Subrogation and Assignment of the Right to the Insurer
Chapter Fifteen
Syllabus topic 2, "General Principles of Law of Insurance."
Pages 74 to 77 of 745
In one line
Subrogation happens automatically when the insurer pays and lets it sue in the insured's name for what it paid; an assignment is a separate agreement that transfers the claim itself, so the insurer sues in its own name and keeps whatever it recovers.
In the wording a student can write in an exam: subrogation arises by operation of law upon payment of an indemnity and vests in the insurer the insured's rights to the extent of the indemnity, exercisable in the insured's name; assignment is a voluntary transfer of a chose in action by agreement, which may be made before or after payment, vests the claim itself in the assignee, and is enforced in the assignee's own name for the whole amount.
Why the two are confused
Because insurers take both at once. When an insurer settles a claim it asks the insured to sign a document commonly headed "Letter of Subrogation cum Special Power of Attorney" or "Subrogation cum Assignment". That single sheet does two different legal things, and a student who has only seen the document assumes there is one doctrine.
And because the practical result often looks the same. In both cases the insurer ends up pursuing the wrongdoer. The differences appear only when something goes wrong: when the recovery exceeds what the insurer paid, when the insured refuses to lend his name, or when the wrongdoer has a defence good against the insured.
The table that answers the question
| Subrogation | Assignment of the right to the insurer | |
|---|---|---|
| How it arises | By operation of law, on payment of an indemnity. Section 79, Marine Insurance Act, 1963 | By agreement, through an instrument of transfer |
| When it arises | Only on payment, and not before | At any time, before or after payment |
| Consent needed | None; it is automatic | Yes; it is a contract |
| Whose name the suit is in | The insured's. The insurer has no independent right to sue in its own name, Simpson v. Thomson, (1877) 3 App Cas 279 | The insurer's own, as holder of the claim |
| Amount recoverable | Limited to what the insurer paid; any excess is held for the insured, Burnand v. Rodocanachi Sons & Co., (1882) 7 App Cas 333 | The whole claim, and the assignee keeps the surplus |
| Title to salvage | Passes only on payment of a total loss, section 79(1); not on a partial loss, section 79(2) | Passes with the assignment if the instrument so provides |
| Which contracts | Contracts of indemnity only | Any assignable chose in action, whatever the contract |
| Defences | The claim is taken subject to every defence available against the insured | The same, because an assignee takes subject to equities |
| Effect on the insured | He retains the claim, subject to the insurer's interest, and must not prejudice it | He parts with the claim entirely |
| Formality | None | An instrument in writing, and notice to the debtor where the claim is a debt |
Subrogation and Assignment of the Right to the Insurer
The three differences that carry the marks
One: the source. Subrogation is a rule of law that attaches to a contract of indemnity. Assignment is a transaction. An insurer who has paid is subrogated whether or not anyone signs anything; it becomes an assignee only if the insured agrees.
Two: the name in which suit is brought. This is the difference examiners test, because it has a case attached.
Facts. Simpson v. Thomson, (1877) 3 App Cas 279. Two ships belonging to the same owner collided. Insurers who had paid on one sought to sue in their own name in respect of the negligence of the other.
Held. The insurer has no independent right of action in its own name. Subrogation puts it in the shoes of the insured, and here the insured could not sue himself, so the claim failed.
Why it matters here. It is the reason an insurer takes an assignment at all. Subrogation alone leaves the insurer dependent on the insured's willingness to lend his name and vulnerable to any bar that affects him; an assignment makes the claim the insurer's own.
Three: what happens to a surplus.
Facts. Burnand v. Rodocanachi Sons & Co., (1882) 7 App Cas 333. Cargo was destroyed by a Confederate cruiser during the American Civil War and insurers paid a partial loss. The United States later distributed a fund to the owners, expressly as compensation for the uninsured part of the loss, and the insurers claimed it.
Held. They could not have it. A payment made expressly as a gift, or otherwise than as an indemnity for the insured loss, is not brought into account, and in any event the insurer's right is limited to what it paid.
Why it matters here. Under subrogation the insurer's ceiling is its own outlay. Under an assignment there is no ceiling, because the claim itself has been sold to it. That is the practical reason an insurer prefers an assignment where the claim may be worth more than the settlement.
The Indian position on how the insurer proceeds
Facts. Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., (2010) 4 SCC 114. An insurer that had indemnified the owner of goods damaged in transit sought to pursue the carrier, and the question was whether a complaint could be brought before a consumer forum for its benefit.
Held. The insurer is subrogated to the owner's rights and may pursue them. A complaint filed by the assured for the benefit of the insurer, or jointly by the assured and the insurer, is maintainable. Oberai Forwarding Agency v. New India Assurance Co. Ltd., (2000) 2 SCC 407, which had held an insurer suing in its own name not to be a consumer, was overruled.
Subrogation and Assignment of the Right to the Insurer
Why it matters here. It tells an Indian insurer exactly how to frame the proceeding: name the assured, or the assured and the insurer jointly. A complaint by the insurer alone, resting on subrogation, still faces the Simpson v. Thomson objection.
A worked example
Nitin Bhagat's consignment of machine tools worth nine lakh rupees is damaged by a transporter's negligence. His marine cargo policy is for the full value, and the insurer settles at eight lakh forty thousand rupees after deducting the excess. Nitin signs a letter of subrogation cum assignment.
Under the subrogation half, the insurer may proceed against the transporter in Nitin's name for the loss. If it recovers nine lakh, it keeps eight lakh forty thousand and accounts to Nitin for the balance of sixty thousand, which is exactly his uninsured excess.
Under the assignment half, the claim itself has been transferred, so the insurer may sue in its own name and, on the terms of the instrument, keep the whole nine lakh.
Now remove the assignment. Suppose Nitin signed only a letter of subrogation. If he refuses to lend his name, or dies, or has already given the transporter a release, the insurer's recovery is in difficulty. That is why the assignment is taken.
Now change the defendant. Suppose Nitin's contract with the transporter limited liability to fifty thousand rupees. Neither subrogation nor assignment helps: the insurer takes the claim subject to that limit, because a subrogated insurer stands in the insured's shoes and an assignee takes subject to equities.
Assignment of the claim against assignment of the policy
Keep these apart; they are different transactions with different rules.
Assignment of the policy transfers the contract of insurance itself, so that the assignee becomes the insured. In life insurance it is governed by section 38 of the Insurance Act, 1938; in marine insurance by sections 52 and 53 of the Marine Insurance Act, 1963. In fire and other property insurance a policy is a personal contract and cannot be assigned without the insurer's consent, because the insurer chose this insured and not another.
Assignment of the claim transfers only the right of action against a third party after the loss. It has nothing to do with who is insured, and it needs no consent from anyone but the insured.
What it does NOT mean
It does not mean an assignment enlarges the claim. The assignee takes subject to equities, so every defence good against the insured is good against the insurer.
Subrogation and Assignment of the Right to the Insurer
It does not mean subrogation requires a document. It arises by law. The letter of subrogation is evidence and a convenience, not the source of the right.
It does not mean the insurer may keep everything it recovers under subrogation. The ceiling is what it paid, and the surplus is the insured's.
And it does not mean an insurer can sue in its own name merely because it has paid. Simpson v. Thomson says otherwise, and the Indian answer, from Charan Spinning Mills, is to bring the proceeding in the assured's name or jointly.
Quick revision
Subrogation: arises by operation of law on payment of an indemnity; suit in the insured's name; recovery capped at what the insurer paid; salvage only on a total loss; indemnity contracts only.
Assignment: arises by agreement; may precede payment; suit in the insurer's own name; the whole claim, surplus included; any assignable chose in action.
The three cases. Simpson v. Thomson, (1877) 3 App Cas 279, no independent right to sue in its own name. Burnand v. Rodocanachi Sons & Co., (1882) 7 App Cas 333, the ceiling is the outlay. Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., (2010) 4 SCC 114, the Indian procedure.
Do not confuse assignment of the claim with assignment of the policy, which is section 38 of the Insurance Act, 1938 in life insurance and sections 52 and 53 of the Marine Insurance Act, 1963 at sea.
Test yourself
1. Give three differences between subrogation and assignment. Subrogation arises by operation of law on payment while assignment arises by agreement; a subrogated insurer sues in the insured's name while an assignee sues in its own; and a subrogated insurer recovers only what it paid while an assignee keeps the whole claim.
2. Why does an insurer take an assignment when it is already subrogated? Because subrogation leaves it dependent on the insured lending his name, Simpson v. Thomson, and caps its recovery at what it paid, Burnand v. Rodocanachi. An assignment removes both limits.
3. Does an assignee of a claim take it free of defences? No. An assignee takes subject to equities, so every defence available against the insured is available against the insurer.
4. How should an Indian insurer frame a consumer complaint against a carrier after paying a cargo claim? In the name of the assured for the insurer's benefit, or jointly by the assured and the insurer. Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., (2010) 4 SCC 114.
5. Distinguish assignment of the claim from assignment of the policy. Assignment of the claim transfers a right of action against a third party after the loss. Assignment of the policy transfers the contract of insurance itself, governed by section 38 of the Insurance Act, 1938 in life insurance and sections 52 and 53 of the Marine Insurance Act, 1963 at sea.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.