Insurance: indemnity and doctrine of subrogation

PROJECT WORK

INDEMNITY AND DOCTRINE OF SUBROGATION

SUBMITTED TO: SUBMITTED BY:

MS. PRATIMA SONI SUNIL SHARMA

ASSISTANT PROFESSOR L/1557

SCHOOL OF LAW SCHOOL OF LAW

Indemnity Insurance

Indemnity insurance is a contractual agreement in which one party guarantees compensation

for actual or potential losses or damages sustained by another party. Most commonly, it is an
insurance policy designed to protect professionals and business owners when found to be at
fault for a specific event such as misjudgment. Typical examples of indemnity insurance
include professional insurance policies like malpractice insurance and errors and omissions
insurance. These special insurance policies indemnify or reimburse professionals against
claims made as they conduct their business.

Although indemnity agreements have not always had a name, they are not a new concept as
they are a necessary part of ensuring cooperation between individuals, businesses, and
governments. In 1825, Haiti was forced to pay France what was then called an "independence
debt." The payments were intended to cover the losses that French plantation owners suffered
in terms of land and slaves. While the indemnity described in this article was unjust, it is one
example of many historical cases that show the ways indemnity has been applied worldwide.

Another common form of indemnity is the reparations a winning country seeks from a losing
country after a war. Depending on the amount and extent of the indemnity due, it can take
years and even decades to pay off. One of the most well-known examples is the indemnity
Germany paid after its role in World War I. Those reparations were finally paid off in 2010,
almost a century after they were put in place.

Indemnity Insurance Works

Indemnity is a comprehensive form of insurance compensation for damages or loss and, in

the legal sense, it may also refer to an exemption from liability for damages.

Indemnity insurance sometimes referred to as professional liability insurance, is a

supplemental form of liability insurance specific to certain professionals or service providers.
The professionals provide counsel, expertise, or specialized services. Indemnity insurance is
unlike general liability or other forms of commercial liability insurance that protect
businesses against claims of bodily harm or property damage. Indemnity insurance protects
against claims arising from possible negligence or failure to perform that result in a client’s
financial loss or legal entanglement. A client who suffers a loss can file a civil claim, and, in
response, the professional’s indemnity insurance will pay litigation costs as well as any
damages awarded by the court.

As with any other form of insurance, indemnity insurance covers the costs of an indemnity
claim including but not limited to court costs, fees, and settlements. The amount covered by
insurance depends on the specific agreement, and the cost of the insurance depends on many
factors including the history of indemnity claims.

Key Takeaways
Indemnity insurance is a contractual agreement in which one party guarantees compensation
for actual or potential losses or damages sustained by another party. Most commonly, it is an
insurance policy designed to protect professionals and business owners when found to be at
fault for a specific event such as misjudgment. Certain professionals must carry indemnity
insurance. Examples include those involved in financial and legal services, such as financial
advisors, insurance agents, accountants, mortgage brokers, and attorneys. An act of indemnity
protects those who have acted illegally from being subject to penalties. This exemption
typically applies to public officers, such as police officers or government officials, who are
compelled to break the law to carry out the responsibilities of their jobs. Often, such
protection is granted to a group of people who committed an illegal act for the common good,
such as the assassination of a known dictator or terrorist leader.

Indemnity Insurance in Practice .

Certain professionals must carry indemnity insurance. Examples include those involved in
financial and legal services, such as financial advisors, insurance agents, accountants,
mortgage brokers, and attorneys. When dispensing financial or legal advice, these
professionals are potentially liable for negligence or inadequate performance despite the
intent of goodwill. In the financial industry, a professional who provides financial advice that
results in the purchase of an insurance or investment product must purchase errors and
omissions insurance (E&O). As an example, accountants may be found negligent for advising
a client on tax matters that in turn result in a penalty or additional taxes.

In the medical field, malpractice insurance is a form of compulsory professional indemnity

insurance. Malpractice insurance protects medical practitioners from civil claims arising from
negligence which result in physical or mental harm to patients. A growing number of
executives are purchasing indemnity insurance to protect their deferred compensation plans
against company claims or bankruptcy. Other professions, such as contractors, consultants,
and maintenance professionals carry indemnity insurance as a practical matter due to their
exposure to “failure to perform” claims.

Professional indemnity insurance provides a critical layer of protection for service providers.
Often these professionals might also need other forms of liability coverage such as general
liability insurance or product liability coverage. Indemnity policies may also carry an
endorsement. An endorsement extends coverage to acts that occurred during the life of the
policy even if the policy is no longer in effect

Indemnity is Paid

Indemnity may be paid in the form of cash or by way of repairs or replacement depending on
the terms of the indemnity agreement. For example, in the case of home insurance, the
homeowner pays insurance premiums to the insurance company in exchange for assurance
that the homeowner will be indemnified if the house sustains damage from fire, natural
disasters or other perils specified in the insurance agreement. In the unfortunate event that the
home is damaged significantly, the insurance company will be obligated to restore the
property to its original state either through repairs by authorized contractors or
reimbursement to the homeowner for expenditures incurred for such repairs.

Acts of Indemnity

An act of indemnity protects those who have acted illegally from being subject to penalties.
This exemption typically applies to public officers, such as police officers or government
officials, who are compelled to break the law to carry out the responsibilities of their jobs.
Often, such protection is granted to a group of people who committed an illegal act for the
common good, such as the assassination of a known dictator or terrorist leader.

Broad Form Indemnity

Under a broad form indemnity provision, the indemnitor assumes an unqualified obligation to
hold harmless the indemnitee for all liability arising out of the contract, regardless of which
party was actually at fault. Even if the indemnitee is solely at fault for the loss, the indemnitor
has an obligation to indemnify. A broad form indemnity provision shifts the entire risk of loss
arising out of the contract to the indemnitor.

By way of example, assume a pedestrian walking by the construction site slips and falls,
resulting in $100,000 in damages. Assume further that the owner, the indemnitee, was solely
at fault for the loss. Under a broad form indemnity agreement, the contractor, the indemnitor,
would be required to indemnify the owner for 100 percent of the damages, or $100,000.

A broad form indemnity agreement may be drafted in many ways. However, there is certain
clear and concise language that indicates a broad form provision. The following language
provides broad indemnity:

Intermediate Form Indemnity

Under an intermediate form indemnity provision, the indemnitor assumes an obligation to

hold harmless the indemnitee for all liability arising out of the contract, so long as the
indemnitor is partially at fault—even one percent at fault. Using the injured pedestrian
example, assume that the owner was 99 percent at fault and the contractor was one percent at
fault for the pedestrian’s damages. The percentage allocated to each party is irrelevant as long
as the indemnitor has some level of fault. Under an intermediate form indemnity agreement,
the contractor would be required to indemnify the owner for any liability allocated to the
owner, 99 percent or $99,000, plus any liability allocated to the contractor, one percent or
$1,000. So long as the contractor is even one percent at fault, the owner receives 100 percent
indemnity.
General Liability Insurance Cover Indemnity Obligations

The Standard Insurance Services Office or ISO CGL policy provides coverage of the insureds
indemnity obligation. The coverage is afforded through an exception to the “contractual
liability” exclusion. Under the contractual liability exclusion, coverage is eliminated for
“assumption of liability” in a contract or agreement. This exclusion is intended to eliminate
coverage for the insured’s contractual obligations, including liability arising out of indemnity
or hold harmless agreements.

Through the exceptions to the exclusion, the exclusion is not applicable to “insured
contracts.” An insured contract is defined in the policy. The definition begins by listing five
types of contracts:

Lease of premises (but not for a promise to pay fire damage to a premises you rent or occupy)
Sidetrack agreement Easement or license agreement (not for construction or demolition on or
within 50 feet of a railroad) Indemnify a municipality (except for work for the municipality)
Elevator maintenance agreement

In addition to the above five enumerated contracts, a blanket clause is included in the
definition of “insured contracts,” which states as follows:

That part of any other contract or agreement pertaining to your business (including an
indemnification or a municipality in connection with work performed for a municipality)
under which you assume the tort liability of another party to pay for “bodily injury” or
“property damage” to a third person or organization. Tort liability means a liability that
would be imposed by law in the absence of any contract or agreement.

The blanket contractual clause extends coverage to any contract pertaining to the named
insured’s business under which they assume the tort liability of another, that is, an indemnity
obligation. But insurance companies may remove coverage for contractual liability using the
Contractual Liability Limitation Endorsement, Form CG 21 39

Doctrine of Subrogation

Subrogation is a term describing a legal right held by most insurance carriers to legally
pursue a third party that caused an insurance loss to the insured. This is done in order recover
the amount of the claim paid by the insurance carrier to the insured for the loss.
A contract of insurance is a contract of indemnity. Each and every contract of indemnity had
the elements of subrogation, which is based on the fundamental principle that in case of loss,
the insured shall be indemnified to the extent of loss and nothing beyond the loss. Thus, the
doctrine of subrogation is an automatic, inbuilt, inherent, implied and incidental to the
principles of indemnity, applicable to all property and liability insurance but not applicable to
personal accident and life insurance policies, since these are not contract of indemnity. Every
rule of insurance law is adapted to carry out this fundamental rule.Property and liability
insurance are based on the principle of indemnity-an insured should not be allowed to profit
from his losses. If an insured could sue and collect damages for a loss and collect insurance
for the same loss, then the insured would profit from the loss.

Subrogation prevents this. Subrogation in insurance is the substitution of the insurer as a

claimant for a loss suffered by the insured. Thus, the right to sue for the losses sustained by
the insured is transferred to the insurance company, which can seek reimbursement for the
payment to the insured from the party who caused the loss. When an insurance company
pursues a third party for damages, it is said to "step into the shoes of the policyholder," and
thus will have the same rights and legal standing as the policyholder when seeking
compensation for losses. If the insured party does not have the legal standing to sue the third
party, the insurer will also be unable to pursue a lawsuit as a result.

While, Universal Dictionary, provides the meaning of the word subrogation as ‘The
substitution of one person for another especially for one creditor for another’, Legal &
Commercial Dictionary, by A. N. Saha, 5th Edition, Eastern Law House provides the same as
‘The substitution of another person in place of a creditor to whose rights he succeeds in
relation to the debt.’

“Subrogation simply means substitution of one person for another; that is, one person is
allowed to stand in the shoes of another and assert that person’s rights against the defendant.
Factually, the case arises because, for some justifiable reason, the subrogation plaintiff has
paid a debt owed by the defendant.”

Doctrine of Subrogation Works

Subrogation literally refers to the act of one person or party standing in the place of another
person or party. Subrogation effectively defines the rights of the insurance company both
before and after it has paid claims made against a policy. Subrogation makes obtaining a
settlement under an insurance policy go smoothly. In most cases, an individual’s insurance
company pays its client’s claim for losses directly, then seeks reimbursement from the other
party, or his insurance company. The insured client receives payment promptly, which is
what he pays his insurance company to do, then the insurance company may pursue a
subrogation claim against he party at fault for the loss.

Insurance policies may contain language that entitle an insurer, once losses are paid on
claims, to seek recovery of funds from a third party if that third party caused the loss. The
insured does not have the right to both file a claim with the insurer to receive the coverage
outlined in the insurance policy and to seek damages from the third party that caused the
losses. Subrogation in the insurance sector, especially among auto insurance policies, occurs
when the insurance carrier takes on the financial burden of the insured as the result of an
injury or accident payment and seeks repayment from the at-fault party.

One example of doctrine of subrogation

is when an insured driver's car is totaled through the fault of another driver. The insurance
carrier reimburses the covered driver under the terms of the policy, and then pursues legal
action against the driver at fault. If the carrier is successful, it must divide the amount
recovered after expenses proportionately with the insured to repay any deductible paid by the
insured

It may be a pure and simple subrogation but may inadvertently or by way of excessive
caution use words more appropriate to an assignment. If the terms clearly show that the
intention was to have only a subrogation, use the words “assign” transfer and abandon in
favour of would in the context be construed as referring to subrogation and nothing more.

Types In view of the foregoing, subrogation can be broadly classified into three categories:

subrogation by equitable assignment;

subrogation by contract; and

subrogation-cum- assignment.

In the first category, the subrogation is not evidenced by any document, but is based on the
insurance policy and the receipt issued by the assured acknowledging the full settlement of
the claim relating to the loss.

Where the insurer has reimbursed the entire loss incurred by the assured, it can sue in the
name of the assured for the amount paid by it to the assured. But where the insurer has
reimbursed only a part of the loss, in settling the insurance claim, the insurer has to wait for
the assured to sue and recover compensation from the wrongdoer; and when the assured
recovers compensation, the assured is entitled to first appropriate the same towards the
balance of his loss (which was not received from the insurer) so that he gets full
reimbursement of his loss and the cost, if any, incurred by him for such recovery. The insurer
will be entitled only to whatever balance remaining, for reimbursement of what it paid to the
assured.

In the second category, the subrogation is evidenced by an instrument. To avoid any dispute
about the right to claim reimbursement, or to settle the priority of inter-se claims or to
confirm the quantum of reimbursement in pursuance of the subrogation, and to ensure co-
operation by the assured in suing the wrongdoer, the insurer usually obtains a letter of
subrogation in writing, specifying its rights vis-`-vis the assured. The letter of subrogation is a
contractual arrangement which crystallizes the rights of the insurer vis-`-vis the assignee. On
execution of a letter of subrogation, the insurer becomes entitled to recover in terms of it, a
sum not exceeding what was paid by it under the contract of insurance by suing in the name
of the assured.

Even where the insurer had settled only a part of the loss incurred by the assured, on recovery
of the claim from the wrongdoer, the insurer may, if the letter of subrogation so authorizes,
first appropriate what it had paid to the assured and pay only the balance, if any, to the
assured.The third category is where the assured executes a letter of subrogation-cum-
assignment enabling the insurer retain the entire amount recovered (even if it is more thanÂ
what was paid to the assured) and giving an option to sue in the name of the assured or to sue
in its own name. In all three types of subrogation, the insurer can sue the wrongdoer in the
name of the assured. This means that the insurer requests the assured to file the suit/complaint
and has the option of joining as co-plaintiff. Alternatively the insurer can obtain a special
power of Attorney from the assured and then to sue the wrongdoer in the name of the assured
as his attorney.The assured has no right to deny the equitable right of subrogation of the
insurer in accordance with law, even whether there is no writing to support it. But the assured
whose claim is settled by the insurer, only in respect of a part of the loss may insist that when
compensation is recovered from the wrongdoer he will first appropriate the same, to recover
the balance of his loss.

The assured can also refuse to execute a subrogation-cum-assignment which has the effect of
taking away his right to receive the balance of the loss. But once a subrogation is reduced to
writing, the rights inter-se between the assured and insurer will be regulated by the terms
agreed, which is a matter of negotiation between the assured and insurer

KEY TAKEAWAYS

Subrogation is a term describing a legal right held by most insurance carriers to legally
pursue a third party that caused an insurance loss to the insured. Subrogation makes
obtaining a settlement under an insurance policy go smoothly. In most cases, an individual’s
insurance company pays its client’s claim for losses directly, then seeks reimbursement from
the other party, or his insurance company. Subrogation is most common in auto insurance
policy, but also occurs in property/casuality and healthcare policy claims.
The doctrine of Subrogation Process for the Insured

Luckily for policyholders, the subrogation process is very passive for the victim of an
accident from the fault of another party. The subrogation process is meant to protect insured
parties; the insurance companies of the two parties involved work to mediate and legally
come to a conclusion over payment. Policyholders are simply covered by their insurance
company and can act accordingly. It benefits the insured in that the at-fault party must make a
payment during subrogation to the insurer, which helps keep the policyholder's insurance
rates low.

In the case of an accident, it is still important to stay in communication with the insurance
company. Make sure all accidents are reported to the insurer in a timely manner, and let the
insurer know if there should be any settlement or legal action. If a settlement occurs outside
of the normal subrogation process between the two parties in a court of law, it is often legally
impossible for the insurer to pursue subrogation against the at-fault party. This is due to the
fact most settlements include a waiver of subrogation.

Waiver of doctrine of Subrogation

A waiver of subrogation is a contractual provision whereby an insured waives the right of

their insurance carrier to seek redress or seek compensation for losses from a negligent third
party. Typically, insurers charge an additional fee for this special policy endorsement. Many
construction contracts and leases include a waiver of subrogation clause.Such provisions
prevent one party’s insurance carrier from pursuing a claim against the other contractual
party in an attempt to recover money paid by the insurance company to the insured or to a
third party to resolve a covered claim.In other words, if subrogation is waived, the insurance
company cannot "step into the client's shoes" once a claim has been settled and sue the other
party to recoup their losses. Thus, if subrogation is waived, the insurer is exposed to greater
risk.

Why is subrogation becoming so important

in the insurance industry and how can it benefit you, the policyholder? Subrogation is
important because any monies recovered through the subrogation process go directly to the
insurance company’s bottom line. The benefits of subrogation have been demonstrated in
company performance. This is according to the Ward Financial Group, a firm that researches
property/casualty operations and identifies operational benchmarks that distinguish high
performing companies. According to a study by Ward, companies that achieved superior
operating results subrogated claims at about twice the rate of average companies and
recovered substantially higher percentages of their loss payments through subrogation. A
company with an effective subrogation department can offer lower premiums to their
policyholders.

Conclusion:

The principles relating to subrogation can therefore be summarized thus :

 Equitable right of subrogation arises when the insurer settles the claim of the assured, for
the entire loss. When there is an equitable subrogation in favour of the insurer, the insurer is
allowed to stand in the shoes of the assured and enforce the rights of the assured against the
wrong- doer. Subrogation does not terminate nor puts an end to the right of the assured to sue
the wrong-doer and recover the damages for the loss. Subrogation only entitles the insurer to
receive back the amount paid to the assured, in terms of the principles of subrogation.

Where the assured executes a Letter of Subrogation, reducing the terms of subrogation, the
rights of the insurer vis-`-vis the assured will be governed by the terms of the Letter of
Subrogation.

A subrogation enables the insurer to exercise the rights of the assured against third parties in
the name of the assured. Consequently, any plaint, complaint or petition for recovery of
compensation can be filed in the name of the assured, or by the assured represented by the
insurer as subrogee-cum-attorney, or by the assured and the insurer as co-plaintiffs or co-
complainants.Where the assured executed a subrogation-cum- assignment in favour of the
insurer (as contrasted from a subrogation), the assured is left with no right or interest.
Consequently, the assured will no longer be entitled to sue the wrongdoer on its own account
and for its own benefit. But as the instrument is a subrogation- cum-assignment, and not a
mere assignment, the insurer has 3 the choice of suing in its own name, or in the name of the
assured, if the instrument so provides. The insured becomes entitled to the entire amount
recovered from the wrong- doer, that is, not only the amount that the insured had paid to the
assured, but also any amount received in excess of what was paid by it to the assured, if the
instrument so provides.