Principle of subrogation
Subrogation means the restitution of the rights of an assured in favour of the insurer against the third party for any damages caused by him in place of the assured after the insurer has indemnified him for the loss. The principle of subrogation is invoked when a third party is responsible for the loss. It is to be noted that on the happening of the event for which the asset has been insured and after the damage has been caused the insured can sue the party who has caused the damage to claim compensation for the loss. Alternatively the insured can seek compensation from the insurance company. In case the insured opts for the latter course he loses the right to sue the party, who has caused the damage and seek further compensation from him. In accordance with the principle of subrogation the insurance company acquires the right of the insured to sue the third party to compensate for his negligence and loss inflicted upon when it indemnifies the insured for the losses suffered by him. Example – Mr. X was on his way to office in his car when it was hit from behind by a Lorry, and the lorry driver was drunk. Here X can claim compensation from the insurance company. The insurer in turn can sue the lorry owner Y for the damages.
Here X has no right of action against Y since he has already been paid compensation for the loss. The principle of subrogation is a corollary of the principle of indemnity and is applicable when the damage has been caused due to the negligence or highhandedness of another party. Principle of indemnity seeks to make good the financial loss suffered by the insured by the insurer. Thus after having been compensated for the loss the insured is restored to the same financial position as he was before the incident. In case he is allowed to sue the damaging party again he stands to make a profit from the loss, which is inconsistent with the principle of indemnity. In the case of Castellain Vs Preston, Preston the owner of a house property entered into a transaction under which he contracted to sell his house. The property was insured against fire. Before the transfer of title of the property to the buyer, the house was partly damaged by fire. The insurer for the loss indemnified Preston. After that the sale was completed and the buyer paid the full price that was agreed upon to Preston. Ultimately the insurer came to know about this and filed a suit against Preston on the ground that since he received the full price he doesn’t stand to incur any financial loss from the mishap. So there is no valid reason for him to receive payment from the insurer. The court accepted the insurer’s stand and ordered Preston to return the amount indemnified by the insurer.
Importance of the principle of subrogation
The principle of subrogation serves to achieve the following objectives: 1. It prevents the insured from profiting from the damage, i.e., obtaining compensation twice for the same loss. 2. It enforces the rule of law that the guilty is brought to book and made to pay for the loss. 3. It helps the insurer to partially or fully recover the amount paid for the loss. 4. It helps to lower the insurance rates. With reimbursements from the concerned third party, the insurance company’s losses are substantially scaled down, the benefit of which in turn is passed on to the final policyholder by way of reduction in premium. Whenever the insurance company indemnifies the insured for the full value of the insurance policy (when the asset is completely damaged) the insurer takes possession of the damaged asset to realise the salvage value. It has to be noted that if the value of compensation recovered by the insurance company from the responsible third party is more than the amount indemnified to the insured, the insurer has to return the excess amount to the insured (after deducting the expenses incurred in recovering the money such as legal charges, etc.). In the case where the insured himself takes action against the negligent party the insurer is not liable to pay any compensation. If the insured comes ahead to relieve the negligent party from his liability for the loss that may happen when the concerned person is a close relation of the insured, the insurer is not liable for compensation as his right to sue the negligent party is lost. Applicability of the doctrine of subrogation Necessarily the principle of subrogation applies to general insurance (other than insurance on human) only. It has no relevance with respect to life insurance or health insurance since the principle of indemnity on which it rests upon applies exclusively to general insurance. There can be no subrogation on anyone’s life. In case of loss of life the insurance company has to pay the assured amount to the beneficiary of the insured. Here the insurer has no right of action against the third party for financial claims even if the loss of life was caused by him.
Limitations of the doctrine of subrogation
1. This doctrine is not applicable to life insurance policies, so the insurer has no right of action against third parties responsible for the death.
2. The doctrine becomes operative only after the insured has been indemnified. There is no relation between the indemnity provided for and the exercise of subrogation. The insurer may not be able to recover the same amount by exercising the right of subrogation against the third party.
3. Subrogation cannot be exercised where the assured is not in a position to take action against the damaging party.
Example –Mr. Bhagat had insured his personal computer. It was damaged by his teenage son Jagat who smashed it with a cricket ball in a fit of rage. In this case Mr. Bhagat does not want to subject his son to any action. Hence the insurer is not obliged to make payment for the loss.
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