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Subrogation allows an insurance company to step into the shoes of the insured and recover amounts from third parties responsible for the loss. This article reflects on the origins of this doctrine, its application under Indian law, and practical considerations that are faced in its application.

The origins

Subrogation is most commonly associated with insurance, but the concept itself is not exclusive to the insurance industry. While it is a fundamental principle in insurance law, especially in cases of indemnity insurance, the broader concept of subrogation can apply in various other legal contexts as well.

The origins of this doctrine can be found in English common law. It was developed to prevent an insured from having double benefit of recovery from the insurance company as well as a third party that caused the loss.

In India, subrogation is codified under the Marine Insurance Act of 1963 and its principles have been clarified in Indian jurisprudence, including the landmark judgment of the Supreme Court of India in Economic Transport Organisation (ETO) v Charan Spinning Mills Ltd (2010).

The Supreme Court in ETO clarified that once the insurer settles the claim under the policy it is entitled to recover the compensation paid, but must do so in the name of the assured. The right of subrogation automatically takes effect when an insurer pays a claim.

While the evolution of this doctrine was based on equitable principles, it is now common practice for insurance companies to include specific clauses in their insurance policies giving the insurer the right of subrogation.

In some cases, the parties also execute subrogation-cum-assignment deeds, streamlining the recovery process and detailing each party’s rights and obligations.

Different forms

The Supreme Court, in the ETO case, also clarified that subrogation can take different forms, each with its own method of implementation.

Subrogation by equitable assignment is not formalised through a written document but arises from the insurance policy and the insured’s receipt of the claim amount. In this case, the insured cannot deny the insurer’s equitable right to subrogation, even if there is no written evidence to support it.

On the other hand, subrogation by contract is supported by a formal written agreement, which is typically a letter of subrogation. This written document is used to prevent disputes about the insurer’s right to recover the loss, clarify the priority of competing claims, or confirm the amount of reimbursement due to subrogation.

Finally, subrogation-cum-assignment involves the insured executing a “subrogation-cum-assignment” deed or letter, which allows the insurer to retain any amount recovered from a third party and gives the insurer the option to pursue legal action in either its own name or the insured’s name.

Development in India

In India, subrogation has developed alongside the legal concept of assignment, but these remain distinct legal principles. Both subrogation and assignment permit one party to enjoy the rights of another.

In an assignment of contract, full rights to the claim are transferred to the assignee, granting them the right to sue in their own name and claim the amount paid under the insurance, including any additional/remaining losses that might have been uninsured. In contrast, subrogation allows the insurer to recover only what has been paid to the insured.

The concept of “subrogation-cum-assignment” was explained in ETO as the right allowing the insurer “the choice of suing in its own name, or in the name of the assured … 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.”

Recent judgments

More recently, Delhi High Court made a clear distinction between assignment and subrogation-cum-assignment in the 2022 case of Fresenius Medical Care Dialysis Service India Pvt Ltd v Kerry Indev Logistics Pvt Ltd.

In Fresenius, the insured, after receiving compensation from its insurer, had executed a subrogation-cum-assignment deed in the insurer’s favour and sought compensation from the third party (Kerry), which caused the loss by initiating arbitration under its agreement with Kerry.

Kerry refused to refer the dispute to arbitration, arguing that: (1) since the insurer had already compensated the insured, there was no surviving claim against it; and (2) the arbitration clause under the agreement only covered disputes between the parties, and the insurer was not party to the agreement.

The insured argued that the subrogation-cum-assignment deed did not completely assign the debt to the insurer. Instead, it was subrogation to the extent of the amount paid by the insurer, and the insured still had the right to pursue recovery in its own name.

While ruling in the insured’s favour, Delhi High Court held that in cases of subrogation-cum-assignment, the insurer has the right to recover from a third party any amount paid to the insured, but the insured retains the right to recover any excess amount beyond what was paid by the insurer.

The court clarified that the deed executed between the insurer and insured is not a simple assignment, as it specifies that any recovery must first be applied to the insurer’s payment, with the balance going to the insured. This arrangement allows the insurer to step into the insured’s shoes to recover the amount paid; but does not prevent the insured from pursuing further recovery beyond that.

Thus, subrogation entitles the insurer to recover only to the extent of the indemnity, with any additional recovery going to the insured.

In another Delhi High Court judgment, in the case of Rahul Cargo Pvt Ltd v National Insurance Company Ltd, the insurer had indemnified the insured for the loss caused by the carrier and thereafter initiated arbitration proceedings under the contract between the insured and the carrier.

The court concluded that once the insurer steps into the shoes of the insured, the arbitration clause will be binding between the insurer and the carrier, even though it was not a party to the original contract. It held that the insurer is suing as subrogee and has all the original rights of the insured under its contract with the carrier.

Practical considerations

Subrogation as an option for recovery is still at a nascent stage in India, and while the decision in ETO remains a source of guidance, there might be practical considerations faced by insurers whilst pursuing a subrogated recovery.

For instance, the insured’s proper co-operation during the recovery process is crucial, including proper support while making evidentiary filings and providing documentation critical for the insurer to effectively pursue the recovery. Without proper support, succeeding in a subrogated recovery action could be difficult.

Given the time and cost associated with bringing and pursuing an action in India, the authors believe it is crucial to be satisfied with the level of co-operation that is expected from the insured.

Conclusion

While subrogation is an established concept in insurance law – and a recognised legal right – its practical application in India so far appears to be limited, given the time and costs associated with bringing proceedings and obtaining a final judgment. However, as the severity and frequency of insurance claims rise, interest in subrogated recoveries is expected to grow.

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