Subrogation
Chapter Fourteen
Syllabus topic 2, "General Principles of Law of Insurance."
Pages 69 to 73 of 745
In one line
When an insurer pays a claim, it steps into the shoes of the insured and takes over his rights against whoever caused the loss.
In the wording a student can write in an exam: subrogation is the right of an insurer, on payment of a claim under a contract of indemnity, to be placed in the position of the insured in respect of all rights and remedies against third parties in relation to the loss, and to receive the benefit of anything that reduces the loss, the right being exercisable in the name of the insured and only to the extent of what the insurer has paid.
Why the law has it
Without it the insured could recover twice and the wrongdoer would go free. A lorry driver negligently destroys a shop. The shopkeeper claims on his fire policy and is paid, then sues the lorry owner and is paid again. He is now better off than before the fire, which the indemnity principle forbids, and the lorry owner has escaped the consequence of his negligence because the loss was met by a stranger to him.
Subrogation solves both problems at once. The insured is indemnified once. The insurer, having paid, may pursue the wrongdoer. And the wrongdoer still answers for what he did.
It is therefore a corollary of indemnity and not an independent doctrine. That is why it does not apply to life or personal accident insurance, which are not indemnities. Everything in this chapter follows from that one sentence.
The principle, and its authority
Facts. Castellain v. Preston, (1883) 11 QBD 380. Preston agreed to sell a house and had insured it. Before completion the house was damaged by fire and the insurer paid. The purchaser then completed and paid the full price, so the vendor had lost nothing.
Held. The insurer could recover its payment. Brett L.J. held that as between the underwriter and the assured the underwriter is entitled to the advantage of every right of the assured, whether by contract, in tort or otherwise, which diminishes the loss, and that this follows from the contract being one of indemnity and of indemnity only.
Why it matters here. It states the widest form of the doctrine. Subrogation is not confined to a claim in tort against a wrongdoer; it reaches any right or receipt that reduces the loss, including a contractual right against a purchaser.
The statutory statement
Section 79 of the Marine Insurance Act, 1963 is the only place Indian law states the doctrine, and it is quoted in answers about general insurance for that reason. Sub section (1) provides that where the insurer pays for a total loss, either of the whole or of any apportionable part of the subject matter, he becomes entitled to take over the interest of the assured in whatever may remain of the subject matter so paid for, and is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject matter as from the time of the casualty causing the loss.
Subrogation
Sub section (2) provides that where the insurer pays for a partial loss, he acquires no title to the subject matter or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured in and in respect of the subject matter as from the time of the casualty causing the loss, in so far as the assured has been indemnified by the payment.
Two rules are in that section and both carry marks. On a total loss the insurer takes the salvage, that is, whatever remains of the thing. On a partial loss it does not; it takes only the rights.
Broken down: the five rules of subrogation
One: it applies only to contracts of indemnity. There is no subrogation on a life policy or a personal accident policy, because the insurer has promised a fixed sum and not to make good a loss. Dalby v. India and London Life Assurance Co., (1854) 15 CB 365, is the authority, and it is worked in the chapter on the nature of a life insurance contract.
Two: it arises on payment, and not before. Until the insurer has paid, it has no right to pursue the third party. In practice insurers take a letter of subrogation from the insured at the time of payment, and often a subrogation cum assignment, which is a different thing and is the subject of the next chapter.
Three: the suit is brought in the name of the insured.
Facts. Simpson v. Thomson, (1877) 3 App Cas 279. Two ships belonging to the same owner collided. Insurers who had paid on one of them 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 places it in the shoes of the insured, and here the insured could not sue himself, so the insurer's claim failed.
Why it matters here. It fixes the procedural rule and its consequence: the insurer takes the claim subject to every defence available against the insured, including limitation, contributory negligence, and any exemption clause in the insured's own contract with the wrongdoer.
Four: the recovery is limited to what the insurer paid.
Facts. Burnand v. Rodocanachi Sons & Co., (1882) 7 App Cas 333. Cargo was destroyed by a Confederate cruiser during the American Civil War and the insurers paid a partial loss. The United States afterwards distributed a fund to the owners, expressly as compensation for the uninsured part of the loss. The insurers claimed it.
Subrogation
Held. They could not have it. A sum given expressly as a gift, or as something other than an indemnity for the insured loss, is not brought into account.
Why it matters here. It marks the limit of the doctrine. The insurer takes only what answers the same loss it paid, and only up to what it paid; the excess belongs to the insured.
Five: it extends to salvage on a total loss. Where the insurer pays a total loss it may take the wreck, the damaged stock or the remains of the machine, and sell them. On a partial loss it may not: section 79(2).
Subrogation in the Indian courts
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 wished to pursue the carrier, and the question was whether a complaint could be filed for the insurer's benefit before a consumer forum.
Held. The insurer is subrogated to the owner's rights against the carrier and may pursue them. A complaint filed by the assured for the benefit of the insurer, or jointly by both, is maintainable. Oberai Forwarding Agency v. New India Assurance Co. Ltd., (2000) 2 SCC 407, in which an insurer suing in its own name had been held not to be a consumer, was overruled.
Why it matters here. It is the practical Indian law of subrogation. Recovery from the carrier is the ordinary sequel to paying a cargo claim, and the case tells the insurer how to frame the proceeding.
A worked example
Yashwant Kadam's godown at Sangli is destroyed by a fire started by a welder employed by a contractor doing work next door. The stock destroyed is worth eighteen lakh rupees. His fire policy is for twenty lakh with no under insurance, and the insurer pays eighteen lakh.
On payment the insurer is subrogated. It may sue the contractor in Yashwant's name for the eighteen lakh. Yashwant must give it the conduct of that suit and must not prejudice it.
Suppose the insurer recovers twenty two lakh rupees from the contractor. It keeps eighteen, being what it paid, and the balance of four lakh belongs to Yashwant, because the insurer's right is limited to its own outlay: Burnand v. Rodocanachi.
Suppose instead Yashwant had signed a contract with the contractor exempting him from liability for fire. The insurer takes the claim subject to that exemption, because it stands in Yashwant's shoes and can be no better placed than he was: Simpson v. Thomson.
Subrogation
Suppose the fire had left damaged machinery with scrap value. If the insurer paid a total loss it may take the scrap under section 79(1). If it paid a partial loss it may not, under section 79(2), although it will have taken the scrap value into account in assessing the claim.
And suppose Yashwant, having been paid, settles with the contractor for one lakh and gives a release. He has destroyed the insurer's right, and he is liable to the insurer for the damage he has caused it. Every property policy contains a condition forbidding exactly that.
Subrogation, contribution and salvage
| Subrogation | Contribution | Salvage | |
|---|---|---|---|
| Against whom | A third party responsible for the loss | Another insurer of the same risk | Nobody; it is a thing |
| When it arises | On payment of an indemnity claim | Where two policies cover the same loss | On payment of a total loss |
| What it transfers | Rights and receipts that reduce the loss | A rateable share of the payment | Property in what remains |
| Statutory source | Section 79, Marine Insurance Act, 1963 | Section 80 of the same Act | Section 79(1) |
| Applies to life insurance | No | No | No |
What it does NOT mean
It does not mean the insurer can sue in its own name. Simpson v. Thomson is clear: the suit is in the insured's name, unless the insurer has taken a separate assignment, which is the next chapter.
It does not mean the insurer gets everything the insured receives. Only what answers the insured loss, and only up to what the insurer paid: Burnand v. Rodocanachi.
It does not mean the insurer may sue its own insured. An insurer cannot be subrogated against the very person it has insured, which is why a policy covering both an owner and a contractor defeats a subrogation claim against the contractor.
And it does not mean subrogation applies to life insurance. It does not, because that contract is not an indemnity.
Quick revision
Definition. On payment under a contract of indemnity, the insurer takes over the insured's rights and remedies against third parties in respect of the loss, and the benefit of anything that reduces it.
Authority. Castellain v. Preston, (1883) 11 QBD 380: the underwriter is entitled to the advantage of every right of the assured that diminishes the loss.
Statute. Section 79 of the Marine Insurance Act, 1963. Total loss: the insurer takes the remains and the rights. Partial loss: the rights only, to the extent it has indemnified.
Five rules. Indemnity contracts only; arises on payment; enforced in the insured's name, Simpson v. Thomson, (1877) 3 App Cas 279; limited to what the insurer paid, Burnand v. Rodocanachi Sons & Co., (1882) 7 App Cas 333; carries salvage on a total loss only.
Subrogation
Indian practice. Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., (2010) 4 SCC 114, overruling Oberai Forwarding Agency v. New India Assurance Co. Ltd., (2000) 2 SCC 407: a complaint by the assured for the insurer's benefit, or jointly, is maintainable.
Test yourself
1. Define subrogation and say why it exists. The insurer's right, on paying an indemnity claim, to take over the insured's rights and receipts in respect of the loss. It exists to stop the insured recovering twice and to stop the wrongdoer escaping because a stranger paid.
2. In whose name is a subrogated claim brought, and what follows? In the insured's name: Simpson v. Thomson, (1877) 3 App Cas 279. It follows that the insurer takes the claim subject to every defence available against the insured.
3. An insurer pays eight lakh rupees and recovers eleven lakh from the wrongdoer. Who gets the extra three lakh? The insured. The insurer's right is limited to what it paid: Burnand v. Rodocanachi Sons & Co., (1882) 7 App Cas 333.
4. What is the difference between a total and a partial loss for the purposes of section 79 of the Marine Insurance Act, 1963? On a total loss the insurer takes over the interest of the assured in whatever remains, as well as the rights. On a partial loss it acquires no title to what remains and takes only the rights, to the extent it has indemnified.
5. Why is there no subrogation on a personal accident policy? Because it is a benefit contract and not an indemnity. The insurer promises a fixed sum on a defined event, so nothing the insured recovers elsewhere reduces its liability.
6. May an insurer complain to a consumer forum in its own name after paying a cargo claim? No, but the assured may complain for its benefit or jointly with it, which is what Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., (2010) 4 SCC 114, held when it overruled Oberai Forwarding Agency v. New India Assurance Co. Ltd..
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.