What is the Principle of Subrogation?

What Is The Principle Of Subrogation?

The principle of subrogation is a legal right that allows an insurer to substitute the insured’s right and recover the insured's business loss from the third party responsible. In simpler terms, once your insurer compensates your business for your loss, they take your role and recover the amount your business lost from the faulty third party. For example, your car gets hit in the parking space by a third party car who is trying to park. In this case, if your car is insured with a motor insurance, you can raise a claim with your insurer. The insurer will first compensate you for the loss, and then proceed to recover the losses and file a lawsuit against the third party on your behalf if required. This assumption of responsibility and filing lawsuits on behalf of the policyholders is known as subrogation in insurance.

The word “subrogation” originates from the Latin word subrogare, which means to substitute. This principle exists to maintain fairness and help the insured in claim recovery.

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What Are The Main Types Of the Principle Of Subrogation?

Let’s understand the main types of subrogation in practice.

Contractual Subrogation

Contractual subrogation is when the insurance policy allows for the insurer to recover the health claim from a third party. For example, if a group health policy has a subrogation clause, it will allow the insurer to recover the claim from a third party in case any physical injury is caused to the insured.

Equitable Subrogation

In the event of equitable subrogation, the insurer can receive the claims even without a policy clause or a specific statute. In India, equitable subrogation is permitted legally, depending on the nature of the claim. Courts usually permit equitable subrogation when the insurers have acted in the best interest of the insured.

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How Does the Principle Of Subrogation Work In Insurance?

Let’s have a complete breakdown of how subrogation in insurance works in real life.

Step 1: The Insurer Settles Claim

The process typically starts after the insured files a claim, and the insurer has compensated for it. Once a claim settlement is made, the insurer looks for possible legal rights to recover the amount from the responsible third party. The insurer may negotiate with them directly or proceed with a legal complaint.

Step 2: Insurer Appeals For Claim

The doctrine of subrogation begins as soon as the insurer assumes the responsibility of appealing a claim on behalf of the insured. The insurer acts in the best interest of the insured and tries to recover the loss amount directly from the third party by appealing.

Step 3: Insurer Legally Appeals

In case the responsible third party does not admit to compensate for the loss, the insurer proceeds to file a legal claim against the responsible party. The insurer can move to the court of law in case of a dispute, or submit a legal notice for getting the claim compensated.

In practice, subrogation in insurance is more common in property and motor accident claims than in health insurance. The reason is that health insurance policies occasionally involve a responsible third party, except in cases of accident.

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Example Of the Principle Of Subrogation

Lokesh owns a warehouse in Borivali, Mumbai. On the festive eve of the Ganapati festival, a fire mishap damaged few of the shops in the area including his warehouse. The fire resulted in a loss of ₹40 lakhs for Lokesh, burning down most of the inventories. Lokesh had fire and theft insurance, as a result of which his insurer raised claims with the store owner, seeking damage compensation. Lokesh filed a claim with his insurer, which compensated him for the loss of damage by fire. By the principle of subrogation, the insurer pursued the third party shop which caused the fire damage, and filed a lawsuit against them.

What Does Waiver Of Subrogation Mean?

A waiver of subrogation is when the insurer waives off its right of the insurer to pursue recovery from a third party on behalf of the insured. Some insurers may also charge a specific fee for the clause of waiver of the subrogation clause. For example, two businesses can have a waiver of subrogation to avoid a public dispute or goodwill damage. You can find a waiver of subrogation in many Indian construction contracts as a part of the contract. In such a clause, the contractor and the client both enter into a mutually agreed decision to compensate each other for any loss.

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Benefits Of the Subrogation For Insured

Subrogation not only benefits the insurer and insured, but it also helps to set a justifiable system. The insurance industry works on a justifiable system based on honesty and transparency. Here the some benefits of subrogation:

Helps Insurers to be Financially Stable

Under this clause of subrogation, insurers assume to act on behalf of the insured. Insurers pay out of their own funds to settle claims of the insured, which is balanced out when the insurer recovers those claims from the responsible entity.

Prevents Double Collection of Claims

When a third party accidentally damages the insured, the insured reserves the right to recover compensation for the damage. The doctrine of subrogation prevents this by allowing only the insurer to recover the loss.

Avoids Legal Complications

The principle also avoids all legal complications from taking place by letting the insurer proceed with the task of raising a claim. The insurer assumes the authority to recover the compensation for loss made to the insured, hence legal repercussions are avoided.

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How Does the Subrogation in Insurance Differ From Indemnity?

Indemnity is a contractual principle where an insurer agrees to compensate the insured for any loss in exchange for the premium received. This is different from the doctrine of subrogation. Subrogation occurs after indemnity has happened, where the insurer tries to recover the compensation from the responsible third-party. Subrogation occurs more often in car insurance or property insurance, where there is a scope of indemnity. Although you won’t be finding subrogation in life insurance, as there is less scope of indemnity there. An insurer cannot compensate the insured in case of the death of the insured; hence, subrogation has a little role to play in life insurance policies.

Insurer Rights Under Subrogation

An insurer holds different rights under the subrogation principle. They can exercise these rights whenever they have to claim compensation. Let’s know what rights the insurers have under subrogation:

Right To Recover

The first right that an insurer gets is to claim compensation for the damages caused by the third-party. Subrogation meaning is to substitute, which an insurer does. An insurer substitutes the right to claim compensation with the insured and can seek compensation, such as medical expenses or physical injury claims.

Right To Take Legal Step

The insurer reserves the right to take legal action against the accountable third party for any damages caused to the insured. By legal action, the insurer can claim against the third party in court and submit a legal petition for damage claims.

Right To Inquire

Subrogation allows the insured to collect proof against the accused and claim the recovery amount. The loss can be greater or small, but the insurer still reserves rights to investigate. The insurer can seek evidence such as medical reports or even reports of damages.

Conclusion

The principle of subrogation is a crucial part of the insurance system, as it ensures that fairness and cost control are maintained. For insurers, it prevents double payment while recovering the compensation. For the insured, it helps them not invest their time in recovering the claims and pursue complex legal battles. Remember that subrogation is a law based on the principle that both the insured and insurer must act with transparency. In India, the subrogation principle is acknowledged in multiple laws and reinforced through court judgments. It applies across sectors like motor, property, and marine insurance. By understanding how it works, both insurers and policyholders can benefit from its appropriate use.