Explain Subrogation in an insurance contract.
Subrogation in its most common form can be understood as substitution. In simper words it is the substitution of the insurer to the insured’s rights. The question is ‘why this substitution’. It is because the first party, the insurer made a payment to the second party, the insured and for the payment a third party is responsible.
Let us clarify it with the help of an example:
Suppose A while trying to jump the red light rammed his car into B’s. B’s car was damaged as a result of the collision. B had two options open before him. He could either sue A for the damages or he could ask his insurer ‘C’ and collect the insured sum from him. If he receives it from C, then C is being made to pay a sum for which A is liable (since A caused the accident and the damage). So, C is paying what A should have paid or he is paying A’s debt. In such an instance he has the right to collect the debt amount from A. So, according to the clause of subrogation in insurance contract C holds the right to step into B’s shoes and sue A for the damages or collect the debt he paid to B for A's misconduct from A.
The basic underlying principles:
- -The insured should not collect the damages twice. If he collects it from the insurer, then he should not collect it from the tortfeasor (a person accused of having committed a tort).
- -The wrongdoer in the case should pay the insurer, what the insurer paid to the insured.
Subrogation can be applied through contracts or through law. However, subrogation clauses are typically found in health plans as well as property and liability insurance contracts or other types of casualty insurance. Typically, the automobile insurance policies outline that in the event of a reimbursement under the policy, the insurer shall be subrogated to all the insured’s rights of recovery. Subrogation ensures that the insured does not get paid twice from both the insured and the tort-feasor. However, in case the insurer receives more money from a subrogation lawsuit than it paid to the insured then the extra money goes to the insured. Moreover, subrogation is not applied to life insurance claims. The main reason is that life insurance is not a contract of indemnity and subrogation is applied to protect the principle of indemnity.