CHAPTER I - INTRODUCTION

Subrogation literally means the substitution of one person for another 1. The term is used to
refer to the situation where an insurer, who has extended indemnity to an insured under a
policy of insurance, becomes entitled to exercise the rights that the insured has against a third
party who caused or contributed to the loss sustained by the insured 2. The doctrine is not
administered as a legal right, but as a principle that is applied to serve the ends of justice and
to do equity3.

In the insurance context, the doctrine of subrogation is associated with two discreet aspects
of the relationship between an insurer and an insured:

1. The doctrine allows the insurer to exercise, in the insured's name, rights that the insured
may have against third parties; and

2. The doctrine is associated with the principle that an insurer can claim from an insured any
double recovery made by that insured.

An example of the latter situation would be where an insurer indemnifies an insured for the
total loss of the insured’s house by fire and the insured later recovers damages from a third
party who caused the fire. In such circumstances, the insurer would generally be entitled to
recover these damages from the insured4.

The doctrine of subrogation only applies to true indemnity insurance, and is generally not
applicable to life insurance5 or some forms of personal accident insurance6. This principle
was considered in some detail by the Supreme Court of Western Australia (Court of Appeal)
in the recent case of Insurance Commission of Western Australia v Kightly7.

The defendant in this case, Mr Kightly was a member of the Denmark Volunteer Sea Rescue
Group (the "Volunteer group") which formed part of the W.A. Police Service. Mr Kightly
was unfortunately seriously injured on 30 May 1998 while participating in a training session
conducted by, Surf Lifesaving Western Australia Inc (SLSWA).

1
Leigh-Jones et al, “MacGillivray on Insurance Law”, 10th Ed (2003) at page 568.
2
Jindra v. Clayton, 247 Neb. 597, 529 N.W.2d 523 (1995); Tri-Par Investments LLC v Sousa 268 Neb 119 (2004).
See discussion in CCH Australia Limited, "Australian and New Zealand Insurance Reporter" (2004).
3
Cagle Inc v Sammons 198 Neb 595; 254 NW 2d 398 (1977). See CCH Australia Limited, "Australian and New
Zealand Insurance Reporter" (2004).
4
See, for example, Castellain v Preston (1883) 11 QBD 380; British Traders Insurance Co v Monson (1964) 111
CLR 86.
5
Solicitors and General Life Assurance Society v Lamb (1864) 2 De GJ & S 251.
6
Thobald v Railway Passengers’ Assurance Co (1854) 10 Exch 45
7
(2005) 30 WAR 380; (2005) 225 ALR 380; (2005) 193 FLR 322; (2005) 13 ANZ Ins Cas 61-656; [2005] WASCA
154.

1
Mr Kightly claimed under he Volunteer Group's personal accident insurance underwritten by
the plaintiff, the Insurance Commission of Western Australia (the "PA Insurer") and received
$70,557.30 in benefits for medical, rehabilitation and travels expenses and loss of income. Mr
Kightly then brought an action in negligence against SLSWA and recovered by way of
settlement the additional sum of $145,000 plus costs which sum was paid by SLSWA's
liability insurer. The PA insurer sought recovery of the sum the sum that it had paid to Mr
Kightly.

The PA Insurer failed at first instance. Relevantly, the issue before the Court of Appeal was
whether the PA policy was a contingency policy not requiring proof of actual loss or was it
an indemnity policy.

The Court of Appeal found that as the PA policy provided for indemnification in the case of
actual, proved, financial loss, it was therefore a policy of indemnity the PA Insurer was able
to exercise its equitable rights of subrogation.

The source of an insurer's subrogation rights

In the context of insurance law, there is some doubt whether subrogation is an equitable or
common law principle8. However, the current view is that the right of subrogation has both
contractual and equitable elements9.

It is important to understand the nature of the doctrine of subrogation as the manner in which
rights of subrogation arise may restrict or expand the extent of those rights. For example, to
the extent that a right of subrogation arises in equity, the exercise of that right may be subject
to equitable principles and equitable defences. To the extent the doctrine rests on the parties'
intentions it may depend upon what is embodied in the contract.

The exercise of the right of subrogation

There are generally two preconditions to the exercise of the right of subrogation (subject to
the express terms of the policy):

1. The insurer must be liable for the relevant loss; and

2. The insurer must have indemnified the insured to the full extent required by the
policy.

In respect of the first requirement, it appears that an insurer is not entitled to exercise its
rights of subrogation if the contract with the insured is void, even in circumstances where the
insurer has already made a payment under that contract10.

8
See Lord Napier v Hunter [1993] AC 713.
9
See Banque Financier de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221 and Woodside Petroleum
Development Pty Ltd v H&R – E&W Pty Ltd (1999) 20 WAR 380.
10
John Edwards & Co v Motor Union Insurance Co Ltd [1922] 2 KB 249.

2
As to the second requirement, it seems that for the right of subrogation to arise, the insurer
must have fully indemnified the insured to the extent required under the policy, even if this
does not provide the insured with a complete indemnity11.

Restrictions on the right of subrogation

As noted above, generally, the right of subrogation enables the insurer to exercise all of the
rights that the insured has against a third party (in so far as such rights are connected with the
subject matter of the insured’s loss). However, these rights can be constrained by the
relationship between the insured and a third party and also by the terms of the policy itself12

Effect of contracts between the insured and third parties

An insurer's right of subrogation against a third party may be affected by the terms of a
contract between the insured and that third party.

(a) Express terms

Generally any contractual modification or limitation of the insured’s rights will apply equally
to the insurer’s rights by way of subrogation.

In State Government Insurance Office (Qld) v Brisbane Stevedoring Pty Ltd (1969) 123 CLR
228 the hirer of equipment agreed to indemnify the owner of that equipment against all
claims arising out of its use. Consequently, the workers compensation insurer of the hirer was
unable to rely on a claim against the negligent owner by way of subrogation.

The contract between the insured and the owner of the equipment prevented any rights
against the owner from accruing. At no time was there a right of the insured which the insurer
might exercise by way of subrogation.

Some contracts of insurance exclude the insurer's liability if the insured enters into a contract
which restricts the right of the insured to recover damages from a third party in respect of a
loss covered by the insurance. Section 68 of the Insurance Contracts Act 1984 (Cth) prevents
the insurer from relying on a term of that type unless it is specifically drawn to the insured's
attention.

(b) Implied terms

In some cases, there may be an implied term in a contract between the insured and the third
party which operates to exclude claims brought by way of subrogation. In the English
decision of Mark Rowlands Limited v Berni Inns Limited13, premises were destroyed by fire
due to the tenant’s negligence. The lease contained a provision stating that the landlord would

11
See for example, GPS Power Pty Ltd and Ors v Gardiner Willis & Associates Pty Ltd (2001) 11 ANZ Ins Cas 61-
482
12
Castellain v Preston (1883) 11 QBD 380
13
[1986] 1 QB 211

3
insure the premises and apply any insurance monies to restoring the premises. The tenant was
obliged to pay monies to the landlord in respect of insurance. The tenant was also obliged to
effect repairs to the premises but not where the damage was caused by fire. The landlord had
taken out an insurance policy over the premises, which did not name the tenant.

When the premises burnt down, the insurer attempted to bring an action in negligence against
the tenant (after indemnifying the landlord). The English Court of Appeal took the view that
having regard to the terms of the lease, it was the intention of the parties that the insurance
effected by the landlord was intended to be for the benefit of the tenant. As such, the
landlord's loss was to be recouped from the insurance monies and accordingly, that the
landlord would have no further claim against the tenant.

4
 CHAPTER II – RESEARCH METHODOLOGY

What is Research?

Research means the systematic enquiry to find out the truth. It involves systematic collection,
analysis and interpretation of data to answer a certain question or solve a problem. The four
important stages in a research process is: Planning, Collection of Data, Analysis and
Reporting.

Statement of Problem:

Subrogation is a legal doctrine whereby one person is entitled to enforce the subsisting or
revived rights of another for one's own benefit. A right of subrogation typically arises by
operation of law, but can also arise by statute or by agreement. Subrogation is an equitable
remedy, having first developed in the English Court of Chancery. Though its doctrinal basis
may be rationalised differently depending upon the extent to which Equity remains a distinct
body of law in that jurisdiction.

The researcher wishes to analyse the doctrine in the light of contract of indemnity and
contract of insurance.

Relevance of the study:

The study of this subject is highly relevant as it is a very significant to understand the
relevance of Doctrine of Subrogation with regards to contract of indemnity and insurance
and its interconnection to law and society and views of different judges in context to the
topic. The study deals with various aspects of the topic in detail.

Research questions:

1. If there is any action brought down to invoke this doctrine?

2. What is the validity of the doctrine in India?

Hypothesis:

The doctrine of Subrogation is not of much help in delivering justice to the people.

Research Methodology:

The study of this subject is highly relevant as it is a very significant to understand the
relevance of study of the doctrine of Subrogation and its interconnection to law and views of
different judges in context to the topic. The study deals with various aspects of the topic in
detail.

5
The research will be conducting secondary research. Materials and fact will be taking from
various books, reports, articles and the internet. However, views and opinions of the
researcher will be stated in the project. The research design type which will be used in the
study is of descriptive and of review nature.

Review of Literature:

The researcher intends to use:

1. S K Verma & M Afzal Wani (eds), Legal Research and Methodology (Indian Law
Institute, New Delhi, 2nd ed., 2001).

While going through this book, the researcher learnt the meaning of research and also
gained insight on how to conduct research and modes of research.

2. Contract II, RK Bangia, Allahabad Law Agency.

This book gave the basic idea of what the doctrine of subrogation is and how relevant it is
in today’s generation.

3. Indian Contract Act, Dinshaw Fardunji Mulla, Lexis Nexis, 15th edition.

On reading this book, the researcher learnt and analysed the change in the pattern of the
application of this doctrine in different judicial cases.

4. Contract and Specific Relief act, Avtar Singh, Eastern Book Agency, 11th edition.

This book helped the researcher to perform a comparative analysis of the doctrine in
different countries of the world.

5. The Law of Contract, P.C Markanda, Lexis Nexis, 3rd edition.

While going through this book, the researcher gained more knowledge about the judicial
decisions and the application of this doctrine.

6
 CHAPTER III – LEGAL ANALYSIS

The doctrine of Subrogation means an insured may waive in writing before a loss all rights of
recovery against any person. If not waived, we may require an assignment of rights of
recovery for a loss to the extent that payment is made by us.

The doctrine can have a better understanding through the given pointers:

(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 subrogee-cum-attorney, or by the assured and the insurer as co-
plaintiffs or co-complainants.

(v) Where the assured executed a subrogation-cum-assignment 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 provides.

The doctrine can be clarified by the position with reference to the following illustration: The
loss to the assured is Rs.1,00,000/-. The insurer settles the claim of the assured for
Rs.75,000/-. The wrong-doer is sued for recovery of Rs.1,00,000/-. Where there is no letter of
subrogation and insurer relies on the equaitable doctrine of subrogation (The suit is filed by
the assured)

7
(i) If the suit filed for recovery of Rs.100,000/- 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. 100,000/- and the doctrine of subrogation would enable the insurer to claim and
receive the balance of Rs.75,000

(ii) If the suit filed for recovery of Rs.100,000/- 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.100,000/- 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.

(iii) Where, the suit is filed for recovery of Rs.100,000/- 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).

(iv) 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/.

(v) 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/-.

(vi) 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/-

(vii) 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

8
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

(viii) 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 fora, 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.

The doctrine of subrogation provides that if an insurer pays a loss to its insured due to the
wrongful act of another, the insurer is subrogated to the rights of the insured and may
prosecute a suit against the wrongdoer for recovery of its outlay. The right of an insurer to be
subrogated to the rights of its insured is typically based upon:

(1) The terms of the policy of insurance; or,

(2) The right of equitable subrogation, i.e., by operation of law.

The typical property insurance policy provision relating to subrogation provides in pertinent
part:

The common-law concept for subrogation by an insurer to the rights of its insured was
designed to place ultimate responsibility for loss upon the wrongdoer, i.e., on whom in good
conscience it should fall, and to reimburse the innocent party who is compelled to pay.

As a general rule, an insurer does not have a right of subrogation or indemnification against
its own insured. More specifically, an insurer has no right of subrogation against its own
insured for claims arising from the very risk for which the insured was covered.

In most instances, these separate and distinct rules respecting an insurer's right of
subrogation, and respecting the prohibition against subrogating against an insured, do not
conflict nor pose a problem for most insurers; nor, do they generally pose a problem for the
typical insured who may be liable for a negligent act.

Moreover, subrogation rights are usually not at issue when an insurer is faced with a claim
caused by the intentional act of its insured. Thus, in such instances the insurer will generally
have a right to properly deny coverage because the loss, as required by most property
policies, was not accidental, and because of the typical exclusion, under most policies, for
intentional acts committed by an insured.

However, where the insured has intentionally caused damage to the insured property, and
where the insurer is required to pay an innocent co insured, the two above-mentioned rules of
law conflict. Thus, in instances where an insured is guilty of fraud or deceit, and where an

9
insurer has paid a claim to an innocent co insured, the insurer will, as subrogee and contrary
to the general rules of law, seek to recover from the tort feasor- insured an amount equivalent
to that paid the innocent co insured.

10
 CHAPTER IV - ROLE OF JUDICIARY

In this chapter I will be referring some of the important case laws and judicial precedents to
make my points more strong and to back my research paper.

In Economy Fire and Casualty Company v. Warren14, the plaintiff settled a fire loss claim
with its insureds -- a husband and wife -- for $20,514.05. Within two months following the
settlement of the claim, the insured-wife gave a written statement admitting to intentionally
causing the fire to the insured dwelling. The insurer then sought to rescind the settlement
agreement entered into with its insureds, and also sought restitution of the entire amount of
proceeds paid towards the claim.

The Court in Economy Fire concluded that the arson committed by the wife should not be
imputed to the husband who was innocent of any wrongdoing so as to bar the husband's
recovery. The Court held that the husband, as an innocent coinsured, was entitled to one-half
of the insurance proceeds, and further held that the insurer was entitled to an equitable lien in
its favor to the extent of the proceeds paid to the innocent coinsured. Economy Fire at 628,
390 N.E.2d at 364.

From an insured's perspective, Economy Fire stands for the proposition that an innocent
coinsured is entitled to recover their proportionate share of insurance proceeds when, based
upon a co-insured's intentional act, an insurer has a valid coverage defense against the non-
innocent coinsured. Conversely, from an insurer's perspective, Economy Fire stands for the
proposition that, when an insured breaches the terms of a policy by intentionally causing a
loss, an insurer is entitled to an equitable lien in its favor to the extent of the proceeds paid to
the innocent co-insured.

It is apparent that the court in Economy did not see the equity in allowing the innocent co
insured to be barred from recovery. Neither did they see the equity in forcing an insurer to
pay insurance proceeds without allowing the insurer a chance to seek out the responsible
party and make that party pay.

In Madsen v. Threshermen's Mutual Insurance Company15, the Wisconsin Court of Appeals

acknowledged the general principle of insurance law, i.e., that an insurer does not have
subrogation or indemnification rights against its own insured. The Madsen court also
recognized, however, the inequity wrought by this long-standing principle when an insured
intentionally causes a loss.

In its analysis, the Court in Madsen reasoned that common sense fairness requires an insured
to be held liable for a loss that he or she intentionally causes:
14
71 Ill. App.3d 625 (1979)
15
Madsen v. Threshermen's Mutual Insurance Company, 186 (Mass. 1999).

11
Ordinarily, an insurer does not have a right of subrogation or indemnification against its own
insured... adhering to this principle in this instance would defeat a purpose of subrogation,
which is to ultimately place the loss on the wrongdoer. Here, the wrongdoer and the insured
are the same person. Thus, requiring [the insured-wrongdoer] to reimburse [the insurer]
would appropriately place the loss on the wrongdoer.

It is interesting to note that a court in Florida held against the insurer in a similar case,
Treciak v. Treciak16. In Treciak, while going through a bitter divorce, the wife set fire to the
husband's home. The insurer paid the loss and filed a subrogation action against the wife.

Because the parties were not yet divorced at the time of the incident, the court held that the
insurer stood in the shoes of its insured, the husband, and thus was barred by the doctrine of
interposal immunity from suing the wife to recover on its subrogation claim. Such a result in
Illinois is unlikely because the applicable statute which bars spouses from suing each other
does not generally apply to intentional torts.

In the past, Courts relied upon the fact that spouses' obligations were joint, and concluded
therefore, that an innocent co insured spouse should not recover if the insured responsible for
the wrong-doing could not recover. However, the majority of Courts now look to the
language of the insurance policy and apply contract law.

A development in the common law view of an insurer's right of subrogation against its
insured will likely occur with cases that are brought under a recently enacted Illinois criminal
statute for persons who have defrauded, or who even attempt to defraud their insurance
company by presenting a fictitious claim for insurance proceeds. In addition to criminal
penalties for the convicted, the statute also provides civil remedies to the defrauded insurer.

Under paragraph 45-5 of the statute, any insured who attempts to defraud its insurer is liable
for twice the amount of the property attempted to be obtained. Additionally, any insured who
successfully defrauds its insurer, but whose scheme later becomes known to their insurer, is
liable for three times the amount of the property wrongfully obtained. The statute also
provides for the recovery of attorneys fees by the insurers who prevail under this section.

Interestingly, although the statute became effective as of the first of the year, questions are
now being raised as to whether the statute may be employed against those fictitious claims
which were filed in 1992, but where the investigation of such claim, and the attempted fraud,
continues past the law's effective date. Although, Illinois courts have yet to rule specifically
on that question as it concerns the recently enacted law, in a similar case, an Illinois

16
Treciak v. Treciak, 168 Cal. 369 (Cal. 1914

12
Appellate Court upheld another law's application under similar circumstances in People of
the State of Illinois v. Stephen D. Earles17.

17
Illinois v. Stephen D. Earles, 420 QB. 31 (Bankr. W.D. Pa. 1990).

13
 CHAPTER V – COMPARATIVE STUDY

POSITION IN UK:

A person can be substituted in place of another regarding a lawful claim, demand, or right
against a third party. The substituted person can gain the rights of the other person regarding
those legal claims against a third party. This right is called subrogation which is an equitable
doctrine. The right of subrogation is a derivative right. A person can satisfy his/her loss that
is created by the wrongful act or omission of another person by stepping into the shoes of the
loser and recovering on the claim from the wrongdoer18.

The major goal of subrogation is to obtain reimbursement for a subrogee for payments made
by the person with respect to a legal claim. However, the person should not be acting as a
mere intruder or volunteer. A person cannot claim rights by subrogation from another, rights
that person did not possess.

There are two types of subrogations:

 Legal subrogation: a legal subrogation arises by operation of law. It is an equitable

subrogation that can take effect with or without an agreement. However, legal
subrogation cannot be used to displace a contract agreed upon by the parties. A legal
subrogation can be modified or terminated by a contractual agreement.
 Conventional subrogation: a conventional subrogation is a right flowing from a
contract19. When one individual satisfies the debt of another as a result of a
contractual agreement which provides that any claims or liens that exist as security for
the debt be kept alive for the benefit of the party who pays the debt. It is necessary
that a conventional subrogation agreement should be supported by consideration.
However, it does not have to be in writing and can be either express or implied.

Statutory subrogation: a statutory subrogation arises by an act of legislature20. The act vests a
right of subrogation with a party or category of parties. It is governed by the terms of the
statute under which it is claimed as a matter of statutory construction.

A subrogation is given a liberal application in law. Courts do not restrict the application of
subrogation rights.

The right of subrogation is not available when a person pays a debt that s/he is obligated to
pay. The right of subrogation is not available to a person who is paying his/her own debt. A
subrogation is not applicable to volunteers or intruders who, without any moral or legal duty,
18
Interstate Fire & Casualty Ins. Co. v. Cleveland Wrecking Co., 182 Cal. App. 4th 23 (Cal. App. 1st Dist. 2010).
19
National Union Fire Ins. Co. v. Riggs Nat’l Bank, 646 A.2d 966 (D.C. 1994).
20
In re Stratford Lamps, Inc., 120 B.R. 31 (Bankr. W.D. Pa. 1990).

14
pay the debt of another. When a person pays the debt of another without any assignment or
agreement of subrogation, s/he can be considered a volunteer.

Generally, a right to subrogation does not accrue in favor of a surety until the surety has
performed its contractual obligation. A person who has an interest in a property can pay the
taxes and the assessment that are due from another on the land. In doing so, the person is
subrogated to the lien of the state or of the public taxing bodies. Generally, such rights of
subrogation are statutorily granted. When there is no written agreement for subrogation, no
person can pay the taxes or the assessment on a property in which that person has no
interest21. If there is no prior agreement, subrogation can be denied even if the party paid the
taxes on the request of the owner of the property.

When a person pays the debts of another by mistake, s/he is in the same position as a
volunteer. However, a protection under the doctrine of subrogation cannot be awarded to
such persons when they have no interest in the property. According to equitable subrogation,
the responsibility of a mistake can determine the results of the mistake.

A person who pays a mortgage when the original debtor fails to pay can get all the rights
under the doctrine of subrogation. However, the entire mortgage should be paid off by the
person22. The person should also have an interest over the property mortgaged. A person
cannot invoke the rule of subrogation favourably without an agreement of subrogation, unless
fraud, mistake, or some other consideration is shown. However, when a person has an
interest in the property, the person can hold the subrogation rights of a creditor when the
person has lent money for the property.

The doctrine of subrogation also applies the rules of equity maxims. When there is adequate
legal remedy, the claimant should approach courts with clean motives. The claimant should
not be interfering in the rights of another by committing fraud or negligence23.

21
Pacific Tel. & Tel. Co. v. Pacific Gas & Electric Co., 170 Cal. App. 2d 387 (Cal. App. 1st Dist. 1959).
22
Merchants’ Ins. Co. v. Herber, 68 Minn. 420 (Minn. 1897).
23
Blair v. Claflin, 310 Mass. 186 (Mass. 1941).

15
POSITION IN INDIA:

Subrogation in India is defined as “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”24.

'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. 25

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.26

Principles regarding doctrine of subrogation in India-27

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.

24
http://thelawdictionary.org/legal-subrogation/
25
Oberai Forwarding Agency v. New India Assurance Co. Ltd. 2002 (2) SCC 407
26
House of Lords in Banque Financiere de la Cite v. Parc (Battersea) Ltd. 1999 (1) A.C. 221
27
Economic Transport Organization Vs. Charan Spinning Mills (P) Ltd. and Anr, 2010(3)ALD58(SC)

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(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 subrogee-cum-attorney, or by the assured and the insurer as co-
plaintiffs or co-complainants.

(v) Where the assured executed a subrogation-cum assignment 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
provides28.

Maintainability of the complaint in the Consumer forum- [section 2(d) of Consumer

Protection Act, 1986]29

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 it’s 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's30 case was as to whether the Insurance Company was
subrogated to the rights of the claimant consignors of the goods with respect to the lost

28
Economic Transport Organization Vs. Charan Spinning Mills (P) Ltd. and Anr, 2010(3)ALD58(SC).
29
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.
30
Supra 43.

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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.

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 CHAPTER VI – CONCLUSION AND SUGGESTIONS

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

Before considering a subrogation action against one's own insured, the insurer should
determine whether or not the insured's conduct supports bringing a civil claim under the
insurance fraud statute .

In other words we can say that when it comes to the application of this doctrine with regards
to insurance it should be borne in mind, that a document should be transaction-specific. Or at
least an effort should be made to delete or exclude inapplicable or irrelevant clauses. But
where a large number of documentation is required to be done by officers not- conversant
with the nuances of drafting, use of standard forms with several choices or alternative
provisions is found necessary.

The person preparing the document is required to delete the terms/clauses which are
inapplicable. But that is seldom done. The result is that the documents executed in standard
forms will have several irrelevant clauses.

Computerisation and large legal departments should have enabled insurance companies,
banks and financial institutions to (i) improve their documentation processes and omit
unnecessary and repetitive clauses; (ii) avoid incorporation of other documents by vague
references; and (iii) discontinue pasting or annexing of slips. But that is seldom done. If
documents are clear, 4 specific and self-contained, disputes and litigations will be
considerably reduced.

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 BIBLIOGRAPHY

Books referred:
 Avatar Singh, Law of contract and specific relief, eastern book company (5th
Ed.,2009)

 Dr. R K Bangia, contract II 2009 edition

 Richard A. Lord, Some Thoughts About Warranty Law: Express and Implied
Warranties
 PC Markanda, The law of contract. Lexis Nexis.
 T R Desai: The Indian Contract Act and the Sale Of Goods Act

Website referred:

 Google Scholar
 Jstor
 Lawteacher.net
 Academia

Online Data Bases:

 Manupatra
 Westlaw
 Jstor

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