Page 81 - DCOM309_INSURANCE_LAWS_AND_PRACTICES

Insurance Laws and Practices

Notes
Example: Mr Sudhir Kumar has insured his house for ` 5 lakh and suffers a loss of ` 1
lakh due to fire. At the time of loss the surveyor finds that the actual market value of the house
is ` 10 lakh. In this case applying the above formula the claim will be as under:
Loss = 1 lakh

Sum insured = 5 lakh
Market Value = 10 lakh
Therefore, 1 lakh × 5 lakh /10 lakh = 50,000/-

Claim = ` 50,000/-
Self Assessment

Fill in the blanks:
5. An …………………………………. is not entitled to new for old as otherwise he would be
making a profit from the accident.

6. …………………………………. as a method of Indemnity is rarely used because of its
inherent difficulties.

5.4 Principle of Subrogation

Subrogation means substituting one creditor for another. Principle of Subrogation is an extension
and another corollary of the principle of indemnity. It also applies to all contracts of indemnity.
It has already been established that the purpose of Indemnity is to ensure that the Insured does
not make a profit or gain in any way as a consequence of an accident. He is placed in the same
financial position, which he had occupied immediately before the loss occurred.
As an off shoot of the above it is also fair that the insurer having indemnified the insured for
damage caused by another (A Third Party) should have the right to recover from that party the
amount of damages or part of the amount he has paid as indemnity.

This right to recover damages usually lies with the bereaved or injured party but the law
recognises that if another has already paid the bereaved or injured party then the person who
has paid the compensation has the right to recover damages.
In case the insured after having received indemnity also recovers losses from another then he
shall be in a position of gain which is not correct and this amount recovered from another shall
be held in trust for the insurer who have already given indemnity. Subrogation may be defined
as the transfer of legal rights of the insured to recover, to the Insurer.

Subrogation can arise in 4 ways:
(i) Tort
(ii) Contract
(iii) Statute

(iv) Subject matter of Insurance
Tort: When an insured has suffered a loss due to a negligent act of another then the Insurer
having indemnified the loss is entitled to recover the amount of indemnity paid from the
wrongdoer.

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