Use Of Subrogation In Insurance Claims
It has already been explained in my previous article on how subrogation arises and how this goes to the benefit of insurers. In so far as the application or use of subrogation in insurance claims is concerned, certain considerations must be properly grasped and these are presented as follows :
(a) When Subrogation Arises :
The position is different with regard to common law and with regard to contractual terms and conditions. Under common law the position is this that the insurers must pay the claim first before the right of subrogation can be exercised. In other words, the insurers cannot go against the third party for the purpose of recovery unless they (insurers) have made payments to the insured. This position may however be varied by means of policy terms and conditions.
In non-marine policies there is usually a policy condition, known as subrogation condition, whereby the insurers may require the insured to recover (or take all steps of recovery) against the liable third party first at insurer’s cost and expenses. This in fact modifies the common law position. In marine insurance, however, the right of subrogation arises only after making payment by insurers as it is not customary ( and most unusual ) to incorporate any policy condition as such so as to modify the Common law position.
(b) Extent Of Subrogation Rights :
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. If he has also received payment from the insurer, he must refund the payment received from his insurers.
If the amount received from the third party does not represent full indemnity then he is entitled to claim only the balance from his insurers so that both the payments together would constitute one full indemnity only. The idea is this that as a result of a loss the insured cannot get more than actual indemnity even though he may have numbers of avenues open to him for recovery. if the insured realizes from both insurer and third party, then he ( insured ) retains only to the extent of full indemnity and returns balance to the insurers subject to the limit of insurer’s payment. Four examples on the Extent Of Subrogation Rights under four different circumstances are give below:
Insurer pays……….. $ 1000
Insurer recovers…. $ 1200
Insurer retains……. $ 1000 and throws back $ 200 to the insured.
Insurer pays……….$ 1000
Insurer recovers…. $ 800
Insurer retains full $ 800 and insured is not required to pay back $ 200 to his insurer.
Actual loss ………$ 1000
Insured gets ……..$1000 from third party.
He has no claim on insurer.
Insured gets say $ 700 from third party then he has claim of $ 300 from his insurer.
Actual loss …….$ 1000
Insurer pays…… $ 900
Insured also recovers $ 700 from third party. Then, insured has to refund $ 600 to insurer.
(c) Ex-Gratia Payments :
Although not legally liable, insurers do sometimes make payments under their policies as a matter of grace or favor. May be, there has been minor breaches of policy terms for which the insurers could easily repudiate the claim. But considering the commercial aspect and minor nature of the breach, may be the insurers will not be that much strict and will be willing to make some payment (whether in full or not) without admitting liability under the policy. Such payments are in fact known as ex-Gratia payments and never create a precedence so as to give a right of claim to the insured in similar other cases.
It should be remembered that when ex-Gratia payments are made insurers are not subrogated to the right of the insured. This is because payments are not made by admitting liability. When, however, one insurer makes a normal payment and the insured gets an ex-Gratia payment from another insurer also, then the former insurer shall stand subrogated to the ex-Gratia money received from the latter insurer even though this money has not been received as a matter of legal right under that policy. In connection with the study of subrogation, it is necessary for the students to understand the implication of “Salvage” and “Abandonment” as these do have a bearing on subrogation right.