Explain subrogation in an insurance contract.
Subrogation in its most common form may be considered as substitution. In simpler words it is the substitution of the insurer to the insured’s rights. The question is ‘why the substitution’. It is because the first party or the insurer has made a payment to the second party or the insured for which (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 insurance sum from him. If he receives it from C, then C is being made to pay a sum for which someone else ( B, the third party having caused the damage) is liable. So, C is paying what B should have paid or he is paying B’s debt in his place. In such an instance C has the right to collect this debt from B. So, according to the clause of subrogation in insurance contract ‘C’ holds the right to step into A’s shoes and sue B for the damages or collect the debt he paid to A on B’s behalf from B.
The basic underlying principles of Subrogation:
– 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 insurer cannot earn a double benefit)
– The wrongdoer in the case should pay the insurer, what the insurer paid to the insured. (Insurer should not get to bear the burden of the wrong doer. If he is made to pay, he should be free to obtain it from the wrongdoer.)
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 and 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.