SUBROGATION: THE ENIGMA SIMPLIFIED FOR INSURER AND INSURED by Mitansha Chopra
An insured must have a complete understanding of the risks involved in transferring its rights under the rule of subrogation. Subrogation is an important concept when it comes to understanding the relationship between an insurer, an insured and a third party in case of loss suffered by the insured. Will the insurer be liable to bear the entire loss claimed by the insured? Can the insurer sue the third party/ wrong-doer responsible for the loss suffered by the insured? This article deals with these major questions regarding subrogation.
What is Subrogation?
The concept of subrogation involves one person or group substituting another in cases of insurance claims by transfer of all the rights and duties associated with it. 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 of subrogation lets one person to stand in another person's shoes and assert the rights of that person against the third party. It comes into picture when an insurance carrier wants to take legal action against a third party who was responsible for the loss caused to the insured and other similar instances. Subrogation arises out of the existing relations between the party.
The doctrine of subrogation is based on the principle of indemnity. It is essential to ensure that the insured is indemnified completely, but not more than that.
In Krishna Pillai Rajasekharan Nair (D) by Lrs. v. Padmanabha Pillai (D) by Lrs. and Ors.1, the Supreme Court 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 Act2, 1872. Another principle is found in equity: ‘he who seeks equity must do equity'.”
Before taking up the rights and duties of another person under the principle of subrogation, it is important to know its essentials. The Supreme Court elaborately discussed the principles of subrogation in the landmark judgment Economic Transport Organization v. Charan Spinning Mills (P) Ltd. and Ors.3 The principles of subrogation as laid down by the Apex Court are discussed as follows:
- 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.
- 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.
- 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.
- 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.
- 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.
The insurance companies must keep these essential principles of subrogation in mind while construing and finalizing the terms of subrogation with the insured.
In Rahee Industries Ltd. v. Export Credit Guarantee Corporation of India Ltd. and Ors.4, the Apex Court 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.
As the insurer shall indemnify the insured against the loss claimed, the insurer will only be entitled to recover to the amount paid by it. In case where the amount recovered by the insurer is more than what was paid by it to the insured, it must only retain the recovered amount to the extent it paid to the insured and the balance should be refunded to the insured.
If the insurer directly recovers the entire loss from the third party, then subrogation does not come into picture. This principle is based on the idea that the insured must be allowed to recover only to the extent of loss suffered by it and not more than that. When the insured receives the loss claimed from the insurer as well as the third party, it shall return the excess to the insurer, subject to the payment limits of the insurer.
Salvage and Abandonment
Salvage and abandonment are important concepts when it comes to subrogation rights. When a loss is suffered by the insured, the remains of the property after the damage and destruction is called salvage. This concept is more prominent in cases where there is partial loss. In such circumstances, the insured can only file a claim to the extent of loss suffered if he does not abandon the entire property. But if the insured chooses to surrender the salvage to the insurer, then the insurer shall pay the entire claim and become the owner of the salvage.
In Kaltenbach v. Mackenzie5, the court observed that abandonment forms a part of every contract of indemnity. Whenever the insured makes a claim for absolute indemnity, abandonment of the damaged property is important along with all his rights in respect of all he is indemnified for.
Can an insurer file a complaint against the third party/ wrong-doer in its own name?
The Supreme Court clarified in a recent case Taj Mahal Hotel v. United India Insurance Co. Ltd. and Ors.6 that an insurer can file a complaint as a subrogee. The court reiterated its decision in Economic Transport Organization case7 and observed that an insurer cannot file a complaint in its own case. However, if the insurer is acting as a subrogee and has filed the case in the name of the insured, where the insurer is the attorney holder of the insured or the insured and the insurer are co-complainants, the case will be maintainable. Thus, it is necessary for the insurer to satisfy either of the two conditions.
In another landmark judgment of Oberoi Forwarding Agency v. New India Assurance Co. Ltd. and Ors.8, the Supreme Court has held that subrogation or deed of transfer does not entitle the insurer to step into insured's shoes or clothe it with a consumer's legal status to maintain a complaint under the Act. Thus, the insurer does not become a consumer even when the insured subrogates its rights in the favour of the insurer.
Under no circumstances can the insurer file a complaint in its own name, even if the terms of the letter of subrogation-cum-assignment entered into between the insurer and the insured confers such right upon the insurer. This is also one of the reasons why the insured must give up his right in favour of the insurer.
Types of Subrogation
Subrogation is mainly of three types. The different categories of subrogation are discussed below:
- Subrogation by Equitable Assignment: As discussed before, equitable subrogation arises once the full claim of the insured is settled by the insurer. It is mainly based on the insurer policy and the receipt issued by the insured act as an acknowledgment. It is not particularly evidenced by any document.
- Subrogation by Contract: This kind of subrogation arises out of contractual arrangement between the insurer and the insured. In order to avoid dispute of any sort relating to reimbursement of claim or quantum of claim, the insurer obtains in writing a Letter of Subrogation from the insured specifying the rights of the insured and the insurer. In this case, the insurer can recover the amount paid to the insured as per the insurance policy.
In New India Assurance Company Ltd. v. Genus Power Infrastructure Ltd.9, the Apex Court observed that the settlement made via Letter of Subrogation would be acceptable only when it is executed and signed without undue influence and coercion. This was reiterated by the court in the matter of United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd.10
- Subrogation-cum-assignment: In this type of subrogation, a Letter of Subrogation-cum-assignment is exchanged between the insurer and the insured. It allows the insured to retain the entire amount recovered from the third party. However, this does not equal to giving up of insured's rights to proceed legally against the third party.
In the matter of Union of India v. Sri Sarada Mills Ltd.11, the Supreme Court held that cause of action of the insured against the third party did not perish on giving a letter of subrogation to the insurer.
What is Anti-Subrogation Rule?
As per the anti-subrogation doctrine, the insurer can sue a third party in the name of the insured. However, the insurer has no subrogation right against the insured. It can only arise against a third party to whom the insurer is not liable. This rule justifies the reason why the doctrine of subrogation was developed in the first place. Giving subrogation rights to the insurer against the insured would defeat the entire purpose of insurance.
Subrogation plays a major role in defining the relationship between an insurer, an insured and the third party. It is founded on the principle of indemnity and ensures that the insured does not get any benefit out of the loss suffered by it at the same time ensuring that it recovers the loss amount. The rule of subrogation focuses on placing the burden on the wrong-doer and also ensures that the insurer is given an opportunity to sue the third party for the loss suffered by the insured.
1 (2004) 12 SCC 754
2 It states that a person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
3 (2010) 4 SCC 114
4 (2009) 1 SCC 138
5  3 CPD 467
6 (2020) 2 SCC 224
7 Supra note 3.
8 (2000) 2 SCC 407
9 (2015) 2 SCC 424
10 (2019) 5 SCC 362
11 (1972) 2 SCC 877
Originally published by VGC Law Firm, August 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.