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THE PRINCIPLE OF SUBROGATION IN INSURANCE

THE PRINCIPLE OF SUBROGATION IN INSURANCE




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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