The The term 'subrogation' in the context of insurance, has been defined in Black's Law Dictionary thus:
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.
'Right of Subrogation is statutorily recognized and described in Section 79 of the Marine Insurance Act, 19631.
Subrogation is the right or rights of the insurer to assume the rights of the insured. Legal rights or to step into the shoes of. Rights of subrogation can arise three different ways:
(i). Subrogation by equitable assignment,
(ii). Subrogation by contract, and
(iii). Subrogation-cum-assignment.
Subrogation by contract commonly arises in contracts of insurance. The doctrine of subrogation confers upon the insurer the right to receive the benefit of such rights and remedies as the assured has against third parties in regard to the loss to the extent that the insurer has indemnified the loss and made it good. The insurer is, therefore, entitled to exercise whatever rights the assured possesses to recover to that extent compensation for the loss, but it must do so in the name of the assured. 2
Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire loss, i.e. insurer stands in the shoes of the insured. Subrogation in this sense is a contractual arrangement for the transfer of rights against third parties and is founded upon the common intention of the parties. But the term is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based upon any agreement or common intention of the party enriched and the party deprived.3
Principles regarding doctrine of subrogation in India-4
The principles relating to subrogation can therefore be summarized thus:
(i) Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire loss. When there is an equitable subrogation in favour of the insurer, the insurer is allowed to stand in the shoes of the assured and enforce the rights of the assured against the wrongdoer.
(ii) Subrogation does not terminate nor puts an end to the right of the assured to sue the wrong-doer and recover the damages for the loss. Subrogation only entitles the insurer to receive back the amount paid to the assured, in terms of the principles of subrogation.
(iii) Where the assured executes a Letter of Subrogation, reducing the terms of subrogation, the rights of the insurer vis-à-vis the assured will be governed by the terms of the Letter of Subrogation.
(iv) A subrogation enables the insurer to exercise the rights of the assured against third parties in the name of the assured. Consequently, any plaint, complaint or petition for recovery of compensation can be filed in the name of the assured, or by the assured represented by the insurer as subrogeecum-attorney, or by the assured and the insurer as co-plaintiffs or co-complainants.
(v) Where the assured executed a subrogation-cumassignment in favour of the insurer (as contrasted from a subrogation), the assured is left with no right or interest. Consequently, the assured will no longer be entitled to sue the wrongdoer on its own account and for its own benefit. But as the instrument is a subrogation-cum-assignment, and not a mere assignment, the insurer has the choice of suing in its own name, or in the name of the assured, if the instrument so provides. The insured becomes entitled to the entire amount recovered from the wrongdoer, that is, not only the amount that the insured had paid to the assured, but also any amount received in excess of what was paid by it to the assured, if the instrument so provides5.
The doctrine of subrogation and the concept of subrogation-cum-assignment is explained by the following example:
The loss suffered by the insured/ assured is Rs. 1,00,000. The insurer settles the claim for Rs. 75,000. The wrongdoer is sued for recovery of Rs. 1,00,000. Where there is no letter of subrogation and insurer relies on doctrine of equitable subrogation. (Suit filed by the insured/ assured)
1. If the suit filed for recovery of Rs.1, 00,000/- is decreed as prayed, and the said sum of Rs.1, 00,000/- is recovered, the assured would appropriate Rs. 25,000/- to recover the entire loss of Rs. 1, 00,000/- and the doctrine of subrogation would enable the insurer to claim and receive the balance of Rs.75, 000.
2. If the suit filed for recovery of Rs.1,00,000/- is decreed as prayed for, but the assured is able to recover only Rs.50,000/- from the Judgment-Debtor (wrong-doer), the assured will be entitled to appropriate Rs.25,000/- (which is the shortfall to make up Rs.1,00,000/- being the loss) and the insurer will be entitled to receive only the balance of Rs. 25,000/- even though it had paid Rs. 75,000/- to the assured.
3. Where, the suit is filed for recovery of Rs.1, 00,000/- but the court assesses the loss actually suffered by the assured as only Rs.75, 000/- (as against the claim of the assured that the value of goods lost is Rs.100,000/-) and then awards Rs.75,000/- plus costs, the insurer will be entitled to claim and receive the entire amount of Rs.75,000/- in view of the doctrine of subrogation. Where the assured executes a letter of subrogation entitling the insurer to recover Rs. 75,000/- (The suit is filed in the name of the assured or jointly by the assured and insurer).
4. If the suit is filed for recovery of Rs.1,00,000/-, and if the court grants Rs.1,00,000/-, the insurer will take Rs.75,000/- and the assured will take Rs.25,000/.
5. If the insurer sues in the name of the assured for Rs.75,000/- and recovers Rs.75,000/-, the insurer will retain the entire sum of Rs.75,000/- in pursuance of the Letter of Subrogation, even if the assured has not recovered the entire loss of Rs.1,00,000/-. If the assured wants to recover the balance of the loss of Rs.25,000/- as he had received only Rs. 75,000/- from the insurer, the assured should ensure that the claim is made against the wrongdoer for the entire sum of Rs.100,000/- by bearing the proportionate expense. Otherwise the insurer will sue in the name of the assured for only for Rs. 75,000/-.
6. If the letter of subrogation executed by the assured when the insurer settles the claim of the assured uses the words that the "assured assigns, transfers and abandons unto the insurer, the right to get Rs.75,000/- from the wrong-doer", the document will be a 'subrogation' in spite of the use of words 'transfers, assigns and abandons'. This is because the insurer has settled the claim for Rs.75, 000/- and the instrument merely entitles the insurer to receive the said sum of Rs.75, 000/- which he had paid to the assured, and nothing more. Where the assured executes a letter of subrogation-cum-assignment for Rs.100, 000/-
7. If the document executed by the assured in favour of the insured provides that in consideration of the settlement of the claim for Rs.75,000/-, the assured has transferred and assigned by way of subrogation and assignment, the right to recover the entire value of the goods lost and retain the entire amount without being accountable to the assured for any excess recovered (over and above Rs.75,000/-) and provides that the insurer may sue in the name of the assured or sue in its own name without reference to the assured, the instrument is a subrogation-cum-assignment and the insurer has the choice of either suing in the name of the assured or in its own name. Where the assured executes a letter of assignment in favour of a third party to sue and recover from the carrier, the value of the consignment.
8. If the assured, having received Rs.75,000/- from the insurer, executes an instrument in favour of a third party (not being the insurer) assigning the right to sue and recover from the carrier, damages for loss of the consignment, such a document will be an Assignment. The assignee cannot file a complaint before the consumer for a, as he is not a 'consumer'. Further, such a document being a transfer of a mere right to sue, will be void and unenforceable, having regard to section 6(e) of Transfer of Property Act, 1882. It is well settled that a right to sue for unliquidated damages for breach of contract or for tort, not being a right connected with the ownership of any property, nor being a right to sue for a debt or actionable claim, is a mere right to sue and is incapable of being transferred.
Maintainability of the complaint in the Consumer forum- [section 2(d) of Consumer Protection Act, 1986]6
a) The insurer, as subrogee, can file a complaint under the Act either in the name of the assured (as his attorney holder) or in the joint names of the assured and the insurer for recovery of the amount due from the service provider. The insurer may also request the assured to sue the wrong doer (service provider).
b) Even if the letter of subrogation executed by the assured in favour of the insurer contains in addition to the words of subrogation, any words of assignment, the complaint would be maintainable so long as the complaint is in the name of the assured and insurer figures in the complaint only as an attorney holder or subrogee of the assured.
c) The insurer cannot in its own name maintain a complaint before a consumer forum under the Act, even if its right is traced to the terms of a Letter of subrogation-cum-assignment executed by the assured.
d) Questions which fell for consideration before Hon'ble the Supreme Court of India in Oberai Forwarding Agency's7case (supra) was as to whether the Insurance Company was subrogated to the rights of the claimant consignors of the goods with respect to the lost consignment or whether the Insurance Company who was the assignee of the rights in respect of the rights of insured thereof; and, if the latter, whether it was a 'consumer' within the meaning of the Consumer Protection Act 1986 entitled to maintain a complaint thereunder?
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. 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.
Footnotes
1. (1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured, the thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing the loss.
(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject matter insured, or such part of it as may remain, but he is thereupon subrogated to all rights and remedies of the assured and in respect of the subject matter insured as from the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.
2. Oberai Forwarding Agency v. New India Assurance Co. Ltd. 2002 (2) SCC 407
3. House of Lords in Banque Financiere de la Cite v. Parc (Battersea) Ltd. 1999 (1) A.C. 221
4. Economic Transport Organization Vs. Charan Spinning Mills (P) Ltd. and Anr, 2010(3)ALD58(SC).
5. Economic Transport Organization Vs. Charan Spinning Mills (P) Ltd. and Anr, 2010(3)ALD58(SC).
6. Section 2(d) of Act was amended by Amendment Act 62 of 2002 with effect from 15.3.2003, by adding the words "but does not include a person who avails of such services for any commercial purpose" in the definition of 'consumer'. After the said amendment, if the service of the carrier had been availed for any commercial purpose, then the person availing the service will not be a 'consumer' and consequently, complaints will not be maintainable in such cases. But the said amendment will not apply to complaints filed before the amendment.
7. Oberai Forwarding Agency v. New India Assurance Company Limited and Another reported in (2000) 2 SCC 407
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