Consider an example that ‘X’ had been to Ottawa driving his car. After parking the car somewhere in front of the market he went inside, made some shopping, came back and found that ‘Y’ was damaging the car. In law “X” has a legal right of action against ‘Y’ for damages. Incidentally ‘X’ may also have a comprehensive motor insurance which protects him against such losses. Here ‘X’ has open to him two avenues of recovery and the principle of subrogation asserts that if the insurers pay the full loss then they (insurers) shall take over the right of ‘X’ (insured) for proceeding against Y (third party) for their own (insurers) benefit. Let us see How The Right Of Subrogation Arises In Insurance.
As already indicated, right of subrogation arises in the following ways:
- Under tort : This is a wrongdoing to another. In other words, it is a breach of duty owed to a third party. A person cannot do wrong to another thereby causing damage to another’s property or inflicting injury to the person of that another. If it is so done then a right of action accrues in favor of the wronged and to the detriment of the wrongdoer.
- Under contract : A contract may put some obligation on the person making breach of the contract to compensate the person who has been aggrieved as a result of the breach. As for example, obligation under contract of affreightment and contract of bailment etc.
- Under Statute : Statutes may also create liability, for making compensation, arising out of a breach thereof. Examples are, Factories Act. Occupiers Liability Act. The Riot Act, Carriage of Goods by Sea Act etc.
Under the right of subrogation the insurers are only entitled to benefit to the extent of payment made. Therefore, if the insurers recover more than the amount paid out, then they are entitled to retain from the recovery only to the extent of the payment they made to the insured. The balance amount must be refunded to the insured. If, however, the recovery is less than the amount of claim paid out to the insured, there is no question of realizing balance money from the insured. If the insured already recovers from the third party and if that is full indemnity, he has no claim against his insurer.