This article is written by Shreya Patel. This article emphasises the meaning, importance, and some of the exceptions to the doctrine of subrogation. The article also discusses the doctrine of subrogation under different Acts such as the Transfer of Property Act, 1882; the Indian Contract Act, 1872; the Insolvency and Bankruptcy Code, 2016; and the Insurance Laws, along with various landmark case laws that will help you understand the doctrine of subrogation in detail. A clear difference between the doctrines of subrogation and assignment is also explained in this article.
Did you know the doctrine of subrogation is quietly at work when any property is caused loss or damage by any third party? What is this doctrine of subrogation? To explain simply, when someone else takes your place and demands reimbursement from the party behind the cause of damage or loss, this is subrogation. In subrogation, the rights to seek claims are transferred to another party. This doctrine helps ensure that the person behind the loss or damage is held liable and pays for the financial burden that the party has caused by the loss or damage to the property. The integral players in the doctrine of subrogation are the policyholders, the insurer, and the liable party. As the other party is putting themselves in someone else’s position, the rights and duties are also now in their ownership, similar to those of the owner.
Subrogation is a legal principle where the third party assumes the responsibility of the other party in relation to debt collection or damages. A right of subrogation can arise by agreement, operation of law, or statute. The doctrine of subrogation is commonly seen in countries that inherit the common law system. The legal doctrine entitles one person to enforce the rights that are revised or substituted for the other party’s benefit.
There is a long history behind the doctrine of subrogation. The case of John Edwards and Co. v. Motor Union Insurance Co. Ltd. (1922) 2 KB 249 (CA) is said to have shaped the origin of the doctrine of subrogation. The doctrine of subrogation was credited to natural justice, a creature of equity, by several historians in the past. The doctrine can be seen commonly in insurance law, but it can also be seen and applied in various other types of legislation, such as insolvency laws, contract law, etc. The word subrogation has a Roman origin, which means to replace one party in the place of another or when someone is substituted for another concerning a legal claim or a legal right. The rational basis for the doctrine of subrogation evolved in the case of Lord Hardwick’s chancellorship.
The doctrine of subrogation has roots in Roman and French law. It evolved from the Roman law principle ‘cessio actionum’, which allows another party to sue on someone’s behalf and keep the trial winnings. The doctrine was further developed under Lord Hardwick’s chancellorship in the case of Randal v. Cockran [Ves. Sen. 98, 27 Eng. Rep. 916 (1748)]. There are two ways by which the right of subrogation arises: one is by operation of law, and the other is by the presence of any written agreement or any part of a contract.
In the case of Krishna Pillai Rajasekharan Nair v. Padmanabha Pillai and Ors (2004) , the Supreme Court gave the judgement that the right of subrogation depends on the natural justice principle along with the equity of doctrine. It does not rest upon the privity of contract.
When a substitution takes place of one thing or person for another, it results in changes relating to the obligations and rights that were originally applied to the person who is the real owner of those obligations and rights. Now all the rights and obligations are with the substituted person or thing. The doctrine of subrogation, in simple words, means stepping into another person’s shoes. This is a legally recognised principle. The doctrine of subrogation is generally applied in the circumstances of suretyship, mortgages, and insurance.
The parties under this doctrine are ‘subrogee’ and ‘subrogor’. Subrogation occurs when one entity (the ‘subrogee’) assumes the rights and duties of another (the ‘subrogor’). To understand the doctrine of subrogation better, we can start with the principles and essentials behind it, which were laid down in the landmark judgement of the Economic Transport Organisation v. Charan Spinning Milla (P) Ltd. and Ors. (2010). The Supreme Court has laid down principles in this case. The principles of subrogation are as follows:
- The insurer can take legal action against any third party under the name of the insured.
- When a letter of subrogation is present and it limits the terms of the subrogation amongst the parties (insurer and insured), the rights of the two parties are governed by the letter of subrogation.
- The right of equitable subrogation arises when the insurer settles the claim. The insurer allows the claimant to claim compensation from the third party.
- The right to take legal action against the insured does not terminate with the end of the doctrine.
The doctrine of subrogation plays a crucial role in India’s legal system due to its various benefits:
- One of the key reasons for implementing the doctrine of subrogation is for cost recovery. The doctrine of subrogation allows insured parties to recover costs and claim damages, reducing their financial burden.
- With the doctrine of subrogation in play, the concept of fairness is also present. The doctrine promotes fairness by ensuring that the party causing the loss or damage bears the financial consequences.
- The subrogation principle also aids in reducing and mitigating risks. In the doctrine of subrogation, the responsible party is held accountable for their actions, which also discourages negligence.
- The insured parties are entirely protected under the doctrine of subrogation. The doctrine provides comprehensive protection for insured parties, helping to maintain their financial security.
- For the insurance sector, subrogation provides stability by promoting effective cost management, balancing risk exposure, and fostering viable business models.
Meaning
The Transfer of Property Act of 1882 (TPA Act, 1882) in India governs all property-related transactions, including gifts, sales, leases, and mortgages. One key concept in this Act is the doctrine of subrogation, which allows for substituting one party for another in a mortgage agreement. This doctrine is based on justice, equity, and good conscience principles.
Essentials of a valid claim of subrogation
The following are the essentials of a valid claim of subrogation:
- A claim can only be made by a co-mortgagor if they repay the other mortgagor on the property. On the other hand, a mortgagor cannot claim the subrogation because repaying the debt is his duty in the first place, and making a payment will only fulfil that duty.
- For a claim to be valid, it must be fulfilled in whole. A partial subrogation is not considered valid. The redemption must be done as a whole.
- To demand subrogation, the presence of a legitimate interest is very important.
- The redemption of the property must be confirmed in writing, stating that the debt has been repaid and the rights will be subrogated.
Relevant sections
The doctrine of subrogation, added to the TPA Act of 1882 in 1929, is outlined in Section 92. This section, rooted in Roman law, applies the principles of equitable subrogation, which existed in India before the amendment. According to Section 92, anyone other than the mortgagor or co-mortgagor who redeems a mortgaged property will have the same rights as the mortgagor or co-mortgagor, including rights related to the sale, redemption, and foreclosure of the property.
There are two types, as per Section 92 of the TPA Act of 1882. The two types of subrogation are:
Legal subrogation
Legal subrogation, commonly resulting from the operation of the law, is based on the principle of reimbursement. It applies when one party makes a payment on behalf of another party who is legally bound to make that payment. The party making the payment is then entitled to reimbursement. The following parties can claim legal subrogation: a co-mortgagor, surety, purchaser of equity of redemption, and puisne mortgagee.
| Surety | The purchaser of equity in redemption | Co-mortgagor | Puisne mortgagee |
| Under Section 91 of the TPA Act of 1882, a surety who repays a loan on a property is entitled to that property. The surety is then subrogated to the position of the creditor, assuming all their rights and liabilities. | A purchaser of equity in redemption becomes the owner of the property. | If a co-mortgagor pays both their share and the share of another mortgagor, they obtain the right to subrogation in place of the other mortgagor. | The prior mortgagee has the right to sue for redemption of an earlier mortgage if they win a prior decree without suing the prior mortgagee. |
Conventional subrogation
If the person who is repaying the debt has no direct interest in the property, conventional subrogation arises when the parties enter into a contract. The contract can be written as well as registered, expressed, or inferred in nature.
Case laws
In the case of Bisseswar Prasad v. Lala Sarnam Singh [(1910) 6 Cal. LJ 134], the Calcutta High Court elaborated on the doctrine of subrogation, a principle of equity jurisprudence. This principle, which can be either implied or expressed, does not depend on the privity of the contract. It applies except when equity is imported into a transaction, thereby implying a contract. The concept of natural justice is used in conjunction with the circumstances and facts of each case.”
Subrogation does not apply if the mortgagor redeems the condition. If the mortgagor discharges the prior debt, it will not be entitled to subrogation or its associated remedies and rights. This was demonstrated in the case of Narain v. Narain, (1930), where the mortgagor discharged their obligation by settling the claim on the property they had created.
The Madras High Court ruled that when a subsequent mortgagee redeems the prior mortgage, the reason for the redemption is irrelevant; it can be for the benefit of the mortgagor or any other reason. The applicability of Section 92 of the Transfer of Property Act, 1882, is crucial only for proving the payment and demonstrating that the mortgagee made the payment, as established in the case of Nagayya v. Govindayuyar [AIR 1923 Mad 349].
Meaning
Globalisation has opened new opportunities and increased market demand, influencing the growth of the doctrine of subrogation. This doctrine, seen under various statutes like contract, tort, and insurance, creates a liability to compensate if a breach occurs. Subrogation rights are divided into several categories, including the rights of the surety, business creditors, indemnity insurance, bankers, lenders, and trustees.
- Indemnity Insurance Subrogation Rights: The infringer can be sued by the insurance company for the sum of damages, which is to be repaid to the insured.
- Surety’s Subrogation Rights: All the prior remedies and claims against the debtor will now be subrogated to the surety if the debt is paid by the surety to another party for recovery of the sum.
- Trustee’s Subrogation Rights: The trustee in the transaction for the beneficiaries has the right to compensation from the beneficiaries if any personal loss occurs. They can also use the beneficiary’s property as a guarantee to assure compensation.
- Lenders Subrogation Rights: When the lender pays the debt of someone else to the third party, they are now themselves in the place of the borrower and have the same rights for recovering the money.
- Bankers Subrogation Rights: The bank will be subrogated to the third party’s rights and remedies when they help in discharging the liability.
The insurance policies have the concept of subrogation present in them. This legal principle permits the companies (insurance companies) to recover the sum paid in the form of compensation from the party that is responsible for the loss that was insured. For instance, when we purchase insurance for a car, the third party is held liable for any damage taking place in the car, and the insurer can reclaim the sum from the insurance company of the third party or straight from the responsible party. The subrogation concept ensures no advantage is taken by the insured from the claims of the insurance.
Types of subrogations under insurance
The three types of subrogation under insurance are:
- Equitable Subrogation
- Contractual Subrogation
- Statutory Subrogation
| Equitable Subrogation | Contractual Subrogation | Statutory Subrogation |
| Frequently seen in insurance policies, this type of subrogation allows the insurance company to recover the claimed amount from the third-party responsible for the vehicle damage. | Also known as conventional subrogation, this occurs when the insurer, standing in the shoes of the insured, sues the responsible party after the insured’s authority has been forfeited to the insurer. If the insured does not want to proceed with the subrogation, the insurer can file a lawsuit against the responsible party for the loss. | In statutory subrogation, the insurance company is not included in covering the loss, as seen in the other two types of subrogation, when a loss occurs to the vehicle that is insured. In statutory subrogation, the parties themselves agree to compensate the amount for the loss that has been incurred. This type of subrogation is more simple than conventional and equitable subrogation. |
Relevant sections
Section 79 of the Marine Insurance Act, 1963, talks about the right of subrogation. The sub-clause (1) states that when the insurer is paying for a loss, either in part or completely, then in that case the insurer will only be entitled to the part for which they have paid. The rights that are subrogated will only be for that particular subject matter. The insurer will have all the rights and obligations as soon as the damage is caused.
The sub-clause (2) states that the insurer will only be liable for the part that is lost or damaged, not the thing that is still insured. They have all the rights and obligations relating to the part that is damaged or lost. According to the Marine Insurance Act, 1963, the rights of the insured are subrogated only when the claim is paid. The claim has to be paid first by insurers as a precondition. The subrogation of the rights is then subrogated to insurers.
Exceptions to the principle of subrogation in insurance
There are some exceptions to the principle of subrogation in insurance in India. The exceptions are as follows:
Accident and life insurance
The doctrine of subrogation does not apply to accident and life insurance, as they cannot be reimbursed in the same form. The indemnity in these policies is independent, meaning the main aim is not monetary compensation and is not dependent on recovering damages and losses.
Pre-agreed agreements
If the two parties, i.e., the insurer and insured have any kind of pre-agreed agreement, the subrogation rules are then adjusted as per the agreement.
Abandonment and salvage
When an insured abandons the damaged property, the ownership of salvage (the taking over of the damaged property to reduce the losses) becomes non-recoverable.
Filling a lawsuit
A legal proceeding can be initiated by the insurer on behalf of the insured, but they are not the real plaintiff. Therefore, it is the insurer’s responsibility to file a lawsuit if it is required to recover damages.
Rights of an insurer in subrogation of insurance
Insurers have several rights under the principle of subrogation in insurance, which assist them in recovering funds paid out for claims. These rights include:
Right to seek legal action
The insurer has the right to take the party that is at fault to court and sue the party that is responsible for causing loss to the insurer. The insurer can pursue legal action to recover the sum of money paid as a claim.
Right to gather evidence and investigate
When a loss is caused, the insurer has the right to investigate it. They can gather evidence such as statements from the witness, estimates of repairs, police reports, etc. to build a compelling case against the party at fault.
Right to recover reimbursement
The insurer has the right to be reimbursed for all the damages for which he has paid. This can include expenses related to repairs, medical bills, etc. Expenses incurred during the claim process can also be reimbursed in some situations.
Right to take over your legal rights
When the claim payment is made, the insurer gets the right of subrogation. The insurer gets the right to claim against the third party.
Right to negotiate settlements
The method of negotiation can also be used by the insurer to settle the matter instead of approaching the court. Settling the dispute through negotiation is a more cost-effective and faster way of recovering the funds.
Meaning
The interests of the surety are protected by the principle of subrogation. It ensures that no drawback is faced by the surety after they have paid the debt that was guaranteed. It also makes certain that all the obligations are fulfilled by the principal debtor, and in case of default by the debtor, the creditor is not left with any remedy. Subrogation by agreement is commonly seen in insurance contracts, where rights are subrogated when a claim is paid out by the insurance company.
Relevant sections
Section 140 and Section 141 of the Indian Contract Act (1872) talk about subrogation. Section 140 is about the rights of the surety to performance or payment. The Section states that if the debt guaranteed by a surety is due or if there is any non-fulfilment from the side of the principal debtor, then all the rights that the creditor had against the principal debtor are vested in the surety.
Once the guaranteed debt is paid, the rights are subrogated, which means all creditor’s rights against the principal debtor can now be exercised. Section 141 states the surety’s right to benefit the creditor’s securities. The surety is entitled to all the benefits of all the securities that the creditor has against the principal debtor at the time of entering the contract. All the security, whether known or not by the surety, is applicable. If the security is lost or given away, then the obligation is also discharged to the value of the security.
Case laws
In the case of State Bank of India v. Fravina Dyes Intermediate (1988), the Bombay High Court held that a temporary injunction can be applied by the guarantor against the debtor, utilising the doctrine of subrogation. This can be done before paying the creditor in case the guarantor fears that the property will be deliberately disposed of to defraud the creditor. The Quia Timet injunction (a type of injunction where the rights of the party are protected even before the violation of the rights has taken place) can be granted to the guarantor in some circumstances against the principal debtor.
The Supreme Court in the case of Amrit Lai Goverdhan Lalan v. State Bank of Travancore (1968) held that all the surety is eligible for all the remedies which the creditor possessed concerning the principal debtor, which included enforcing all means of payment as well as every security and the usage of those securities. The surety’s right is based on the principle of natural justice and is not just founded on a contractual basis.
In the case of the State of M.P. v. Kaluram (1966), the Supreme Court held that the word “security” under Section 141 of the Indian Contract Act, 1872, encompasses all the creditor’s rights against the principal debtor’s property on the date of the contract.
Meaning
The Insolvency and Bankruptcy Code, 2016 (IBC) is a comprehensive Indian bankruptcy law that includes all major rules and regulations for bankruptcy and insolvency. It is considered one of the biggest insolvency reforms in India’s history. The doctrine of subrogation under the IBC pertains to the rights of guarantors in India. A November 15, 2019 notification made guarantors liable, sparking debates about liabilities and rights across several legal platforms.
Essentials
The IBC has been a debtor-centric framework since its establishment, with the prime objective of preventing companies from reaching the insolvency stage. This is a very shortsighted approach used by the legislation when it relates to personal guarantors. In the effort to maximise the debtors’ assets, the courts appear to have obliterated that the CIRP (Corporate Insolvency Resolution Process) also needs to balance stakeholders’ interests.
Section 238 of the IBC protects the difference between the liabilities and rights of the guarantor. This section states that the IBC will prevail over other inconsistent laws in force. The notion of unjust enrichment states that no person should take advantage at the expense of another, which underpins the guarantor’s right to subrogation. In simple words, if the corporate debtor is not allowed to use his assets to pay off the debts, how will the problems related to insolvency be solved? This undermines the main objective of the IBC.
Case law
In the case of Vikas Aggarwal v. Asian Colour Coated Ispat Limited & Ors, the key point that is talked about is the doctrine of subrogation. The right of the guarantor is related to this doctrine. Both concepts become entangled when mixed with the IBC. The IBC’s main aim is to resolve companies with debt, not personal guarantors. The personal guarantors are the target of the creditors; hence, their rights in resolving the debt change. The definite right given by the subrogation principle is affected due to the existence of the IBC. Both the Indian Contract Act of 1872 and the IBC have different personal guarantor rights.
These subrogation rights might not continue after insolvency proceedings. The IBC is an extremely vital code connected with the treatment of personal guarantors. When there are certain rights against the personal guarantor for financial creditors, the right to sue under the TPA Act of 1882 will not be considered applicable. The landmark judgement highlights how the responsibilities and rights of the creditors and guarantors can change. The right of subrogation is also among them.
The doctrine of subrogation, a key principle in insurance law, has a few exceptions. The exceptions are as follows:
Contractual limits
There can be limitations to the subrogation rights. The terms in the contract can exclude or restrict the right of subrogation in certain situations, such as when a specific type of damage is not covered. These types of contractual limitations constrain the right to subrogation.
Equity consideration
Equity principles can override subrogation rights if their enforcement leads to extreme hardship or unjust enrichment.
Contractual waiver
Parties can waive subrogation rights through contract clauses. This kind of contractual waiver is seen in agreements related to insurance, where a party is prevented from pursuing the claim even when the loss has been compensated, such as in waivers of subrogation clauses in property leases.
Anti-subrogation laws
Some regulations and laws in some jurisdictions act as anti-subrogation laws. Rules on compensation for workers may restrict or limit subrogation rights to protect injured workers, such as those who are injured.
Voluntary payments
In subrogation, the party makes the payment because they are legally obligated to do so. In some circumstances, parties can make voluntary payments. These voluntary payments are not considered legal obligations and do not activate subrogation rights.
The doctrines of subrogation and assignment are key principles in insurance law, each with distinct characteristics. The key differences between them are as follows:
| Subrogation | Assignment | |
| Meaning | The legal right is where the insurer pursues the third party that has caused the loss or damage to the party that is insured. | Assignment is the transfer of rights from one party to another. |
| Right to damages | In subrogation, only the damages that are insured for or claimed are recovered, nothing more than that. Only the entitled claim can be reclaimed. | The assignment of rights means the complete transfer of the rights. All the rights are in the interest of the insurer. The party that is assigned the rights can claim all the damages, regardless of the amount settled. |
| Right to sue | In subrogation, the insured can initiate a legal action against the third party, and the insured can assist a party to the suit. | In an assignment, the insured party’s entire rights are transferred. The right to sue is also among the rights that are transferred. |
| Transfer of interests | In the doctrine of subrogation, rights cannot be transferred due to the subrogation resulting from the operation of the law. | In subrogation cum assignment, the rights can be transferred. All the rights that are vested in the insured can be transferred. |
| Agreement requirements | Subrogation of rights is statutory enforcement. | The assignment of rights is normally the result of an express agreement. |
| Parties Involved | There are mainly three parties involved in subrogation. The insured, the insurer, and the third party that has caused the loss. | In the assignment, there are only two parties. The assignor and the assignee. |
The doctrine of subrogation helps in making sure that there is efficiency and fairness in the matter. The subrogation principle acts as a powerful tool for recovery. The right use of the doctrine of subrogation helps in adhering to the rules and regulations. With this doctrine in use, the insurer can step into the shoes of the insured and seek recovery from the party that is responsible for the damage or loss caused. The doctrine of subrogation will ensure that the real party responsible for causing the loss bears the financial burden for the same, which also prevents unjust enrichment. In conclusion, both subrogation and assignment play vital roles in matters of insurance; they differ significantly in terms of their meaning, rights, transfer of interests, agreement requirements, and the parties involved.
What are the limitations of the doctrine of subrogation under insurance?
The doctrine of subrogation is only applicable to marine, fire, and non-life policies. The doctrine of subrogation does not apply to any type of accident policy or life insurance.
What is the purpose of subrogation?
The main purpose of subrogation is to recover the sum that is claimed.
How is the doctrine of subrogation beneficial?
With the existence of the doctrine of subrogation, both parties in question can make up for their losses, regain, or recover.
Can a right of subrogation arise from an agreement?
Yes, the right of subrogation can arise from an agreement; usually, it arises from the operation of law. But when it is expressly mentioned in some agreement about the right of subrogation, then it is valid.
What is the difference between subrogation and indemnity?
Indemnity is prior protection against any type of financial damage or loss. Subrogation is when the right to repay is substituted by someone else.
Can the right of subrogation be waived in India?
Yes, the right of subrogation can be waived in India.
Is the doctrine of subrogation used in the health insurance sector?
Yes, the health insurance sector in India uses the doctrine of subrogation. The health insurance company has the right to recover the amount that was provided for medical care if the loss or damage was caused by a third party. For instance, if an insured person is injured due to someone else’s negligence and the health insurance company pays for the medical expenses, the company can then seek to recover those costs from the party at fault.
Under which statutory provisions is the doctrine of subrogation protected in India?
The doctrine of subrogation is present in the Insolvency and Bankruptcy Code of 2016, the Indian Contract Act of 1872, the Transfer of Property Act of 1882, and in insurance laws.
What does it mean to be subrogated to rights?
Being subrogated to rights means that one party assumes the legal rights of another. For instance, in an insurance context, if an insurance company pays a claim for an insured loss, the company is then subrogated to the rights of the insured and can seek recovery from the party responsible for the loss.
What is the difference between subrogation and assignment of rights?
Subrogation is vested in the operation of law, whereas assignment requires a written agreement. For instance, if an insurance company pays a claim for an insured loss, it is automatically subrogated to the rights of the insured. On the other hand, the assignment of rights would occur if the insured explicitly transferred their right to claim from the party at fault to the insurance company.
What are the parties involved in subrogation?
The three parties involved in subrogation are the insured, the insurer, and the party responsible for causing loss and damage.
What is the most common type of subrogation?
The most common type of subrogation is when a party claims for property damage.
Who can claim subrogation?
The subrogation is usually claimed by the insured individual. The right of subrogation can also be waived if the insured wants to.
Why is subrogation necessary?
Subrogation is necessary as it aids in recovering the loss or damage caused to the property.
