Principle of Subrogation

Project Report

Submitted to-
Dr. Yogendra Kumar Srivastava

Professor

Submitted by-
Anam Khan

Semester – VIII, Section – B, Roll No. 14

B. A. LL. B. (Hons.)

Hidayatullah National Law University

Uparwara Post, Atal Nagar – 492002 (C.G.)

 ABSTRACT
In order to understand the principles of insurance law is it vital to understand the concept of
insurance. Insurance is a type of contract wherein the insured pays a certain sum of money called
premium and the other party i.e. insurer promises to reimburse the same in cases of loss or
damage. The Principle of Subrogation is a very important concept under insurance law.
According to this principle, a person or a group of people can substitute the other in cases of
claims of insurance. It includes transfer of all rights and duties associated which such a contract
of insurance.
 CHAPTER 1

INTRODUCTION AND RESEARCH METHODOLOGY

1.1 Introduction

A simple understanding of the Principle of Subrogation tells us that is a form of substitution.

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”. As mentioned
above, with the help of this principle one person has the right to stand in the other person’s shoes
in times of need. Such a substitution arises when an insurance carrier wishes to take action
against the third party. In other words, it arises out of the existing relations between the parties of
an insurance contract. It is a part of all indemnity claims. The Principle of Subrogation finds a
specific mention under Section 79 of the Marine Insurance Act, 1973.

It can be better understood with an example of subrogation. When an insured driver's car is
damaged and another driver is at fault, it is the insurance carrier who will reimburse the
covered driver in accordance with the terms of the policy. It is after this that a legal action can
be pursued against the driver actually at fault.

1.2 Review of Literature

 Reuben Hasson, “Subrogation in Insurance Law-A Critical Evaluation-(1985)” As the
name suggests, this paper talks about the lesser known criticism of principle of
subrogation. The author focuses his attention on how the alleged objectives of
subrogation are never really fulfilled. The author is of the view that the fewer objectives
that are actually met are rather wasteful and harmful.
 Mitansha Chopra, India: “Subrogation: The Enigma Simplified For Insurer And Insured
(2020)” -This article comprehensively evaluates and explains the meaning and extent of
Principle of Subrogation. It deals with the position of the principle in India and also
discusses various judicial pronouncements delivered by the courts.
 Singh, Avtar, Law of Insurance, EBC- The author has discussed all the important aspects
of the principle of subrogation in a detailed analysis.
 1.3 Research Objectives

In purpose of this study and the broad objective is to understand the principle of subrogation, its
critical analysis and relevancy before the court of law.

1.4 Research Questions

The following are the questions which this study aims to answer:

 The extent to which the principle of subrogation is useful.

 What is the relevancy of such a principle?

1.5 Research Methodology

In this kind of study, a descriptive approach has to followed. While doing research on the topic
emphasis has been made on the critical aspects of the topic of study. Being non-empirical in
nature the project follows a descriptive approach for explanation and interpretation. The author
has taken help of secondary data such as articles, journals, reviews and editorials, etc.

1.6 Organization of the study

The project has been divided into three chapters in order to facilitate a clear picture of the study.

Chapter 1: Introduction and research methodology

This chapter brief introduced the topic and structure of the study.

Chapter 2: Principle of Subrogation- Section 79 of the Marine Insurance Act

This chapter discusses the concept of subrogation in detail and cites relevant examples and
case laws.

Chapter 3: Critical analysis of Principle of subrogation

This chapter makes a critical analysis of the Principle of subrogation and cites recent judicial
pronouncements.
Chapter 2- Principle of Subrogation- Section 79 of the Marine Insurance Act

 What is Subrogation?

The word Subrogation finds its origin in a Latin word, “subrogare” which means to “choose as a
substitute” or “ask in place of another.” Subrogation has been defined in Laurence P. Simpson’s
Handbook of Law of Suretyship, as “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.”1

Under this contractual provision of Subrogation, after paying the amount of claim by insured, it
is the insurer who gets the right to sue the third party.

 “Krishna Pillai Rajasekharan Nair (D) by Lrs. v. Padmanabha Pillai (D) by Lrs. and
Ors”2., 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'.”

 “Economic Transport Organization v. Charan Spinning Mills (P) Ltd. and Ors”.3

In this landmark case under insurance law, the Principle of Subrogation has been explained very
minutely. In the following case the Apex Court stated the following-

1
Deepak P. Singh, Doctrine of Subrogation under Insurance, Tax Guru, (22nd February, 2022, 7:55 pm ),
https://taxguru.in/corporate-law/doctrine-subrogation-insurance.html
2
(2004) 12 SCC 754
3
(2010) 4 SCC 114
 1. When a third party/wrong doer causes certain damages to the insured, the insurer has to
settle the claims that arise. When the settlement is complete an equitable
subrogation/substitution right arises for the insurer, wherein he can take legitimate legal
action against the third party. It is through such legal action that the insurer has the right
to recover the claim of damages so paid by him.
2. Since it is a contractual principle, it is important that the insurer and insured exchange a
letter of subrogation clearly stating the terms and conditions.
3. Any legal action so taken can only be in the name of the insured. There is however, a
provision for being co-plaintiff but the suit cannot be in the name of the insurer in any
circumstances.
4. The insured has to give up all his rights and he cannot sue the wrong doer on his own
account.
5. It is important for the insurance companies to keep these points in mind while construing
and finalizing the terms of subrogation with the insured.

 “Rahee Industries Ltd. v. Export Credit Guarantee Corporation of India Ltd. and
Ors”.4 the Apex Court observed, “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.”

Types of Subrogation

There are three types of subrogation.

1. Subrogation by Equitable Assignment: this category of subrogation arises once the full

claim of the insured is settled by the insurer. It primarily focuses on the insurer policy
and the receipt issued by the insured as an acknowledgment. This provision finds its
mention in Section 80 of the Marine Insurance Act, 1961.
2. Subrogation by Contract: In order to avoid any dispute of reimbursement a contract is
signed by the insurer and insured under this category of subrogation. The claim or
4
(2009) 1 SCC 138
 quantum of claim, the insurer gets has to be specified in the contract. The Letter of
Subrogation from the insured specifically mentions the rights of the parties involved.
This helps the insurer to recover the amount paid to the insured according to the terms of
the policy. “New India Assurance Company Ltd. v. Genus Power Infrastructure Ltd”. 5,
the Apex Court observed, “the settlement made via Letter of Subrogation would be
acceptable only when it is executed and signed without undue influence and coercion.”
The same was again reiterated by the court in the matter of “United India Insurance Co.
Ltd. v. Antique Art Exports Pvt. Ltd”.6

3. Subrogation-cum-assignment: here a letter of subrogation-cum-assignment is

exchanged between the insurer and the insured. With the said letter, the insured has the
right to retain the entire amount recovered from the third party. “Union of India v. Sri
Sarada Mills Ltd”7, the Supreme Court held, “cause of action of the insured against the
third party did not perish on giving a letter of subrogation to the insurer.”

Understanding doctrine of subrogation and the concept of subrogation-cum-

assignment with example.

An insured suffers a loss worth Rs. 50000. The insurer has to settle the claim for Rs. 25,000. The
third party is sued for recovery of Rs. 50000. In a case where there is no letter of subrogation the
insurer has to rely on doctrine of equitable subrogation.

If the recovery suit is filed for an amount of Rs. 50,000/- and the amount so claimed is
recovered, the assured would appropriate Rs. 25,000/- to recover the entire loss of Rs. 50,000/.
Further the doctrine of subrogation would enable the insurer to claim and receive the balance of
Rs. 25, 000.

2. In another scenario if the recovery suit is worth Rs.1,00,000/- but the assured is able to recover
only Rs.50,000/- from third party, the assured will be entitled to appropriate Rs.25,000.

5
(2015) 2 SCC 424.
6
(2019) 5 SCC 362.
7
(1972) 2 SCC 877.
4. When the suit for recovery for Rs.1,00,000/- is decreed and prayed for and if the court grants
Rs.1,00,000/-, the insurer will take Rs.75,000/- and the assured will take Rs.25,000/.

Understanding Anti-Subrogation rule

According to the anti-subrogation rule, “the insurer has the rights and powers to sue a wrong
doer in the name of the insured. However, this does not mean that the insurer has any rights of
subrogation against the insured. Such right can only arise against a wrong doer to whom the
insurer is not liable in any way. This rule gives the correct justification and reason as to why it
was important to develop the doctrine of subrogation in the first place. If all subrogation rights
were given to the insurer against the insured, it would ultimately defeat the entire purpose of an
insurance claim.”8

Failure of a subrogation claim

 Waiving of Subrogation Right: This happens when the subrogee gives up hi rights
according to the terms of a contract or agreement.

 With the lapse of Time: 6 years is a common time period to initiate a subrogation
proceedings and also a contract. However, failing to bring a subrogation claim within the
above mentioned time frame may lead to the failure of action.

 Bankruptcy of the person who claims subrogation: “The subrogee’s right against the
third party is derived from that of the subrogor. Therefore, in the event of bankruptcy of
the subrogor, it is the subrogee who may lose the right of subrogation before or during
litigation. This happens unless he is able and willing to restore the assured.”9

8
Rahul Paney, India: Doctrine of Equitable Subrogation in Indian Law, Mondaq, (24 th February, 2022,
3:02 pm), https://www.mondaq.com/india/insurance-laws-and-products/392864/doctrine-of-equitable-
subrogation-in-indian-law
9
Mitansha Chopra, India: Subrogation: The Enigma Simplified For Insurer And Insured, Mondaq, (24th February,
2022, 2:42pm), https://www.mondaq.com/india/insurance-laws-and-products/972530/subrogation-the-enigma-
simplified-for-insurer-and-insured.
 Chapter 3- Critical analysis of Principle of Subrogation

There are a very few legal principles that have attracted critical attention from Commonwealth
countries. Principle of Subrogation is also well-known for the fact that it does not find a whisper
of criticism in any textbooks. However, as man marches from cave to computers, and there are
advancements made in the legal sphere it is natural for such principles to attract criticism. One of
the key reasons why this Principle has not attracted criticism is because practitioners never found
it relevant to invest in policy debate. Another reason is that this particular rule is centuries old
and we have been associated with this rule since the time of Lord Mansfield. Majority of the
legal fraternity were of the opinion that there could not anything more beneficial than an insurer
gets to penalize the third party. Also because it holds the recoveries in trust for the benefit of the
policy holder.

Through the discussion of the principle, we have known that subrogation applies only to
contracts of indemnity. There was a time when life insurance contracts and accident insurance
were not contracts of indemnity. Although it was very clear that the purpose of such contracts
was basically to indemnify. In this case, why should a loss of property is treated any differently
from a loss of arm or life? This creates sufficient confusion. The trends in Canada have been
evidentiary to the same. According to one side of the argument, a disability insurance being a
contract of indemnity makes sense and seems valid. Disability insurance can be said to be
contract of indemnity.

The objectives of subrogation are mentioned below-

1. It is essential for the survival of insurance industry.

2. It is known to be a cost saver.
3. Deterrent against negligent behavior.

It is now being pointed out that legal scholars from the Commonwealth countries have started to
point out the failure to achieve these objectives. This principle has often been criticized by many
as being deterrent against negligent behavior.

Conclusion
Supreme Court of India held that in the case of subrogation, Rights of Subrogation “vests by
operation of law rather than as the product of express agreement. Right of Subrogation can be
enjoyed by the insurer as soon as payment is made, whereas an assignment requires an
agreement that the rights of the assured be assigned to the insurer. In the case of subrogation, the
assignee can recover whatever amount has been paid by him to the insurer whereas in the case of
assignment, he can recover more than the actual loss from the insurer/third party.” 10 Thus
Supreme Court of India came to the conclusion that the letter styled as "subrogation" was in fact
“assignment of the rights by the insured and, therefore, the insurer was not a 'consumer' within
the meaning of the Consumer Protection Act, 1986 and, therefore, not entitled to maintain the
complaint. A valid contract of insurance is a prerequisite to ascertain rights of subrogation.” 11
The Supreme Court has often reiterated through various judicial pronouncements that rights of
subrogation arise from the operation of law rather than by the express agreement. For the
insurer’s right of subrogation to come into existence, it is important that the claim of the insured
arises upon payment of the loss. Such payment can be either partial or complete. The subrogation
rights of the insurer has one limitation- the right must either be incidental or it must be attached
to the ownership of the particular thing insured.

BIBLIOGRAPHY

 WEBSITES

 https://www.godigit.com/guides/subrogation-in-insurance#:~:text=Subrogation%20in
%20insurance%20is%20a,damages%20caused%20to%20the%20insured.

 https://www.bajajfinserv.in/principle-of-subrogation-in-insurance

 https://www.mondaq.com/india/insurance-laws-and-products/972530/subrogation-the-
enigma-simplified-for-insurer-and-insured

 https://www.mondaq.com/india/insurance-laws-and-products/392864/doctrine-of-
equitable-subrogation-in-indian-law

 ATICLES OR JOURNALS

10
Supra note 7.
11
Supra note 8.
   Reuben Hasson, Subrogation in Insurance Law- A Critical Evaluation,  Oxford Journal
of Legal Studies, vol. 5, no. 3, Oxford University Press, 1985, pp. 416–38,

 Langmaid, Stephen I. “Some Recent Subrogation Problems in the Law of Suretyship and
Insurance.” Harvard Law Review, vol. 47, no. 6, The Harvard Law Review Association,
1934, pp. 976–1008.