Principle of Subrogation

PRINCIPLE OF SUBROGATION

Principle of Subrogation is an extension and another corollary of the

principle of indemnity. It also applies to all contracts of indemnity.
Subrogation is the substitution of one person in place of another in relation
to a claim, its rights, remedies or securities. According to the principle of
subrogation, when the insured is compensated for the losses due to damage
to his insured property, then the ownership right of such property shifts to
the insurer.
Having satisfied the claim of the assured, the insurer stands in the place, and
subrogated to all the rights of the insured.
This principle is applicable only when the damaged property has any value
after the event causing the damage. The insurer can benefit out of subrogation
rights only to the extent of the amount he has paid to the insured as
compensation.
❖ In the words of W.A. Dinsdale, “Subrogation is the insured’s right to
receive the benefit of all the rights of the assured against third parties
which, is satisfied, will extinguish or diminish the ultimate loss
sustained.”

❖ According to Federation of Insurance Institutes, Mumbai. “Subrogation

is the transfer of rights and remedies of the insured to the insurer who
has indemnified the insured in respect of the loss.”
According to the principle of subrogation, on the payment of claim of the
insured, the insurer steps into the shoes of the insured, to claim the
damages/loss caused to the property by third party:

For example, the owner of a motorcar having a comprehensive insurance

cover, has got two alternative in case of an accident with another car or
person (third party) who caused the accident. Firstly, he can claim for the
damages from the Insurance Co. or from the third party. If the car owner
decides to collect compensation from the Insurance Co., his right against
the third party is subrogated to the Insurance Co. so that the company can
afterwards claims the damages from the third party.
For example: Mr. Arvind insures his house for ` 1 million. The house is
totally destroyed by the negligence of his neighbour Mr. Mohan. The
insurance company shall settle the claim of Mr. Arvind for ` 1 million. At the
same time, it can file a law suit against Mr. Mohan for ` 1.2 million, the
market value of the house. If insurance company wins the case and collects `
1.2 million from Mr. Mohan, then the insurance company will retain ` 1
million (which it has already paid to Mr. Arvind) plus other expenses such as
court fees. The balance amount, if any will be given to Mr. Arvind, the
insured.
 FEATURES OF PRINCIPLE OF SUBROGATION
(i) Corollary to the principle of indemnity – This principle of subrogation is
the supplementary principle of indemnity.
(ii) Subrogation is the substitution – The insurer according to this principle
becomes entitled to all the rights of insured subject-matter after
payment because he has paid the actual loss of the property.
(iii) Subrogation only up to the amount of payment – The insurer in
subrogation all the rights, claims, remedies and securities of the
damages insured property after indemnification but he is entitled to get
these benefits only to the extent of his payment.
(iv) The subrogation may be applied before payment – If the assured got
certain compensation from third party before being fully indemnified
by the insurer, the insurer can pay only the balance of the loss.

(v) Personal Insurance – The doctrine of subrogation does not apply to

personal insurance because the doctrine of indemnity is not applicable
to such insurance. The insurers have no right of action against the
third party in respect of the damages.
LIMITATIONS TO THIS DOCTRINE

1. Does not apply to life and personal accident policies;

2. Insurer must pay before he claim subrogation;
3. Assured must have been able to bring action.
 DOUBLE INSURANCE
Double Insurance is possible in all types of Insurance Contracts. A person can insure his life in
different policies for different sums. In life insurance the assured can claim the sum insured with
different policies on maturity on to his nominee after his death. This becomes possible in life
insurance because life insurance is not an indemnity insurance. Where risk connected with a
particular subject-matter is insured under mare than one policies taken out from different
Insurance Co., it is called “Double Insurance
Double Insurance may not be of much advantage in case of indemnity
insurance because insured can recover only one amount which is equal to his
loss and not more than that.

Same Risk Same Insured Different insurance Companies

 PRINCIPLE OF CONTRIBUTION

This principle is a corollary to the principle of indemnity. This principle is

applicable in all types of insurance contracts except life insurances.
According to this principle, the insured can claim the compensation only
to the extent of actual loss either from all insurers or from any one insurer.
If one insurer pays full compensation then that insurer can claim
proportionate claim from the other [Link] an insurer gets the
subject matter insured with more than one insurer and case of loss/damage
to the insured property, all of them shall be called upon to contribute
towards the claim in proportion to the sum assured with each.
❖ According the Federation of Insurance Institute, Mumbai, “Contribution is
the right of an insurer who has paid a loss under a policy, to recover as a
proportionate amount from other insurers who are liable for the loss.” This
principle ensures equitable distribution of losses between different insurers.
A policy holder is not entitled to claim from each insurer more than the
ratable proportion of the loss to which one is liable.
❖ In an English case North British and Merchantile Insurance Co. v/s
London Liverpool and Globe Insurance Co. [(1877) 5 CHD 569],
the principle of contribution has been explained as under,
“Contribution exists where the thing is done by the same person
against the same loss and to prevent a man first of all recovering more
than the whole loss or if he recovers from the other then to make the
parties to contribute ratably. But that only applies where there is the
same person insuring the same interest with more than one office.”
Calculation of Contribution – The following formula is applicable to
calculate the contribution by each:

Contribution = Sum assured with individual insurer x Total Loss

Total sum assured
Example : A insurers a building against fire with three fire insurance
companies x, y and z with Rs. 30,000/- Rs. 40,000/- and Rs. 30,000/-
respectively. A fire took place during the period of insurance and a total
loss of Rs. 60,000/- was calculated. The contribution from x, y and z shall
be as under:Contribution of x Company = 30,000 x 60,000 = 18,000
1,00,000

Contribution of y Company = 40,000x x 60,000 = 24,000

1,00,000

Contribution of z Company = 30,000x x 60,000 = 18,000

1,00,000
In case Company X has made the payment of claim for Rs. 60,000/- to A , X
has right to claim Rs. 24,000/- and Rs. 18,000/- from Y and Z respectively.

So, if the insured claims full amount of compensation from one insurer then
he cannot claim the same compensation from other insurer and make a profit.
Secondly, if one insurance company pays the full compensation then it can
recover the proportionate contribution from the other insurance company.
 ESSENTIAL CONDITIONS OF CONTRIBUTION

a. All the insurance must relate to the same subject-matter.

b. The policies concerned must all cover the same interest of the same
insured.
c. The policies concerned must all cover the same peril which caused the
loss.
d. The policies must have been in force and all of them should be
enforceable at the time of loss.
 RE-INSURANCE
* Re-Insurance is a contract between two or more Insurance Company by
which a portion of risk of loss is transferred to another Insurance Company.
Reinsurance is an insurance of insured risk where the insurer retains a part and
cedes the balance of a risk to the reinsurer. This is done to facilitate a greater
spread and reduce liability on the part of the insurer.

* This happens only when an Insurance Company has undertaken more risk
burden on its shoulder than its bearing capacity. In the words of Riegel and
Miller “Re-Insurance is the transfer by an Insurance Company a portion of its
risk to another Company.”
* According to the Federation of Insurance Institute, Mumbai :
Re-Insurance is an arrangement where by an insurer who has accepted an
insurance, transfers a part of the risk to another insurer so that his liability
on any one risk is limited to a figure proportionate to his financial
capacity.”
In other words, reinsurance is insurance that is purchased by an insurance
company (reinsurer) from an insurer as a means of risk management, to
transfer risk from the insurer to the reinsurer.
* The reinsurer and the insurer enter into a reinsurance agreement which
details the conditions upon which the reinsurer would pay the insurer's
losses (in terms of excess of loss or proportional to loss). The reinsurer is
paid a reinsurance premium by the insurer, and the insurer issues thousands
of policies. It is an independent contract between the reinsurer and the
insurer and the original insurer is not a part of the contract.

* A Re-Insurance does not affect the contract between the original insurer
and the assured. Re-Insurance contracts are contract of indemnity, even
though the original policy may not the one of indemnity, such as a life or
personal accident policy.
* Reinsurance primarily deals with catastrophe risks that are not predictable
and cause the greatest exposure for the insurance company. A single insurer
will not be able to bear the damaging financial impact of such losses.
Therefore, an unbearable loss is broken down into bearable units by risk
transfers. An insurance company limits the amount of risk it takes depending
on the reinsurance terms along with factors like the worth of its assets, trend
of inflation in the economy, price of the insurance products and the type of
risk.
 CHARACTERISTICS OF RE-INSURANCE

i. It is an Insurance contract between two Insurance Company.

ii. The insurer transfer the risk beyond the limit of his capacity to
another Insurance Company.
iii. The relationship of the assured remains with the original insurer
only. The Re-Insurance is not liable directly towards the assured.
iv. Re-Insurance does not affect the right of insured.
v. The original insurer cannot do Re-Insurance more than the insured
sum.
vi. Re-Insurance is a contract of indemnity.
 DIFFERENCE BETWEEN DOUBLE INSURANCE AND
RE-INSURANCE

1. Double Insurance is the method by which an insured purchases

different policies against the same subject-matter. Where as in
Re-Insurance an insurer obtain Re-Insurance with another insurer.

[Link] Re-Insurance, relationship exists between the Original Insurer and

the Re-Insurer. The insured has no relationship with the Re-Insurance
with the Re-Insurance but in double insurance always a relationship
between insured and insurer.
3. In Double Insurance, every insurer is bound to contribute in properties to
the policies on happening of losses. In Re-Insurance the insurer is
required to contribute in proportion to the amount of Re-Insurance.

[Link] Double Insurance, the insured the insured has the right to claim from
every insurer subject to the limit of actual loss. In the Re-Insurance the
insured can demand compensation from the original insured only.
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