- Subrogation is the substitution of one party for another.
- Provides the legal right to claim damages from a third party on behalf of another party.
- The Primary Area of Application is the Insurance Sector.
- Involves 3 parties, namely insurer, insured, and third-party/wrongdoer.
History and Origin
The doctrine of subrogation has a long history. The origin of the doctrine is said to be outlined in the case of John Edwards and Co v. Motor Union Insurance Co Ltd [(1922) 2 KB 249 (CA)] by Mc Cardie J, who noted that the doctrine had its roots in Roman law. Various Historians also attribute the doctrine to a creature of equity. The doctrine is predominantly present in insurance law but is also applied in other types of law such as the bill of exchange and so on.
The concept of insurance is said to originate from the sixteenth century when merchants regularly faced the risk of losing their cargo and ships at sea. Thus,one of the first known types of insurance is marine insurance. As the importance of insurance grew in various aspects of life, whether it be economic or social, the concept spread even further in the 18th and 19th centuries and started covering all sorts of transactions including personal accident insurance, fire insurance, industrial insurance, and so on.In every contract for insurance, it is pertinent that the insured should possess a complete understanding of all the risks involved while transferring their rights. Subrogation is a concept that defines the relationship subsisting between the insured, insurer, and the third party.
Etymology and Meaning
The word Subrogation has its origin in 2 Latin words, “sub” which means in place of another, and “rogare” which means ask, thus “subrogare” means choose as a substitute. Inlayman’sterms, subrogation is one person stepping into the shoes of another. In the context of insurance, if an insurer under an insurance contract has compensated for a loss, then the insurer will be entitled to all the rights of the insured against any third party, with respect to the loss that was incurred.The doctrine of indemnity and the doctrine of subrogation are interconnected, an insurer has the right to be indemnified completely but nothing more is allowed.
Insurance companies, who are liable to pay for the losses arising from the actions of a third party, recover the expenses by issuing letters of subrogation. To put it simply, these letters are just emails that inform a party that they are liable for some accident and have to pay compensation.
The Supreme Court in the judgment of Krishna Pillai Rajasekharan Nair v. Padmanabha Pillai and Ors [(2004) 12 SCC 754], held that subrogation rests upon the principles of natural justice and the doctrine of equity and not on the privity of the contract.
Given below is an illustration, that breaks down the concept of subrogation.
Suppose there exists a contract of insurance. The insured person suffers a loss amounting to Rs.10,00,000.The claim for insurance between the insured and insurer is settled for Rs. 8,00, 000.Now, if a suit is filed for the recovery of the loss of Rs.10,00,000 and it is recovered, then in such a case as per the doctrine of subrogation, the insured can keep 2,00,000 and the rest of 8,00,000 would be received by the insurer.
To better understand the doctrine, it is important to understand the essentials and principles behind it. In the landmark judgment of Economic Transport Organisation v. Charan Spinning Milla (P) Ltd and Ors [(2010) 4 SCC 114], the apex court had laid down the principles of subrogation as follows
- The doctrine of subrogation gives the insurer the right to take legal action against the third party but in the name of the insured.
- In situations where a letter of subrogation limits the subrogation terms between the insurer and insured, the letter drawn governs the rights of both parties.
- Whenever a claim is settled by an insurer, there arises an equitable subrogation right which allows the insurer to claim compensation from the third party.
- The right of the insured to take legal action does not end with this doctrine.
Types of Subrogation
There are three types of subrogation as discussed below:
- Subrogation by equitable assignment:Mainly based on the insurance policy, it arises once the claim is settled by the insurer.
- Subrogation by Contract: Subrogation arising out of contracts between the insured and insurer. A letter of subrogation is obtained from the insured to avoid disputes.
- Subrogation-cum-assignment: involves a letter of subrogation-cum-assignment between the parties, allowing the insured to retain the compensation received from the third party.
Waiver of Subrogation Right.
The insurers can voluntarily give up their right of subrogation if they wish to do so.This can be done through an agreement between the insurer and the insured. This can also be done through a Knock for Knock agreement between insurers. A knock-for-knock agreement is an agreement by which two insurance companies who had sustained losses in the same insured event, pay for the losses sustained by their policyholder, despite whoever may be actually responsible.
The doctrine has faced criticism as well. One of the main criticisms is that if the third party/wrongdoer is also insured, then the entire process becomes wasteful and expensive. Also, another argument put forth is that the doctrine puts the burden on the third party and relieves the corporate insurer who has the luxury of recouping the cost from the premium-paying customer base.
The doctrine of subrogation helps define the relationship between parties in an insurance contract and a third party. Based on the principle of indemnity, ensures that the insurer recovers the loss suffered without any unlawful gains. The liability in such a situation is on the third party or the wrongdoer.