Principle of subrogation refers to the practice of substitution of a person or group by another in cases of debt claims in insurance. Subrogation is an important component of indemnity principle, which is a differentiating factor between a commercial contract and an insurance contract.
Subrogation is defined under the Marine Insurance Act, 1963. It says that the insurer (which is the insurance company) pays for a loss to the insured (an individual or company) due to the wrongdoing of a third party, then the insurer has the authority to subrogate the rights of insured and therefore is able to prosecute a suit against the wrongdoer for the recovery of the amount it had paid to the insurer.
By invoking the principle of subrogation, the insurer (which will be the insurance company) gets hold of the insured property and with this has the legal right (seeking claim) of the insured property.
In other words, once the insurer has paid the insured for any loss or damage to the property, the right to ownership of property then passes on to the insurer.
Types of Subrogation
There are three categories of subrogation which are as follows:
1. Subrogation by equitable assignment
2. Subrogation by contract
3. Subrogation cum contract
Subrogation by equitable assignment: In this category, the subrogation is not based on any kind of document, rather it is based on the insurance policy and the receipt that is issued by the insured where it is acknowledged that the claim has been paid in full for the loss.
Subrogation by Contract: In this type of subrogation, it is evidenced by an instrument. This is done to avoid any kind of dispute regarding the right to claim reimbursement or settling the priority of inter-se claims or for confirming the quantum of reimbursement in pursuant of subrogation and also ensuring that the assured offers full cooperation in suing the wrongdoer.
This is facilitated by a letter of subrogation that specifically mentions the rights of the insurer and the insured. With the use of this letter, the insurer gets the right to sue the wrongdoer.
Subrogation cum assignment: In the case of subrogation cum assignment, the insured executes a letter of subrogation cum assignment which enables an insurer to sue the wrongdoer in the name of the insured or the insurer itself.
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