Table of Contents

Introduction

Historical Background

Research Question

Understanding the principles of Insurance-

Principle of indemnity

How is indemnity provided and the limitation of it.

Principle of subrogation

Subrogation How?

Limitation on the doctrine

Conclusion

Bibliography
Introduction

The todays world is full of risk and in every point of time there is risk involved relating or
causing to the loss of life and property and thus in order to have a safer side or to fulfil or
covers that loss the insurance is done. Thus the insurance is equitable transfer of the
risk of a loss, from one entity to another in exchange for payment. It is a form of risk
management primarily used to hedge against the risk of a contingent, uncertain loss.
Under this, the insurer provides policies on some consideration and it is taken up by the
buyer who further becomes the insured person. There are certain principles of insurance
and among which the doctrine of indemnity and doctrine of subrogation plays important
role. The Principle of indemnity means that the insured can in no event make a gain out
of that transaction is salutary rule of law to keep in check a human weakness. Indemnity
means security, protection and compensation given against damage, loss or injury.

According to the principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future uncertainties. Insurance
contract is not made for making profit else its sole purpose is to give compensation in case
of any damage or loss. It is a very fundamental principle of insurance that the subrogation
and contribution are corollaries of this principle and ensures that the insured does not make
profit out of the transaction. Indemnity usually means to put any person in a situation as if he
has not incurred loss by providing monetary relief after the damages caused to him. But
sometimes damages is caused or done by the person with dishonest intention in order to
make out the profit. This principle doesnt apply in case of life insurance as the value of
human life cant be measured in monetary terms.

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. According to the principle of subrogation, when the insured is compensated for
the losses due to damage to his insured property, then the ownership right of such property
shifts to the insurer. This principle is applicable only when the damaged property has any
value after the event causing the damage. The insurer can benefit out of subrogation rights
only to the extent of the amount he has paid to the insured as compensation.
Historical Background

The origin of insurance is lost in antiquity. The earliest traces of insurance in the ancient
world are found in the form of marine trade loans or carriers contracts which included an
element of insurances. The evidences are therein which proves that the arrangements
embodying the idea of insurances were made in Babylonia and India at quite an early
1
period . In Rigveda, the most sacred book of India, references were made to the concept
YOGAKSHEMA more or lea akin to the well-being and security of people. There are also
certain other things which talk and recognised the admissibility about the sharing of future
losses, such as Manu and Hammurabi. There are different kinds of insurance; these are
Marine insurance, Fire insurance, Life insurance, and miscellaneous insurance. Each of the
insurance has developed according to the time and need. The Marine insurance is the oldest
form of insurance and under the Bottomry Bond the system of credit and law of interest were
well developed and these were based on the clear appreciation of the hazards involved and
the means of safeguarding against it. The marine policies of the present form were sold in
the beginning of fourteen century by the Brugians. The fire insurance has been originated in
Germany in the beginning of sixteen century and it got momentum in England after the great
fire in 1666 when the fire losses were tremendous. There was a great loss of property and
thus seeking this Fire Insurance Office was established in 1681 in England.

The Life insurance made its first appearance in England in sixteen century. The life
insurance developed at Exchanfe Alley. The first registered life office in England was the
Hand in Hand Society established in 1696. In India some Europeans started the first life
insurance company in Bengal Presidency viz the Orient Life Assurance company in 1818.
The year was a landmark in in the history of Indian Insurance separating the early period of
life. And since then several office developed in India. Miscellaneous insurance took the
present shape at the later part of nineteen century with the industrial revolution in England.

1
Insurance Principle and Practice by M.N Mishra and S.B Mishra Sixteen Edition 2009.
Research Question

The project aims to resolve the following question

What is the principle of indemnity and why it has been provided as general principle
of insurance?
What is the principle of Subrogation and why it has been provided as general
principle of insurance?
Whether any relation exists between both of these principles? Are they
interconnected to each other?

Understanding the principles of Insurance-

The business of insurance aims to protect the economic value of assets or life of a
person. Through a contract of insurance the insurer agrees to make good any loss
on the insured property or loss of life (as the case may be) that may occur in course
of time in consideration for a small premium to be paid by the insured.

Apart from the above essentials of a valid contract, insurance contracts are subject to
additional principles.

These are:

Principle of Utmost good faith Principle of Insurable interest Principle of Indemnity

Principle of Subrogation Principle of Contribution

Principle of Proximate cause

Principle of Loss of Minimization

These distinctive features are based on the basic principles of law and are applicable
to all types of insurance contracts. These principles provide guidelines based upon
which insurance agreements are undertaken.
A proper understanding of these principles is therefore necessary for a clear interpretation of
insurance contracts and helps in proper termination of contracts, settlement of claims,
enforcement of rules and smooth award of verdicts in case of disputes.

PRINCIPLEOFINDEMNITY

Indemnity according to the Cambridge International Dictionary is Protection against

possible damage or loss and the Collins Thesaurus suggests the words
Guarantee, Protection, Security, Compensation, Restitution and
Reimbursement amongst others as suitable substitute for the word Indemnity.
The words protection, security, compensation etc. are all suited to the subject of
Insurance but the dictionary meaning or the alternate words suggested do not
convey the exact meaning of Indemnity as applicable in Insurance Contracts.

Thus one of the most important principles, indemnity, can be quoted to be the cornerstone of
insurance. And can be defined as financial compensation sufficient to place the insured in
the same financial position after a loss as he enjoyed immediately before the loss occurred.

The need to be compensated, or at least indemnified, for loss or damage suffered is

the very basis of insurance. In insurance parlance, this is the bread and butter of
insurance, or the second face of marketing.

What if the unthinkable occurs-a fire takes place, there is an accident, a burglary or an
illness occurs? What if...? Contemplation of the negative aspects makes a prospect
introspect on the need for adequate insurance cover. But once the policy is availed of, the
most important aspect is the speed and ease with which the insured is compensated or
indemnified in the event of a claim therefore Indemnity comes into the picture. Indemnity
means guarantee or assurance to put the insured in the same position in which he was
immediately prior to the happening of the uncertain event. The insurer undertakes to make
good the loss. It is applicable to fire, marine and other general insurance. Under this, the
insurer agreed to compensate the insured for the actual loss suffered.

According to the principle of indemnity, an insurance contract is signed only for getting
protection against unpredicted financial losses arising due to future uncertainties. Insurance
contract is not made for making profit else its sole purpose is to give compensation in
case of any damage or loss.

In an insurance contract, the amount of compensations paid is in proportion to the incurred

losses. The amount of compensations is limited to the amount assured or the actual losses,
whichever is less. The compensation must not be less or more than the actual damage.
Compensation is not paid if the specified loss does not happen due to a particular reason
during a specific time period. Thus, insurance is only for giving protection against losses and
not for making profit. However, in case of life insurance, the principle of indemnity does not
apply because the value of human life cannot be measured in terms of money.

Servicing of customers at the time of claim is the most important and vital aspect of any
insurance service. A satisfied customer is the best public relations officer of an insurance
company. An insured having suffered a loss, is always in a damaged or vulnerable
condition; alleviation of some of the suffering by ensuring speedy processing and
settlement of the claim is the best and most excellent aspect of any insurance.

Indemnity thus prevents the insured from recovering more than the amount of his
pecuniary loss. It is undesirable that an insured should make a profit out of an event
like a fire or a motor accident because if he was able to make a profit there might
well be more fires and more vehicle accidents. As in the case of Insurable Interest,
the principle of indemnity also relies heavily on the financial evaluation of the loss but
in the case of life and disablement it is not possible to be precise in terms of money.

Insurance may be for less than a complete indemnity but it may not be for more than it. To
illustrate let us take the example of a person who insures his car for Rs.4 lacs and it meets
with an accident and is a total loss. It is not certain that he will get Rs.4 lacs. He may have
over valued the car or may be the prices of cars have fallen since the policy was taken. The
Insurer will only pay an amount equal to the value of the car at the time of loss. If he finds
that a car of the same make and model is available in the market for Rs.3 lac then he is not
liable to pay more than this sum and payment of Rs.3 lacs will indemnify the Insured.
Similarly in the case of partial loss if some part of the car needs to be replaced the Insurer
will not pay the full value of the new part. He shall assess how much the old part had run and
after deduction of a proportionate sum he shall pay the balance amount. An insured is not
entitled to new for old as otherwise he would be making a profit from the accident.
However there are two modern types of policy where there is a deviation from the application

of this principle.

One is the agreed value policy where the insurer agrees at theoutset that they will accept the
value of the insured property stated in the policy (sum insured) as the true value and will
indemnify the insured to this extent in case of total loss. Such policies are obtained on valuable
pieces of Art, Curious, Jewellery, Antiques, Vintage cars etc.

The other type of policy where the principle of strict indemnity is not applied is the
Reinstatement policy issued in Fire Insurance. Here the Insured is required to insure
the property for its current replacement value and the Insurer agrees that in the event
of a total loss he shall replace the damaged property with a new one or shall pay for
the replacement in full.

HOWISINDEMNITYPROVIDEDANDTHELIMITATIONOFIT.

The Insurers normally provide indemnity in the following manner and the choice is

entirely of the insurer

Cash Payment

Under this mode, the cheque are made directly in the name of third party and thus
avoids the cumbersome process of the insurer first paying the insured and he in turn
paying to the third party.

Repairs

This mode is one of the best method used in Motor Insurance as sort of indemnity,
and it is used frequently by the insurer. As under this the company pays the entire
cost of repairing depending upon the condition and type of damages occurred to the
vehicle.
Replacement

This method of replacement is not preferred by the insurance companies and is

mostly used in glass insurance where the insurer get the glass replaced by the firms
with whom they have arrangements and because of the volume of business get
considerable discounts.
Reinstatement

This mode applies in cases of the property insurance where the insurer undertakes to restore the
building or the machinery damaged substantially to the same condition as
before the loss. But sometimes the policy itself gives the right to insurer to pay
money instead of restoration of building or machinery.

Limitation of indemnity

It is not as if in case of loss arising of the Insurers do not issue blank checks when
they write policies. Limitations which determine the amount of their liability include:

Extent of insurable interest

Actual cash value of the loss

Policy limits

Other insurance

coinsurance, contribution and average clauses

deductibles

PRINCIPLEOFSUBROGATION

The Roman doctrine of CessioActionum bore the closest resemblance to subrogation, as

known in England, and it is that doctrine that had been regarded as the precursor of
subrogation. As per this principle after the insured is compensated for the loss due to
damage to property insured, then the right of ownership of such property passes to the
insurer. This principle is corollary of the principle of indemnity and is applicable to all
contracts of indemnity. 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. According to the principle of subrogation, when the
insured is compensated for the losses due to damage to his insured property, then the
ownership right of such property shifts to the insurer.

This principle is applicable only when the damaged property has any value after the
event causing the damage. The insurer can benefit out of subrogation rights only to
the extent of the amount he has paid to the insured as compensation.

For example: Mr. Arvind insures his house for ` 1 million. The house is totally destroyed by
the negligence of his neighbour Mr. Mohan. The insurance company shall settle the claim of
Mr. Arvind for ` 1 million. At the same time, it can file a law suit against Mr. Mohan for
` 1.2 million, the market value of the house. If insurance company wins the case and
collects ` 1.2 million from Mr. Mohan, then the insurance company will retain ` 1
million (which it has already paid to Mr. Arvind) plus other expenses such as court
fees. The balance amount, if any will be given to Mr. Arvind, the insured.

Thus in insurance law the subrogation is the name given to the right of the insurer who has paid
a loss to be put in the place of the assured so that he can take advantage of any means
available to the assured to extinguish or diminish the loss for which the insurer has indemnified
the assured. Subrogation is the substitution of one person for another. The Principle of
subrogation confers upon insurer the right to receive the benefit of such rights and remedies as
the assured has against third parties in regards to the loss to the extent that the insurer has
indemnified the loss and made it good. Subrogation as observed in Halsburys

2
Laws of England is a convenient way of describing a transfer of rights from one person to
another without assignment or assent of the person from whom the right are transferred and
which takes place by the operation of law in a whole variety of widely different circumstances. It
is a remedy rather than a right. The doctrine is applied at law in case of insurances where the
insurance is contract of indemnity only. Upon paying the insured his loss, the underwriter or
insurer is entitled to the benefits of ail remedies of the insured against persons liable for loss,
whether in contract or in tort, and is entitled to sue in the name of the insured, but he may not
sue in his own name. Subrogation does not have the effect of transferring to the insurer any
cause of action which the insured may have had against the third party. The right arises in equity
and does not depend on the contract between the parties.

3
In Castellain v. Preston , it was contended that this doctrine applied only where there
is subsisting right of action against the third parties, as in that case the right against
the third party had already been exercised.

Thus the Principle of subrogation confers two specific rights on the insurer namely:-

2
Fourth Edition Volume 16, para 889

3
(1883) 11 QBD 380: 49 LT 29
All right and remedies of the assured against parties incidental to the subject matter

4
of the loss, by the exercise of which the insurer may recoup his loss. The insurer
can compel the insured to take proceeding against the third parties for the benefit of
5
the insurer.

All benefits received by the assured from third parties with a view to compensate the
assured for the loss which the insurer has indemnified him. The insurer is entitled to
get even the moneys received by the assured ex-gratia except those that are given
6
to the benefit the assured exclusively .

Subrogation is a process in insurance law whereby an insurer, having indemnified an

assured, has transferred to himself all the rights and remedies of the assured with
respect to the subject matter as from time of the casualty. However, those rights and
remedies brought about by way of subrogation, may only be acted upon in the name
7
of the assured who has been indemnified.

SUBROGATIONHOW?

Subrogation can arise in 4 ways

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. The Insured has a right in Tort to recover the damages from the individuals
involved. The Insurers assume these rights and take action in the name of the insured and
take his permission before starting legal proceedings.
Contract

This can arise when a person has a contractual right to compensation regardless of
a fault then the Insurer will assume the benefits of this right.

4
Castellain v. Preston & cousin and Co. v. D and C carriers Ltd. (1971) 1 All ER 55

5
Morris v. Ford Motor Co. (1973) QB 792

6
Burnand v. Rodocanachi and co. (1882) 7 App Case 333 (HL)

7
Esso Petroleum Co. Ltd. V. Hall Russell and Co. [1988] 3 WLR 730, HL (per Lord Jauncey)
Statute

Where the Act or Law permits, the insurer can recover the damages from
Government agencies like the Risk (Damage) Act 1886 (UK) gives the right to
insurers to recover damages from the District Police Authorities in respect of the
property damaged in Riots which has been indemnified by them.
Subject matter of Insurance

When the Insured has been indemnified and the property treated as lost he cannot
claim salvage as this would give him more than indemnity. Therefore when Insurers
sell the salvage as in the case of damaged cars it can be said that they are
exercising their right of subrogation.

LIMITATIONONTHEDOCTRINE

As the insurer stands in the shoes of the insured, the most important restriction on
the doctrine of subrogation is that insurers can be in no better position than the
insured would have been themselves. If the insured is therefore prevented from
making a claim, the insurer falls with him.

No Right of Claim: This can arise in many ways.

If the insured's claim is out of time, either by way of a contractual provision or by

virtue of the Limitation Act, insurers' right of subrogation is lost as well. If immunity is
granted by the policy itself in the form of a subrogation waiver, then that is the end of
that.
If the insured no longer exists and cannot exercise its rights, then insurers cannot do so
either. In Smith (Plant Hire) Ltd v Mainwaring [1982] 2 Lloyds Rep 244, insurers had issued
subrogation proceedings in their insured's name but later found out that the insured had
been wound up some time previously. No assignment of rights had been taken prior to the
liquidation and accordingly the Defendant was successful in getting the claim struck out as
the claimant simply did not exist.

Persons Against Whom Subrogation Is Unavailable

The Insured: An insured has no right of action against himself and nor do his insurers. In
Simpson v Thompson [1877] 3 App Cas 279 two ships in the ownership of the same insured
collided. Having indemnified the owner in respect of one ship, insurers attempted to subrogate
against him by virtue of his ownership of the other vessel but
the House of Lords dismissed the claim as an insured has no right of action against

him.

Persons for whose benefit insurance has been procured: One specific area of importance which
is well known is where, under a contractual arrangement, the insured may have agreed that the
insurance should ensure to a third party's benefit. This is a frequent issue in relation to leases, as
seen in Mark Rowlands Ltd v Berni Inns Ltd [1986] 1 QB 211. In that case, a landlord leased a
building to a tenant and the property was subsequently damaged by fire through the tenant's
negligence. The property was insured by the landlord and once indemnified; the issue was
whether a subrogated action could be brought against the tenant. The answer was no. The Court
of Appeal took the view that the contractual arrangements between landlord and tenant as
encapsulated in the lease were such that the landlord had taken out buildings insurance for the
benefit of himself and his tenant and that in the event of fire the landlord and tenant had intended
to look to the buildings insurers to cover the loss.

According to the common law, the right of subrogation arises when the insureds claim has been
8
fully paid and not till then . This right arises due to the complete payment done thereof. And it
does not arise in the case of PPI policies as they are based on the principle of indemnity and
9
even though the insurer has paid under it. The right of subrogation arises only in respect of right
incidental to the subject matter of loss. Payment for loss if the ship does not entitle the insurer
has to be subrogated for the owners right of action for loss of freight.

Conclusion

The basic purpose of insurance is that the insured is put in same financial position as
he was before the loss. The principle of indemnity and their corollaries i.e the
principle of subrogation has been formulated so that any person does not make profit
out of the insurance transaction.

8
Principle of Insurance law 8th edition 2006 page 243.

9
Edward v. Motor Union 1922 2KB 249.
Bibliography

Books

th
Principles of Insurance Law 8 Edition reprint 2009 by Lexis Nexis

The Principle of Indemnity in Marine Insurance Contracts: A Comparative

Approach By Kyriaki Noussia

Insurance Law and Practice by C.L. Tyagi & Madhu Tyagi, Madhu Tyagi

Web Sources

www.manupatra.com

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http://bkksiam.com/indemnity01.php

http://kalyan-city.blogspot.com/2011/03/principles-of-insurance-7-basic-general.html

http://homepage.eircom.net/~businessclass/principles.ht m