PRINCIPLE OF SUBROGATION

A Project Submitted to

ARMY INSTITUTE OF LAW, MOHALI

In partial fulfilment of the requirements for the award of degree of B.A. LL.B.

SUBMITTED TO SUBMITTED
BY

Ms. Upagya Sharma. Mrityunjai Rai

(Assistant Professor of Law) (2038)

PUNJABI UNIVERSITY, PATIALA (PUNJAB)

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DECLARATION
It is certified that the project work presented in this report entitled “PRINCIPLE OF
SUBROGATION ” embodies the results of the original research work carried out by me. All
the ideas and references have been duly acknowledged.

NAME: Mrityunjai Rai

PLACE: Army Institute of Law, Mohali
ROLL NO: 2038
DATE: 12 March 2024

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 ACKNOWLEDGMENT

This project consumed a huge amount of work, research, and dedication. Still,
implementation would not have been possible if I did not have the support of many
individuals and organizations. Therefore, I would like to extend my sincere gratitude to all of
them.
Ms. Upagya Sharma., our Law of Insurance teacher for the provision of her expertise, and
technical support in the implementation. Without her superior knowledge and experience, the
Project would lack in quality of outcomes, and thus her support has been essential.
I would like to express my sincere thanks to all who devoted their time and knowledge to the
implementation of this project.
Nevertheless, I express my gratitude toward my family and colleagues for their kind
cooperation and encouragement which help me in the completion of this project.

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 TABLE OF CONTENTS

INTRODUCTION.......................................................................................................V
WHAT IS SUBROGATION.......................................................................................V
PRINCIPLES OF SUBROGATION..........................................................................V
EXTENT....................................................................................................................VII
SALVAGE AND ABANDONMENT......................................................................VII
CAN AN INSURER FILE A COMPLAINT AGAINST THE THIRD
PARTY/WRONG DOER IN ITS OWN NAME?................................................VIII
TYPES OF SUBROGATIONS..............................................................................VIII
ANTI-SUBROGATION RULE................................................................................IX
CONCLUSION...........................................................................................................IX

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 INTRODUCTION

An insured must have a complete understanding of the risks involved in transferring its rights
under the rule of subrogation. Subrogation is an important concept when it comes to
understanding the relationship between an insurer, an insured and a third party in case of loss
suffered by the insured.

WHAT IS SUBROGATION

Subrogation in insurance is a legal right of the insurance company to legally pursue a

thirdparty responsible for the damages/insurance loss caused to the insured. Subrogation is
done to recover the claim amount insurance company pays to the insured for the damages.
In simple words, when you suffer a financial loss because of negligent or irresponsible
actions of a third-party, you have a legal right to be compensated for the loss by this party.
However, if you had a life insurance for the loss and you file a claim for it, the legal right of
pursuing the third-party responsible for the loss also shifts to the insurer.
The doctrine of subrogation is based on the principle of indemnity. It is essential to ensure
that the insured is indemnified completely, but not more than that.
In Krishna Pillai Rajasekharan Nair (D) by Lrs. v. Padmanabha Pillai (D) by Lrs. and
Ors,1 the Supreme Court held:
“A subrogation rests upon the doctrine of equity and the principles of natural justice and not
on the privity of contract. One of these principles is that a person, paying money which
another is bound by law to pay, is entitled to be reimbursed by the other. This principle is
enacted in Section 69 of the Contract Act, 1872.

Another principle is found in equity: ‘he who seeks equity must do equity’.”

PRINCIPLES OF SUBROGATION

The Supreme Court elaborately discussed the principles of subrogation in the landmark
judgment Economic Transport Organization v. Charan Spinning Mills (P) Ltd. and Ors.2
The principles of subrogation as laid down by the Apex Court are discussed as follows:

1
Krishna Pillai Rajasekharan Nair (D) by Lrs. v. Padmanabha Pillai (D) by Lrs. and Ors, (2004) 12 SCC 754.
2
Economic Transport Organization v. Charan Spinning Mills (P) Ltd. and Ors ,(2010) 4 SCC 114.

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 1. When an insurer settles an insured's claim for the loss incurred by it, an equitable
subrogation right arises in favour of the insurer. Equitable subrogation allows the
insurer to assert rights against the third party or the wrong-doer who caused damage
to the insured.
2. The doctrine of subrogation does not put an end to the rights and duties of the insured.
It only allows the insurer to recover the claims paid by it to the insured from the third
party. The insurer continues to enjoy the right to proceed with legal actions against the
wrong-doer.
3. The insurer and the insured may exchange a letter of subrogation limiting the
subrogation terms. In such a scenario, the letter of subrogation would govern the
rights of the insurer vis-à-vis the insured.
4. The rule of subrogation gives the right to the insurer to take any legal action against
the third party/ wrong-doer, but only in the name of the insured. Any complaint,
petition or plaint filed in the court of law must be in the name of the insured. The
insurer can also represent the insured as subrogee-cum-attorney or the two of them
can be cocomplainants or co-plaintiffs. In any case, the insurer cannot take legal
action against the third party on its own.
In case the insured executes a subrogation-cum-assignment in favour of the insurer, the
insurer becomes completely entitled to the amount recovered from the third party. The terms
mentioned in the instrument would govern the rights and duties of the insurer and the insured.
The insured may also have to give up all its rights and would no longer be able to sue to the
wrong-doer on its own account.

The insurance companies must keep these essential principles of subrogation in mind while
construing and finalizing the terms of subrogation with the insured.

In Rahee Industries Ltd. v. Export Credit Guarantee Corporation of India Ltd. and
Ors.3, the Apex Court observed that the parties to an insurance contract may express and
define the terms of subrogation in the insurance policy which may be at variance from the
ordinary principles of subrogation. Only in case of ambiguity or doubt in the construction of
the insurance policy, the parties may invoke the principles of subrogation as a controlling
authority or guide.

3
Rahee Industries Ltd. v. Export Credit Guarantee Corporation of India Ltd. and Ors, (2009) 1 SCC 138.

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 EXTENT

As the insurer shall indemnify the insured against the loss claimed, the insurer will only be
entitled to recover to the amount paid by it. In case where the amount recovered by the
insurer is more than what was paid by it to the insured, it must only retain the recovered
amount to the extent it paid to the insured and the balance should be refunded to the insured.

If the insurer directly recovers the entire loss from the third party, then subrogation does not
come into picture. This principle is based on the idea that the insured must be allowed to
recover only to the extent of loss suffered by it and not more than that. When the insured
receives the loss claimed from the insurer as well as the third party, it shall return the excess
to the insurer, subject to the payment limits of the insurer.

SALVAGE AND ABANDONMENT

Salvage and abandonment are important concepts when it comes to subrogation rights. When
a loss is suffered by the insured, the remains of the property after the damage and destruction
is called salvage. This concept is more prominent in cases where there is partial loss. In such
circumstances, the insured can only file a claim to the extent of loss suffered if he does not
abandon the entire property. But if the insured chooses to surrender the salvage to the insurer,
then the insurer shall pay the entire claim and become the owner of the salvage.

In Kaltenbach v. Mackenzie4, the court observed that abandonment forms a part of every
contract of indemnity. Whenever the insured makes a claim for absolute indemnity,
abandonment of the damaged property is important along with all his rights in respect of all
he is indemnified for.

CAN AN INSURER FILE A COMPLAINT AGAINST THE

THIRD PARTY/WRONG DOER IN ITS OWN NAME?

The Supreme Court clarified in a recent case Taj Mahal Hotel v. United India Insurance
Co. Ltd. and Ors.,5 that an insurer can file a complaint as a subrogee. The court reiterated its
4
Kaltenbach v. Mackenzie, (1878) 3 CPD 467.
5
Taj Mahal Hotel v. United India Insurance Co. Ltd. and Ors., 2020 (2) SCC 224.

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decision in Economic Transport Organization case and observed that an insurer cannot file a
complaint in its own case. However, if the insurer is acting as a subrogee and has filed the
case in the name of the insured, where the insurer is the attorney holder of the insured or the
insured and the insurer are co-complainants, the case will be maintainable. Thus, it is
necessary for the insurer to satisfy either of the two conditions.

In another landmark judgment of Oberoi Forwarding Agency v. New India Assurance Co.
Ltd. and Ors.6 the Supreme Court has held that subrogation or deed of transfer does not
entitle the insurer to step into insured's shoes or clothe it with a consumer's legal status to
maintain a complaint under the Act. Thus, the insurer does not become a consumer even
when the insured subrogates its rights in the favour of the insurer.

Under no circumstances can the insurer file a complaint in its own name, even if the terms of
the letter of subrogation-cum-assignment entered into between the insurer and the insured
confers such right upon the insurer. This is also one of the reasons why the insured must give
up his right in favour of the insurer.

TYPES OF SUBROGATIONS

Subrogation is mainly of three types. The different categories of subrogation are discussed
below:
1. Subrogation by Equitable Assignment: As discussed before, equitable subrogation
arises once the full claim of the insured is settled by the insurer. It is mainly based on
the insurer policy and the receipt issued by the insured act as an acknowledgment. It is
not particularly evidenced by any document.
2. Subrogation by Contract: This kind of subrogation arises out of contractual
arrangement between the insurer and the insured. In order to avoid dispute of any sort
relating to reimbursement of claim or quantum of claim, the insurer obtains in writing
a letter of Subrogation from the insured specifying the rights of the insured and the
insurer. In this case, the insurer can recover the amount paid to the insured as per the
insurance policy. In New India Assurance Company Ltd. v. Genus Power
Infrastructure Ltd7, the Apex Court observed that the settlement made via Letter of
Subrogation would be acceptable only when it is executed and signed without undue

6
Oberoi Forwarding Agency v. New India Assurance Co. Ltd. and Ors., 2000 4 AllMR 579.
7
New India Assurance Company Ltd. v. Genus Power Infrastructure Ltd, 2015 AIR SCW 67, (2015).

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 influence and coercion. This was reiterated by the court in the matter of United India
Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd.8

3. Subrogation-cum-assignment: In this type of subrogation, a Letter of

Subrogation-cumassignment is exchanged between the insurer and the insured. It
allows the insured to retain the entire amount recovered from the third party.
However, this does not equal to giving up of insured's rights to proceed legally against
the third party.
In the matter of Union of India v. Sri Sarada Mills Ltd.,9 1973 AIR 281 the Supreme
Court held that cause of action of the insured against the third party did not perish on
giving a letter of subrogation to the insurer.

ANTI-SUBROGATION RULE

As per the anti-subrogation doctrine, the insurer can sue a third party in the name of the
insured. However, the insurer has no subrogation right against the insured. It can only arise
against a third party to whom the insurer is not liable. This rule justifies the reason why the
doctrine of subrogation was developed in the first place. Giving subrogation rights to the
insurer against the insured would defeat the entire purpose of insurance.

CONCLUSION

Subrogation plays a major role in defining the relationship between an insurer, an insured and
the third party. It is founded on the principle of indemnity and ensures that the insured does
not get any benefit out of the loss suffered by it at the same time ensuring that it recovers the
loss amount.

8
United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd, (2019) 5 SCC 362.
9
Union of India v. Sri Sarada Mills Ltd., 1973 AIR 281.

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