Exceptions: There are certain obvious exceptions to the indemnity

principle:
Firstly, the principle of indemnity does not apply to life insurance because
life and limbs cannot be precisely measured in financial terms, and as
such, it is extremely difficult to assess the financial compensation as a
result of death of a person.
No money value can be placed on human life and, therefore, insurer
undertakes to pay a fixed or guaranteed sum irrespective of the loss
suffered. A life insurance contract comes nearer to guarantee than to
indemnity.
Secondly, accident and sickness insurance also form an exception to the
indemnity principal. In these cases also the liability is to pay a fixed sum
without measuring the actual loss suffered.
Thirdly, valued policies, namely, where the value of the subject matter
and the amount payable in the event of loss are agreed upon beforehand,
that case also, though not strictly speaking, is not a case of indemnity.
In all the above exceptions, however, except the first, the principle of
subrogation may still apply and that will prevent the assured from
receiving anything more than the fixed sum.
Whether contract of insurance is really a contract of indemnity:
According to section 124 of the Indian Contract Act 1872, a contract of
indemnity is a “contract by which one party promises to save the other
from loss caused to him by the conduct of the promisor himself or by the
conduct of any other person.” On analyzing the contract of insurance we
find that it does not have all the incidences of a contract of indemnity.
The following are the reasons:
(i) Concept of person is very much associated with the contract of
indemnity i.e., loss caused by the promisor himself or any other person.
Indian Law confines the contract of indemnity for loss arising out of
human conduct. But in case of insurance it is not necessary that the loss
may be caused because of the involvement of some human i.e., loss may
arise independent of any human conduct. Therefore, all the insurance
contracts are contingent contract and not indemnity contract. Here we
find a fundamental difference with English law.
Under English law except life insurance all the contracts of insurance are,
indemnity contract because under English law contract of indemnity is
defined as: “a promise to save another harmless from loss caused as a
result of a transaction entered into at the instance of the promisor.”
(ii) In every contract of insurance there will be a ‘sum insured’ and
though contract of insurance is described as a contract of indemnity, on
the happening of the event, the insured can recover no more than the
sum insured though it does completely indemnify the assured.
In United India Insurance Co. Ltd v. Kantika Colour Lab, (2010) 6
SCC 449 It was held that, it is only upon the proof of the actual loss,
the assured can claim reimbursement of loss to the extent it is
established, exceeding the amount stipulated in the contract of insurance
which signifies outer limit of the insurance company’s liability.”
(iii) The principle that the assured should not recover more than the
loss suffered by him may be modified by the express terms of the policy.
In National Inssurance Co. v. Susheela Devi Mantoo & Others AIR
2005 J&K 42 The insured, a co-sharer of a building, insured the whole
building by paying the premium for the whole building. When the
building was damaged completely, the insured’s claim for loss for the
whole building was repudiated by the insurer. It was held that, having
accepted the premium for the whole building, the insurer was liable to
pay the loss for the whole building.”
(iv) The parties may estimate the loss and value the policy. If there is no
gross over valuation, the contract is enforceable though the amount
recovered is slightly more than the actual loss suffered by him. Valued policies
are common in the case of insurances on ships and profits.
(v) Life insurance is not a contract of indemnity because the insurer
promises to pay fixed sum on the happening of the insured event or after a
fixed period irrespective of any loss to the insured. In this category of
insurance contract, a fixed sum is promised to be paid either on the death of a
person or after the expiry of a fixed period. In this sense, life insurance
contracts may be described as “contingent contracts” or benefit policy
contracts “as they cannot indemnify but only pay a certain benefit if the
insured event happens.”
‘Lord Mansfield’ defined a life Insurance contract as a contract of indemnity.
This principle was followed in Godsall v. Boldero, (1807) but, in Dalby v.
Indian and London Assurance Co (1854), this principle was not followed and
held that a life insurance contract is not a contract of indemnity.
Though, prima facie the insurer indemnifies the assured, as his liability may
be limited in several respects, a contract of insurance cannot be said to be a
contract of perfect indemnity.
IV. Subrogation:
In Insurance law, 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. The right of
subrogation said to be a corollary of the principle of indemnity.
It has its genesis in the principle of indemnity. Although an insured is entitled
to indemnity from an insurer pursuant to coverage provided under a policy of
insurance, the insured is entitled only to be made whole, not more than
whole i.e., he cannot be more than indemnified.
Principle of Subrogation normally prevents an insured from obtaining one
recovery from the insurer under its contractual obligations and a second
recovery from the tort-feasor under general tort principles.
The term subrogation is derived from two Latin words: sub, meaning
“under”, and rogare, meaning “to ask”. Thus, subrogation literally means
“asking (for payment) under another’s name”.
‘Evelyn Thomas’ defines it as the, ”right to which one person has to stand in
the place of another and avail himself of all the rights and remedies of that
other”
According to Halsbury’s Laws of England “subrogation, is a
convenient way of describing a transfer of rights from one person to
another without assignment and assent of the person from whom the
rights are transferred and which takes place by operation of law in
whole variety of widely different circumstances”.

In the words of ‘W.A. Dinsdale’, “Subrogation is the insurer’s right to

receive the benefit of all the rights of the assured against third parties
which satisfied, will extinguish or diminish the ultimate loss
sustained.”

Subrogation which simply means substitution comes from Roman law.

In Roman law, a creditor who lent money to the debtor for the purpose
of payment of a mortgage on condition that he was to be substituted in
place of the mortgagee was entitled to claim the benefit of the security
discharged with his money.
This law of Roman System has now been recognized in all modern
system.
In a leading case Yorkshire Insurance Co. v. Nisbet Shipping Co, (1962)
2 Q.B 330, Diplock J observed: “Although often referred to as in
‘equity’, subrogation is not an exclusively equitable doctrine. It was
applied by the common law courts in insurance cases long before the
fusion of law and equity, although the powers of the common law
courts might in some cases require to be supplemented by those of a
court of equity in order to give full effect to the doctrine for example,
by compelling an assured to allow his name to be used by the insurer
for the purpose of enforcing the assured’s remedies against third
parties in respect of the subject matter of the loss.”
Subrogation means the restitution of the rights of an assured in favour of
the insurer against the third party for any damages caused by the third
party, after the insurer has indemnified the assured for the loss.
In accordance with this principle the insurance company acquires the
right of the insured to sue the third party to compensate for the loss
inflicted, when it indemnifies the insured for the losses suffered by him

This means that, if another vehicle hits your vehicle, and the insurer pays
you the claim, then the insurer, not you, can sue the owner of that vehicle
to claim damages.
Subrogation thus refers to the process an insurance company uses to seek
reimbursement from the responsible party for a claim it has already paid.
Another party is actually responsible for all or part of the damages.

In this case, the insurance company may pay the claim, and then seek
reimbursement from the other party. It is the right for an insurer to
pursue a third party that caused an insurance loss to the insured.
This is done as a means of recovering the amount of the claim paid to the
s insured for the loss
In Algemeene Bankvereening v. Langton, (1935) it was held that the
principle of subrogation is applicable to all insurance contracts which
are by their nature contracts of indemnity.
Subrogation occurs in property/casualty insurance when a company
pays one of its insured’s for damages, then makes its own claim
against others who may have caused the loss, insured the loss, or
contributed to it.
For example, suppose another driver runs a red light and hits your car.
You have insurance on your car, so you call your insurance carrier and
they pay you for all of your expenses related to the accident. Your
insurance company, realizing that the other driver had an insurance
policy, then seeks reimbursement from the at fault party’s insurance
carrier.
Your insurer is “subrogated” to the rights of your policy and can “step
in your shoes” to recover any amount paid out on your behalf.
Therefore, it is a plain common sense that a person should not be
compensated twice for the same loss.
The doctrine was confirmed in a famous case Castellain v. Preston, by
L. J. Bratt, in the following words: “In order to carry out the
fundamental rule of insurance law this doctrine of subrogation must be
carried to the following extent as between the underwriter and the
assured the underwriter is entitled to the advantage of every right of
the assured whether such right consists in contract fulfilled or
unfulfilled or in remedy for tort capable of being insisted or already
insisted on, or in any other right, whether by way of condition or
otherwise, legal or equitable which can be or has been exercised or has
accrued and whether such right could or could not be enforced by the
insurer in the name of the assured by the exercise or acquiring of which
right or condition the loss against which the assured is insured can be or
has been diminished. That seems to put this doctrine of subrogation in
the largest possible forum.
In another decision of Barnard v. Rodocanachi (1882) Lord Blackburn
remarked: “If the indemnifier has already paid it, then, if anything which
diminishes the loss comes into the hands of the person to whom he has
paid it, it becomes an equity that the person who has already paid the
full indemnity is entitled to be recouped by having that amount back.”

In simple words, the insurer will step into the shoes of the assured and
avail to himself all those benefits when he has paid the amount of the
policy to the assured, If the insured himself receives compensation for
his loss from another party, after he has been indemnified by his
insurers, he will hold in trust the amount of compensation received for
his insurers to the extent the latter is entitled thereto.
In the same way if the insurer has received more money from the third
party or by selling the damaged property than the actual amount of
indemnity paid by him to the insured, the insurer must refund the
excess amount to the insured.
Thus, the right of subrogation to the insurer against the policyholder is
limited to the extent of the payments made by the insurer.
Effect of under insurance on right of subrogation: An illustration of the
effect of under insurance upon the right of subrogation is to be seen in
Commercial Union Assurance Co v. Lister 1874 This case is usually
cited as authority for the proposition that an assured not fully
compensated for his loss retains control of legal proceedings brought
against a third party.
In this case a mill was insured with 11 insurers for a total of £33,000. The
mill was destroyed in a gas explosion, the responsibility for which lay
with the Halifax Corporation. The estimated true losses exceeded
£56,000. including consequential loss of profits of £6,000. The insured
recovered under the policies and sued the Corporation. It was held that the
assured could retain control of the action subject to an undertaking to sue
for the whole loss.
The court further said: “If the assured obtains from the Corporation of
Halifax a sum larger than the difference between the amount of the
insurance and the amount of the loss, he is a trustee for that excess for
the insurance company or Companies ....., The implication seems to be
that recovery in these circumstances should go first in favour of the
assured in respect of his losses not covered by the policy.”
However, the insurers cannot recover from a third party before he has
indemnified his own insured, but can only take steps to hold the third
party liable pending the settlement of the claim under the policy.

As subrogation means substitution, where the assured himself cannot

bring an action, the insurer also cannot claim anything by subrogation.

For example, where the wife of the assured set fire to his house and the
insurers paid, it was held in Midland Insurance v. Smith, (1881) 6
QBD 561 that the insurers cannot recover the insurance money as the
assured had no right of action against his wife.

Simpson v. Thompson (1887) Again where two ships belonging to the

same owner collide by the fault of one, the insurers of the ship not in
fault will not be entitled to any claim of the owner for acts of the other
ship, though the insurers of the cargo owned by a third party would have
had a claim against him.
 In National Insurance Co v. SS Navigation Co. AIR 1998 Cal, a vessel
belonging to the SS Navigation Company, collided with a vessel belonging
to the Shalimar Paints Company, causing it to sink. The insurer
indemnified the insured, took a deed of subrogation and filed this suit
against SS Navigation Company, to recover damages for the loss caused
more than three years after the collision. The defendant contended that the
suit was barred by limitation.
The plaintiff (insurer) claimed that as a public undertaking it had 30 years’
time to sue according to the West Bengal Amendment to Article 112 of the
Limitation Act, 1963.
Rejecting this claim the court held that the insurer could not claim better
or higher rights or remedies than what were available to the insured under
section 79(1) of the Marine Insurance Act under which he merely steps into
the shoes of the insured.
The insurers are not entitled to make a profit by subrogation.
In Yorkshire Insurance Co v. Nisbet Shipping Co, 1962 2 QB it was held
that, though the insured recovers more from the third party, the insurers
by claim of Subrogation, cannot claim the entire amount and their right is
limited to repayment only of the amount paid by them.
How right of subrogation arises”:
The right of subrogation may arise in any of the following ways:
(i) Right arising out of Tort:
A tort is a “civil wrong” and the most common types of tort being
negligence and nuisance. When a duty owed to a third party is
breached, the injured person will have a right of claiming damages from
the wrong-doer, Insurance company will succeed to the policyholder’s
right of action in all those cases where tort has caused some loss.

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.
(ii) Right arising out of Contract: Where a contract imposes on a third
person the obligation of making compensation to the insured in respect
of the loss, the benefit of the obligation shall pass over the insurer.
Examples of subrogation arising under contract are: goods damaged
while in the custody of a common carrier or tenancy agreement.
(iii) Right arising by Statue: Sometimes, Acts of Parliament give
subrogation rights which might not otherwise exist, for e.g. in marine
insurance, subrogation arises by statute, i.e., by operation of Section 79
of the Marine Insurance Act, 1963.
(iv) Subrogation arising out of Salvage: Where an insured is paid for a
total loss. ignoring. the monetary value of the wreckage or remains of
the insured article, the subrogation rights arise out of the subject-matter
of the insurance. For example, a motor car may be damaged beyond
economic repair, but still have some scrap value, which should be taken
into account after the insurer takes over the salvage.
Rights of Insurer on Payments:
The doctrine of subrogation confers two specific rights on the insurer
namely
(Assam Bengal Roadways (P) Ltd, v. Hindustan Photo Film
Manufacturing Co Ltd., (1998))
(1) All rights and remedies of the assured against third parties incidental to
the subject matter of the loss, by the exercise of which the insurer may
recoup his loss.
In Morris v. Ford Motor Co, (1973) Q.B 792 it was held that the insurer can
compel the insured to take proceedings against the third parties for the
benefit of the insurer.
(2) 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
exgratia except those that are given to benefit the assured exclusively.
In Oberoi Forwarding Agency v. New India Assurance Co. Ltd AIR 2000
SC 855 it was held that the insurer is therefore entitled to exercise whatever
rights the assured possesses to recover (to that extent compensation for the
loss but it must do so in the name of the assured.
Limitations of the Doctrine of Subrogation:
The doctrine of subrogation does not provide absolute right to the
insurer. It is a remedy rather than a right. This right is subject to following
limitation:
(l) Insurer must pay before he claims subrogation. The right of
subrogation of insurer arises only when the assured’s claim has been fully
paid and not till then, though it may be modified in terms of the policy.
(Scottish Union & National Insurance Co v. Davis 1970 Lloyds Rep )
(2) The right of subrogation does not arise where the assured himself has
no cause of action against the third party, for example where the
assured’s wife sets fire to his house and the insurer indemnifies it, the
insurer has no right of action against the wife.
Another example is the decision of Simpson v. Thomson, where there was
a collision between two ships which were owned by the same person,
due to the fault of one of the ship. The owner could not recover from the
ship at fault as that was also owned by him. Hence the insurer of the ship
not at fault could not sue the ship at fault under the right of subrogation.
3) The insurer cannot enforce his right in his own name but in the
name of assured.

(4) The insurer could not claim better or higher rights or remedies
than what were available to the insured.

(5) The insurer cannot get any proprietary right in the policy.

(6) The principle of subrogation does not apply to life. The doctrine
applies only to marine, fire and other non-life policies.
V. Contribution:
The principle of contribution enables the total claim to be shared in a
fair way. The doctrine of contribution operates as a corollary of the
doctrine of Indemnity and hence is applicable in case of general
insurance. The rule is of ancient origin and was recognized by the
Chancery courts.
The doctrine is defined and explained in North British and Mercantile v.
Liverpool and London Globe 1877 5 CH D 569 (also known as King
and Queen Granaries) case as: ‘Contribution exists where the thing is
done by the same person against the same loss, and to prevent a man
first of all recovering more than the whole loss or if he recovers the
whole loss from one which he could have recovered from the other, then
to make the parties contribute rateably. But that only applies where
there is the person insuring the same interests with more than one
office’.
Principle of contribution has application where there is a person
insuring the same interest with more than one office.

The genesis of contribution lies in liberty of the assured to insure the

same property with more than one insurer which is called ‘double
insurance’.
It is based on the premise that no one should gain from a loss, since an
insurable risk is a pure risk.

Contribution, simply put, is the “The right of an insurer to call upon

others similarly, but not necessarily equally, liable to the same insured
to share the cost of an indemnity payment.”

Federation of Institute Bombay It has been defined as, “the right of

an insurer who has paid a loss under a policy, to recover a
proportionate amount from other insurer who are liable for the loss.”
As per the doctrine of contribution the indemnity provided for the loss
occurring on the asset, which is insured with several insurers has to be
proportionately shared among them according to the rateable
proportion of the loss.
The amount of total compensation or indemnity provided to the insured
by all the insurers should not exceed the amount of loss. Sometimes
when the value of the asset is very high the amount of risk involved is
higher and that particular asset if insured by the company forms a
significant portion of the total risk.
Thus, where there are two or more insurances against one risk, the
insurer can call upon other insurers similarly (but not necessarily equally)
liable to the same insured to share the cost of an indemnity payment.
In other words, contribution is the right of an insurer who has paid
under a policy, to call upon other insurers equally or otherwise liable for
the same loss to contribute to the payment.
This doctrine ensures equitable distribution of losses between different
insurers. A policyholder is not entitled to claim from each insurer more
than the rateable proportion of the loss to which one is liable.” “
By mere double insurance also, the right to contribution does not arise unless
there is over insurance. Where there is double insurance and, over insurance,
the right of contribution springs up. Thus where the assured is over insured
by double insurance, each insurer is bound, as between him and other insurers,
to contribute rateably to the loss in proportion to the amount for which he is
liable under the contract. If any insurer pays more than his proportion of the
loss he is entitled to maintain a suit for contribution against the other
insurers, and is entitled to the like remedies as a surety who has paid his
proportion of the debt. However where the insured is insured for an amount
less than the insurable value he is deemed to be his own insurer in respect of
the uninsured balance.
To give rise to a right of contribution the following conditions must be
satisfied:
(i) All the insurance must relate to the same subject-matter North British v.
London Liverpool and Globe, 1887 5 CH D 569 In general insurance, terms
of coverage are very specific. One could insure a building, but insuring the
building would not be the same as insuring the building and its contents. If a
loss related to contents of the building occurs, then the insurer that covers
stock would be called on to indemnify. The other policy would have covered
the building alone, so that insurer would not be liable.
(ii) The policies concerned must all cover the same interest of the same
insured. Let’s assume that one policy covers fire and malicious
damage while another covers fire to the exclusion of malicious
damage. If arson is the determined cause of the loss, the insurer
covering malicious damage cannot call on the other insurance to help
indemnify the insured. This is because the proximate cause of the fire
was malice and the other insurer excluded malicious damage.
(iii) The policies concerned must all cover the same peril which caused
the loss.
(iv) The policies must have been in force and all of them should be
enforceable at the time of loss. With general insurance, timing is
everything. The difference between being covered or not could be a
matter of minutes. There is no grace period with general insurance, so
this prerequisite assumes paramount importance.

(v) The policy must not contain any stipulation by which it is

excluded from contribution.
The common law right of contribution is, however, modified in
practice by an express term in the policy, which results in the insured
being required to proceed against each of the insurers and recover from
them the rateable proportion of the loss, they are liable to make good
and no more.

The clause inserted for this purpose merely states that the insurer will
pay no more than his rateable share.

The contribution clause is worded as follows: "If at the time of any

other subsisting insurance or insurances effected by the assured or by
any other person or persons on his behalf covering such property,
either alone or together with any other property, this company shall not
be liable to pay or contribute more than its rateable proportion of such
loss or damage".
The object of such a clause is simply to do away with the old practice
of the assured recovering the whole loss from one of the several co-
insurers leaving the paying company to obtain contribution from the
other co-insurers.

They are inserted in order that the assured himself should collect from
each insurer a rateable proportion and so it is also called Rateable
Proportion clause.

Thus if a house is insured with company X for Rupees 5,000/ and with
company Y for Rupees 10,000/ and the damage amounts to Rupees
l,200/-,
company X will apparently be liable to contributs Rupees 400/ and
company Y to contribute Rupees 800/-.
When does insurer’s right to Contribution Accrue:
Where there is no rateable proportion clause, the insured can on the
date of loss or damage choose the insurer from whom to recover his
indemnity.
If he chooses to recover his loss from ‘A’, then a right in equity to
claim contribution from others arises on the same day though ‘A’
cannot enforce his equity until he has indemnified the insured.
This right is not lost even though in the meantime the insured commits
a breach of any condition in B’s policy. ‘
B’ cannot escape his liability to share his burden of the loss by any
default of the insured after the date of loss.
However, where there is rateable clause and the insurer pays more
than his rateable share, such insurer cannot claim contribution from
other insurers for the excess paid by him, because he cannot claim
contribution for voluntary payments.
In other words it could be said that in case of rateable proportion
clause an insurer is liable to pay only his share and not more than that.
Example: Two insurers A and B have independently covered a risk.
Both the policies contain the usual rateable proportion clause that the
insurer will not pay more than his share of the loss.

‘A’ fully indemnifies the insured and claims 50% contribution from
‘B’.
‘B’ is not bound to reimburse ‘A’, because the excess paid by ‘A’ was
voluntary.

In, Legal and General Insurance Society v. Drake Insurance Co., it

was held that the right of contribution only arises in equity where an
insurer has been obliged under his policy to pay more than his rateable
proportion. The rateable proportion clause excludes the right of
contribution.
Calculation of Contribution: The application of the principle of
contribution can take two forms:
(a) Contribution in proportion to sum insured i.e., ‘maximum
liability’ basis.
Under this method the insurers pay proportionately according to the
insurance cover provided by them. The following formula is applied:

Contribution= Sum Insured with individual Insurer x Amount of Loss

Total Sum Insured

Example: A insures his house against loss by fire with insurer ‘X’ for
Rupees 40,000/-, with ‘Y’ for Rupees 60,000/-, and with ‘Z’ for Rupees
1,00,000/-.
Fire broke out and A suffered a loss of Rupees 50,000/-. X, Y and Z
will contribute according the sum insured by them i.e., Rupees 10,000/-,
Rupees 15,000/and Rupees 25 ,000/respectively.
(b) Contribution in proportion to liability i. e., ‘independent liability’
basis.
Under this method, the amount payable by each insurer is calculated
independently, totally ignoring the fact that insurance has also been
affected by other insurers. The contribution differs not according to the
proportions of the sum insured but in proportion of their liabilities
under each of their policies. If the amounts calculated above are more
than the loss, then the contribution of every insurer is reduced
proportionately so that an indemnity is provided.

Example: Insurer ‘A’ has provided a cover of Rupees 8,000/and insurer

‘B’ of Rupees 4,000/ and the loss sustained is Rupees 3,000/-. Under
this method both A and B will contribute Rupees 1,500/each, because
each policy would have paid the whole amount of loss if there would
have been no other insurance and so each contributes equally towards the
loss.
Now, in the above example, if the loss is Rupees 6,000/-, A would be
independently liable to pay Rupees 6,000/ and B would be independently
liable to pay Rupees 4,000/-. But, if both pay, it would be more than
indemnity, and hence both will contribute in proportion of their
independent liability and will be scaled down to 6/ 10 and 4/10 of
Rupees 6,000/respectively.

Contribution=Independent Liability of individual Insurer x Amount of Loss

Total Sum Insured

A’s contribution = 6000/ 10000 x 6000 =3600

B’s contribution = 4000/ 10000 x 6000 =2400

A’s contribution = (6000/ 10000) x 6000 = 3600/

B’s contribution = (4000/ 10000) x 6000 = 2400/
Differences between Contribution and Subrogation

(i) In contribution the purpose is to distribute the loss while in

subrogation the loss shifted from one person to another.

(ii) Contribution is between insurers but subrogation is against third

party.

(iii) In contribution there must be more than one insurer but in

subrogation there be one insurer and one policy.

(iv) In contribution the right of the insurer is claimed but in

subrogation the right of the insured is claimed.