essential principles of subrogation in mind while construing and finalizing the terms of subrogation with the insured. These principles can also be varied by contract.³

Excesses in Subrogation:

If the Insurer recovers excess of amount paid to the insured, such excess should be made good to the insured. If the insurer recovers the complete loss from the third-party, then subrogation does not get triggered. Loss should still be made good to the insured. If the insured recovers loss from both insured and third-party, then the excess needs to be made good to the insurer.

Types of Subrogation:

1. Subrogation by Equitable Assignment: The Right arises once the insurer settles the full claim of the insured. The Right is based on the insurance policy, and the acknowledgment receipt issued by the insured. It is not particularly evidenced by any document.

2. Subrogation by Contract: Such subrogation right arises out of contractual agreement between insurer and insured. For clarity sake the insurer obtains a written Letter of Subrogation from the insured specifying the rights of the insured and the insurer. The right is evidenced by the specific contract, insurance policy, and acknowledgment receipt.

3. Subrogation-cum-Assignment: Letter of subrogation-cum-assignment allows the insured to retain the entire amount recovered from the third party.

Salvage-Abandonment:

In cases of partial loss the concept gets triggered. If there is a partial loss, say of a car, and the insured sells off the said car, he can recover only the different of IDV and cost of sale of the car so damaged. In such circumstances, the insured can thus only claim to the extent of loss suffered. However, if the insured chooses to surrender the entire salvage to the insurer, then the insurer shall pay the entire claim and become the owner of the salvage.

Actions as Subrogee:

The Supreme Court in Taj Mahal Hotel v. United India Insurance Co. Ltd. and Ors.,⁴ has clarified that insurer can bring a claim against third-parties either as the attorney holder of the insured, or if the insured and the insurer are co-complainants. However, this does not extinguish the insured’s right to legally proceed against the third party in either event. Additionally, Rule of Anti-Subrogation (a common law defense to subrogation) protects the insured. It states that a subrogated insurance company standing in the shoes of its insured cannot bring a subrogation action against or sue its own insured.

1[2004] 12 SCC 754.

2[2010] 4 SCC 114 .

3The Supreme Court in Rahee Industries Ltd. v. Export Credit Guarantee Corporation of India Ltd. and Ors., [2009] 1 SCC 138 observed that the parties to an insurance contract may express and define the terms of subrogation in the insurance policy which may be at variance from the ordinary principles of subrogation. Only in case of ambiguity or doubt in the construction of the insurance policy, the parties may invoke the principles of subrogation as a controlling authority or guide.

4[2020] 2 SCC 224.