3.

THE PRINCIPLE OF
INDEMNITY
What is the Principle of Indemnity?
• A contract of insurance is designed to protect the financial
interest of the insured in the subject matter of insurance.
• An insured can recover a loss under a policy only if he has
insurable interest.
• Common law further provides that an insured can recover a
loss only to the extent of his insurable interest. This is the
principle of indemnity.
• Thus, the prin­ciple of insurable interest leads naturally to the
principle of indemnity.
11/22/2024 Principles and Practice of General Insurance 2
 Object and Effect of the Principle of indemnity
• Principle of indemnity requires that when a loss arises under an
insurance policy, the loss must be made good in such a manner
that financially the insured is neither better off nor worse off as the
result of the loss.

• The object of this principle is to place the in­sured after a loss in the
same pecuniary position as far as possible as he occupied
immediately before the loss.

• The effect of this principle is to prevent the insured from making a

profit out of a loss. Principles and Practice of General Insurance
11/22/2024 3
 Why this Principle?
1. In Public Interest: The necessity for this principle arises
out of public interest.
• If it were possible to make a profit or derive any
advantage out of loss or damage by the peril insured
against, the in­sured would be tempted to deliberately
cause loss or damage.
• This would result in destruction of national wealth and
would be clearly against public policy.
11/22/2024 Principles and Practice of General Insurance 4
 2.To serve the very basis of insurance
• The absence of this principle would cut across the very
basis of insurance operations.
• Insurance is based on the principle of sharing of losses out
of a common pre­mium fund.
• As, contribution to this common fund, i.e., premiums are
determined mainly on the basis of past losses, it becomes
necessary to ensure that payments from the common fund
are made strictly according to the losses suf­fered by the
insured without giving him any profit or benefit.
11/22/2024 Principles and Practice of General Insurance 5
 3. To ensure full indemnity
• It is always felt that in case of loss against which the policy has
been made, the insured should be fully indemnified.
• If he is not fully indemnified it is not justified in his favour.
• And if more than fully indemnified he will be making profit
out of loss, which will be injustice with others who contributed
to common fund in the form of premium but did not suffer
loss.
• Absence of this principle will either prevent the insured from
obtaining a full indemnity, or will give him more than a full
indemnity, that proposition must certainly be wrong.
11/22/2024 Principles and Practice of General Insurance 6
 Whether all insurances are governed by this principle?

• All insurances are not governed by the principle of indemnity.

• Generally speaking, the principle is applied in insurances where the
loss suffered by the insured is measu­rable in terms of money.
• Thus the principle is applied to insurances of physical property (i.e.
fire, burglary etc.) and insurances of liabilities (e.g. public liability,
employers' liability).
• It does not apply to insurances of the person (e.g. personal accident)
where it is not possible to measure the financial loss caused by the
death of the insured or bodily injury sustained by him.
11/22/2024 Principles and Practice of General Insurance 7
• The additional cost of reinstatement of buildings under Municipal
regulations:
• The cost of rein­statement of buildings after loss may be considerably in­
creased by reason of municipal building regulations.
• While reinstating the building municipal building regulations may require the
use of different materials or alterations in the layout or provision of safety
devices.
• This may considerably increase the cost of rein­statement of buildings.
• Such additional cost can be covered, provided it is included in the sum
insured.
11/22/2024 Principles and Practice of General Insurance 8
 Application of indemnity to different branches of
insurance
Fire Insurance
• As a rule, fire insurance contract is strictly a contract of indemnity based in
intrinsic or market value of the property at the place and the date of the loss.
• The insured is paid the actual loss sustained subject to the sum insured under
the policy and other terms of the polity, e.g., pro-rata condition of average,
excess clause, etc.
• If the loss suffered by the insured is recoverable from other insurers, every
insurer pays only the proportionate loss and thus the insured cannot recover
from all sources.
• The principle of indemnity is modified in its applica­tion to certain types of
fire insurances:

11/22/2024 Principles and Practice of General Insurance 9

 1. Reinstatement Value Policies:

• Under these policies, the basis of indemnity is the cost of reinstatement or

replacement of damaged or destroyed property by new property but of
the same type.
• In as much as the insured gets new property in the place of old, the
principle of indemnity is modified.
• It is important to note, however, that the basic idea of indemnity is still
preserved in these policies.
• The replacement of damaged property is by property in a condition equal to,
but not better or more extensive that its condition when new.
• Moreover, if due to technical innovations the damaged machinery may be
obsolete and is replaced by better machinery, in such cases the ­insured is
required to make a suitable contribution towards the cost of new property.
11/22/2024 Principles and Practice of General Insurance 10
 2.Contract Price
Insurance
• This clause is attached to policies, insuring 'Imported Goods’
which are sold under a contract but not delivered.
• If the goods are damaged by an insured peril, the sale contract
may be cancelled either wholly or to the extent of the loss or
damage.
• The clause allows the settlement of losses on the basis of the
contract price and not the market value.
• In absence of this clause, the loss would have been settled on
market value.
11/22/2024 Principles and Practice of General Insurance 11
 Marine Insurance
Marine insurance is Contract of commercial Indemnity
Cargo Insurance
• There is constant fluctuation in the price of goods, which
are in course of transit from one country to another.
• The goods also appreciate in value as they approach the
destination.
• Hence Pure Indemnity does not provide sufficient
indemnity.
• In Marine Insurance Commercial Indemnity is applied "in
manner and to the extent agreed" by the par­ties to the
contract.
11/22/2024 Principles and Practice of General Insurance 12
• There is the custom to issue valued or agreed value
policies on cargoes.
• The sum insured is agreed to be the value of the cargo
and includes prime cost of the goods, freight,
insurance and other incidental charges plus a
reasonable percentage of profit.
• In the event of total loss the sum insured is paid.
• If goods are damaged, indemnity is arrived at as a
proportion of the sum insured according to the
percentage of depreciation
11/22/2024 Principles and Practice of General Insurance 13
 Hull Insurance
• The market values of ships too fluctuate widely but this may
not change the value of the ship to the owner.
• There are many ships, which are specially built for a
particular trade, and the market value of such ships would
not reflect the true value of the ships to the owner.
• Hence Pure Indemnity does not provide sufficient indemnity
in case of insurance of ships
• There­fore, in hull insurance also there is the custom to issue
valued or agreed value policies.
11/22/2024 Principles and Practice of General Insurance 14
• The sum insured based on a fair value to the insured is
fixed by agreement between the insurer and the insured.
• In the event of total loss the sum insured is paid.
• When a ship is damaged, the measure of indemnity is
the reasonable cost of repairs.
• Once the value has been ag­reed in a hull or a cargo
policy it cannot be questioned or reopened
subsequently, unless the insurer is able to prove fraud.

11/22/2024 Principles and Practice of General Insurance 15

 ACCIDENT INSURANCE
1.Insurances of property
• In case of Total loss the measure of indemnity is the intrinsic or market value of the
property at the place and the date of the loss.
• In respect of claims for damage the indemnity is provided by cost of repairs and if old parts
are replaced by new, a suit­able deduction for depreciation is made in the cast of parts.

2.Insurance of liabilities:
• The amount payable under these policies is the actual cost of settlement of a third party
claim.
• This would include the sum of damages, the legal costs and expenses awarded to the third
party.
• Legal expenses incurred by the insured with the written consent of the insurer are also
reimbursed.
11/22/2024 Principles and Practice of General Insurance 16
 3 Insurances of interest:
• The insured is entitled to re­cover only the actual monetary
loss sustained by him as a result of employee's dishonesty.
• This loss can be accurately computed from the books of
account.
• The amount of claim payable is arrived at after deducting
salary, commission and other assets of the defaulting
employee that may be in the control of the insured.

11/22/2024 Principles and Practice of General Insurance 17

 4. Insurances of the person:
• Theoretically the principle of indemnity is not applicable to personal accident
insurances.
• It is not possible to estimate the monetary loss sustained by relatives in the event of the
death of the insured or the pecuniary loss suffered by the insured when he loses a limb.
• Personal acci­dent policies, are issued as fixed benefit policies.
• Specified sums are paid on the happening of speci­fied contingencies, in accordance with
the scale of benefits incorporated in the policy.
• However in practice, the spirit of the principle of indemnity is preserved this class of
insurance by taking following safe guards:
i. Restricting the sum insured to an amount, which is commensurate with the financial
status of the insured.
ii. Ensuring that the weekly benefits for disablement are in line with the insured's
normal earning capacity.
iii. Insu­rers also endeavor to control over-insurance.
11/22/2024 Principles and Practice of General Insurance 18
 FACTORS LIMITING THE INSURER'S LIABILITY

• According to the principle of Indemnity the" actual loss sustained

by the insured” is recoverable.
• However insurer’s liability may not always be actual loss suffered
by the insured. It is limited by following factors:

a) Sum Insured under the Policy:

• The" actual loss sustained by the insured” is recoverable but only
upto the sum insured, which is a limitation on the insurer's liability.
• If two or more items are insured under the same policy, the policy
shall not pay for each or any of the several items subject to the
total sum insured.
11/22/2024 Principles and Practice of General Insurance 19
b)Under some types of policies, there may be different limits to
insurer's liability under different sections.
Under Motor Insurance Package Policy liability for loss of or damage
to the vehicle insured is limited to the insured's declared value of
the vehicle (i.e. the sum insured) whereas legal liabilities to third
parties are covered to an unlimited extent.
• Public liability policies may contain a maximum limit of liability for
any one accident (AOA)with a further limit for all accidents during
any one period of insurance(AOY).

11/22/2024 Principles and Practice of General Insurance 20

 Excess/Franchise
Clause
• Insurers liability may be further limit­ed by the imposition of excess
or a franchise.
• The policy may contain an excess or deductible clause.
• The deductible or excess is the portion of any claim that is not at all
payable. The insurer is to be liable for loss above excess clause
figure, the insured bearing any loss below it.
• Certain policies contain a clause that no loss shall be paid by the
insurer unless the damage exceeds an agreed amount. This is called
the franchise. But if the loss equals or exceeds the franchise, the
company pays the entire amount.
11/22/2024 Principles and Practice of General Insurance 21
 Illustration: Deductible
(Excess)/Franchise
• DEDUCTIBLE (EXCESS)Customer have a fire insurance policy for his shop with a
deductible of Rs 500. There is fire loss in the shop and the repair cost is 4,000.
• Claim Settlement: Customer will pay the first Rs 500 (the deductible)and the
insurance company pays the remaining Rs 3,500.
• Explanation: The deductible/Excess is the amount customer pay and the
insurance company covers the remaining cost. In this case, customer is
responsible for the first Rs 500, and the insurer pays the balance.(Rs 4000-Rs
500= Rs 3,500)

• FRANCHISE : In the same exercise, if the repair cost is less then Rs 500 then
nothing is payable, but it it exceed Rs 500 and loss is Rs 4000, then total Rs 4000
will be payable.
11/22/2024 Principles and Practice of General Insurance 22
 Why Excess or deductible is
applied in insurance claims
1. Reduction of Small Claims: It discourages customer from filing claims for
minor damages.. Processing many small claims is costly for insurers, so
reducing the number of such claims reduces administrative costs.
2. Lower Premiums: When customer agree for voluntary deductibles, they
typically benefit from lower premium payments.
3. Risk Mitigation and Cost Control: If policyholders knows that he has to pay
some portion of the claim,then he will take all procurations to reduce the
likelihood of frivolous or minor claims. This helps to keep overall insurance
costs lower for everyone.
4. Interests of Insurer and Insurers: As both share the impact of financial loss,
and this shared responsibility encourages carefulness and better risk
management by the policyholder.
11/22/2024 Principles and Practice of General Insurance 23
 Pro-rata Condition of Average/Under
Insurance
• According to this condi­tion, if the sum insured of the policy is less than the
value of the property at the time of loss the insurer's liability is limited to such
proportion of the loss as the sum insured bears to the full value of the
property.
• An example will illustrate the application of this condition.

Value of Property is Rs.20,000

Sum Insured is Rs.15,000
Loss is Rs. 8000

Sum Insured X Loss

Value of Property

= 15,000 X 8,000
11/22/2024 20,000 =Principles
Rs 6000 willof General
and Practice be payable
Insurance 24
• Condition of Average is incorporated in fire policies to
limit insurers' liability in case of under insurance.
• An insured is expected to insure his property for its full
value and pay premium on that.
• Hence in the event of claim if it is found that he has not
covered the property for its full value, the amount of loss
payable is proportionately reduced and the insured is
thereby penalized for under insurance.
11/22/2024 Principles and Practice of General Insurance 25
 Example of
Underinsurance
• How the condition is applied -If the policy covers more than one item,
each of them will be separately, subject to the condition of average.
• Thus the adequacy of sum insured will be checked against sum
insured under each item as well as on the total sum insured.
Item covered by the policy Sum Insured Lakh Value on the date of
loss
Building 10 12
Machinery 12 9
Other contents 3 4
Total 25 25
11/22/2024 Principles and Practice of General Insurance 26
• In the example total sum insured is 25 lakh and value on the date of loss for all
the properties taken together is also 25 lakh.
• This does not mean that there is no under-insurance.
• We have to apply the condition for each item separately.
• Hence under insurance shall be applicable on loss to building and contents.

• Loss Sum Insured Market Value Actual

•
• Building Rs. 3,00,000 4,00,000 1,20,000
• Machinery Rs. 6,00,000 4,90,000 3,00,000
• Contents Rs. 1,00,000 1,10,000 1,10,000
• _________________________________________
TOTAL Rs. 10,00,000 10,00,000 5,30,000
11/22/2024 Principles and Practice of General Insurance 27
 Amount payable after average/underinsurance:
Loss Payable = Sum Insured x Loss /Market Value

a) Building = 3,00,000 (Sum Insured ) x 1,20,000 (Loss)/ 4,00,000 (Market Value)

= Rs. 90000
b) Machinery = Rs. 3,00,000 in full since no under insurance

c) Contents =1,00,000 (Sum Insured ) x 1,10,000 (Loss)/110000 (Market Value)

• = Rs. 1,00,000
• Total amount of loss payable under the policy – (90,000 +3,00,000 + 1,00,000)
11/22/2024 Principles and Practice of General Insurance 28
Rs 4,90,000.
• 1) Collectively there is no under insurance in this example, since sum
insured is Rs. 10,00,000 /- which is equal to the Market value.

• But condition of average applies to each item separately. Hence loss to

building is not paid in 'full’.

• 2) In case of total loss, even if there is any under-insurance the loss is

payable to the extent of sum insured.

• This is evident from the loss to contents in above example.

11/22/2024 Principles and Practice of General Insurance 29
 METHODS OF INDEMNIFICATION

1. Cash Payment
• The most common method of indemnification is by means of cash payment to the insured.
• This is applies both in case of total and partial loss.
• In case of partial loss, the insured himself arrange for the repair and the cost incurred for
repair and parts replaced is reimbursed to the insured

2. Repair
• This is applicable in case of partial loss.
• Instead of making cash payment, the settlement of claims for loss or damage may be
effected by repair.
• This is the practice followed for motor damage claims.
• The insurer authorizes the repair of the vehicle.
• On receipt of the final bill of repairs, and a satisfaction note from the insured confirming
that repair has been done to hisPrinciples
11/22/2024
satisfaction, the
and Practice of payment
General Insurance is made to repairer. 30
 3. Replacement:
• Under this method the insurer directly arranges with a dealer to replace the
property lost or damaged.

4.Reinstatement:
• This method is applied in respect of buildings or other property destroyed
or damaged by fire.
• Under this method, the insurers carry out the reinstatement.
• Generally, insurers resort to this method when the insured claims an amount
far in excess of the cost of reinstatement.
• The right to select the method of indemnification is reserved to the insurers.
• The insured cannot demand re­placement or reinstatement of the property.
This11/22/2024
is pro­vided for in policy conditions.
Principles and Practice of General Insurance 31
 MODIFICATION OF PRINCIPLE OF INDEMNITY
UNDER CERTAIN
TYPES OF POLICIES
1. Reinstatement Value Policies: These Policies are issued under Fire
Department.
2. Valued or Agreed Value Policies:
• It is a policy in which the sum insured is agreed between the insurer
and the insured as the value of the property insured.
• Such agreed amount is payable in the event of total loss,
irrespective of considerations of depreciation etc.
• Once the value has been ag­reed it cannot be questioned or
reopened subsequently, unless the insurer is able to prove fraud.
• Thus, under these policies the basis of indemnity is decided, at the
commencement of the contract instead of, at the time of the loss.
11/22/2024 Principles and Practice of General Insurance 32
• Valued policies are recognized by law and their issue is not considered to be a
violation of the principle of in­demnity, so long as the valuation is reasonable
and bonafide

• The agreed value is paid in the event of total loss.

• Unless specifically specified in the policy that Partial Losses shall be settled in
the usual way i.e. subject to considerations of depreciation, the proportionate
agreed value may determine the basis of indemnity for partial losses.

• In absence of such specific mention in the policy in an English case (Elcock v.

Johnson 1948) it was held that the amount payable for partial losses shall be a
proportion of the agreed value determined according to the deterioration
suffered
11/22/2024 by the property due to the
Principles loss.of General Insurance
and Practice 33
 First Loss Policies

• First loss policies are a specialized type of coverage where the insured
feels that, because of the nature of the property (e.g. Burglary
Insurance on heavy machinery), a total loss is practically impossible.
These policies are not issued for full value of the property, but for a pre-
agreed limit for specific types of losses estimated by the insured to be
the maximum likely loss on any one occasion

• The sum insured is expressed as a percentage of the full value.

• Since the coverage limit is lower than the total value of the property,
the premiums for first loss policies are generally lower compared to
full value insurance
11/22/2024 Principles and Practice of General Insurance 34
• Under first loss policies the usual condition of average under/ insurance is not applied.
• However the under insurance is applicable in following situation.

• Sum Insured is Rs. 50 lacs which is 25% of the full value Rs, 200 lacs
• Value of the Property on the date of loss Rs. 240 lacs
• Amount of Loss Rs. 24 lacs.

Value arrived at by applying the specified percentage to the full value on the date of
loss
= 240 x 25% i.e. Rs. 60 lacs
• Sum Insured is = Rs. 50 lacs
• Loss Payable = 24 lacs x 50 lacs/60 lacs
• = Rs. 20 lacs
11/22/2024 Principles and Practice of General Insurance 35
 INSURANCE VS. WAGERING

• Insurance and wagering (or gambling) are financial mechanisms that involve
risk, but they operate under fundamentally different principles and serve
distinct purposes.
• An agreement between two parties by which one promises to pay money to
other party's on the happening of some uncertain event. He promise to
promise to pay money if the event does not happen is called a wagering
agreement.
• Thus, if Suresh and Ramesh enter into an agreement that Suresh shall pay Rs.
10,000 to Ramesh if in IPL Match Chennai Super Kings wins the match, then
Ramesh shall pay Rs 10,000 to Suresh the same amount if it does not win, it is
a wagering agreement.
• It is sometimes said that a contract of insurance whether it is marine, fire or
life very closely appears like a wagering agreement. But insurance differs from
wager as evident from the comparision:
11/22/2024 Principles and Practice of General Insurance 36
INSURANCE WAGERING
An insured/assured cannot get insurance The insurable interest is not essential for a
without having insurable interest in the wagering agreement. Parties are interested in
subject-matter of insurance. knowing about the event only for the purpose of
winning or losing.
Insurance is contracts of indemnity In a wagering agreement the amount to be paid is
(with the exception of life insurance). pre-decided by the parties to the agreement. There
The insured is indemnified for the actual is no question of indemnity as no risk is covered.
loss suffered by him and not more than
that.
Contracts of insurance are valid Wagering agreements have been expressly declared
contracts and thus legally enforceable. to be void in India. In fact, in the states of
Both parties to the contract can take Maharashtra and Gujarat they have been declared
legal action against non-performance. to be illegal. Neither party has any legal remedy
against non­performance.

11/22/2024 Principles and Practice of General Insurance 37

INSURANCE WAGERING

Contracts of insurance are based upon the There is no question of disclosure of material
principles of good faith, i.e., both parties to facts by either of the parties in a wagering
the contract must make full disclosure of agreement.
material facts. Otherwise there would be no
binding contract.

Assessment of risks and premium is on the No such calculations are made in the case of
basis of scientific methods and actuarial wagering agreements. A wagering agreement
calculations. is just a gamble

11/22/2024 Principles and Practice of General Insurance 38

 4. SUBROGATION
• Subrogation may be defined as the transfer or rights and remedies of the
insured to the insurer who has indem­nified the insured in respect of the
loss.
• It may happen that the insured is entitled to recover the loss from a third
party who is responsible for the loss.
• If the insured recovers his actual loss both from the third party and the
insurers, he would be clearly making a profit out of the loss.
• This would defeat the object of the principle of indemnity.
• Common law has, therefore, evolved the doctrines of subrogation as
corollary of indemnity.
• Principle of Subrogation prevents the insured from recovering the loss from
third party by transferring his rights and remedies against the third party to
the insurers.
11/22/2024 Principles and Practice of General Insurance
39
• Having paid the loss the insurers are entitled to avail themselves of
any rights of action to recover the loss from any third party, who is
primarily responsible for the loss.
•
• The effect is, the insured does not receive more than the actual
amount of his loss and any recovery effected from the third party
goes to the benefit of the insurer to reduce the amount
of his loss.

• If the insured himself recovers the loss from the third party after
having received the claim from the insurers, he holds that recovery
as trustee for the benefit of the insurer to the extent that the latter
is entitled to.
11/22/2024 Principles and Practice of General Insurance
40
 How the subroga­tion rights
may arise?
Torts: Tort is the wrongful act of the third party, which gives rights to
the insured to recover the loss form the latter.
Example:
• Mr. Jaideep property is covered under Fire Policy. This property is
destroyed by fire caused by the negligence of neighboring factory-
owner. Insurance company indemnify the loss.
• The neighboring factory-owner is at law responsible to make good the
loss to Mr. Jaideep but Jaideep have recoved the loss from the
insurance company.
• The insurer having paid the loss to the Jaideep is entitled to recover
loss from factory owner. Principles and Practice of General Insurance
11/22/2024 41
2. Contract:
• Subrogation may arise through a contract of the insured with a third party.
Example:
• Mr. Ram Niwas under marine policy sent good from Jodhpur to Mumbai
through M/s Jodhpur Bikaner Transport Carriers.
• The goods are damaged in transit due to the negligence of a carrier’s
driver.
• Under the contract of carriage between Ram Niwas and and the Carrier
the latter has an obligation to make good the loss of Mr. Ram Niwas
• . If Mr. Ram Niwas gets the claim from insurers under the insurance policy,
but the insurer have right to claim loss from the carrier.

11/22/2024 Principles and Practice of General Insurance 42

3.Salvage:
Subrogation may also arise through 'salvage.'
Example:
• A private car is damaged beyond repair. The insurers
settled the claim on a "Total Loss" basis. The insurers
will be entitled to take over the remains of the car.

11/22/2024 Principles and Practice of General Insurance 43

Position of Insurers’ Subrogation Rights
under Common law

• As per Common Law Insurers’ right of subrogation is implied in all insurance

contracts which are contracts of indemnity.
• In other words its application to contracts of in­demnity is automatic without
any express condition in the contract.
• However, it arises only after payment of a loss.
• Certain insurance contracts contain the express condition of subrogation e.g.
fire and accident policies.
• As per this condition the right of subrogation can be exercised
by the insurer even before payment of a claim.

11/22/2024 Principles and Practice of General Insurance 44

 Limitations on subrogation rights

• Subrogation is limited to the actual amount of loss paid by the insurers

• Since subrogation is limited to contracts of indemnity only it applies
only to the extent of indemnification.
• The insurers therefore cannot recover more than what they have paid
the insured.
• If because of limitations of insurers’ liability under the policy (e.g Under
Insurance and Excess Clause) if the insured is paid lesser amount than
the actual amount of loss and if the amount recovered by insurers from
third party under subrogation rights is more than the amount
of the claim paid the insurers are entitled to receive only the amount of
the claim and the insured is entitled to the balance.
11/22/2024 Principles and Practice of General Insurance 45
• The insurers are not entitled to any subrogation rights
under ex-gratia payments (Insurers sometimes settle
claims for which they are not liable or in respect of
which their liability is doubtful. Such payments are
called ex-gratia payments)
• Subrogation rights arise only where there is legal
liability of insurers.

11/22/2024 Principles and Practice of General Insurance 46

 Application of subrogation to various branches of insurance

Fire Insurance
• Under Fire Insurance Contracts there is an express condition of Subrogation. According to
this condition:
• The rights of subroga­tion arise even before indemnification.
• The insured is required to give the insurer all necessary assistance.
• The insurer is allowed by the insured to sue in his name but
at the expense of the insurer.

Marine Insurance
• Although in marine insurance there is no express condition of subrogation the provisions of
Section 79 of the Marine Insurance Act, 1963 are relevant. According to this section:
• The insurer is subrogated to the rights and remedies of the insured both under total and
partial losses.
• Under total losses the insurer is also entitled to take over what remains of the property47 that
11/22/2024 Principles and Practice of General Insurance
is, he is entitled to proprietary rights.
 Accident Insurance
Insurances of property
• Like Fire Insurance, under Property Insurance Contracts there is an express
condition of Subrogation. According to this condition:
• The rights of subroga­tion arise even before indemnification.
• The insured is required to give the insurer all necessary assistance, and
• The insurer is allowed by the insured to sue in his name but
at the expense of the insurer.
Insurances of liabilities:
• In all insurances against legal liability, the policy contains a condition, which
expresses the principle of subrogation.
• This condition ex­tends the pure doctrine of subrogation.
• The11/22/2024
insurers not only take over the
Principles and insured's
Practice of Generalrights
Insurance but they are also ex­pressly
48
 Insurances of interest:
• In all insurances of interest the policy contains a condition, which
expresses the principle of subrogation.
For example in fidelity guarantee insurance:The insurer is entitled
to prosecute all claims in the name of the insured.
• He can exercise all rights available to the insured against the
employee in respect of any act insured against in regard to which it
may have made a payment.
• The insured is required to give to the insurer all such information
and assistance as may be rea­sonably required for maintaining any
such claims or rights.

11/22/2024 Principles and Practice of General Insurance 49

 Insurances of person(Waiver of Subrogation rights)
• Personal accident policies are not contracts of indem­nity, hence the principle
of subrogation does not apply to these policies.
• The insured can claim in respect of the injuries sustained by him under the
personal accident policy as well as recover damages from a negligent third
party who had caused the injuries.

Knock-for-Knock Agreement ((Waiver of Subrogation rights)

)
Insurers have agreed amongst themselves in a Knock-for-Knock agreement.
According to this agreement when vehicles insured by different insurers are
involved in a collision the claims in respect of damage to the vehicles will be
settled by the res­pective insurer without going into the question of
negligence or responsibility for the accident.
By this agreement, in­surers have waived their rights of subrogation.
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 Case law 1
Midland Insurance v. Smith (1881)
Facts- The Insured's Wife Destroyed the Insured Property (House).
Held- Insurers cannot recover insurance money as the insured has no right of
action against his wife and the insurer was restricted by that fact.

Economic Transport Organization v. Charan Spg. Mills (P) Ltd.,(2010)

4 SCC 114.:
The Apex Court has referred to the definition of the term subrogation which
simply means substitution of one person for another.
The definition emphasizes that a party is allowed to stand in the shoes
of another and assert that person's rights against the defendant in a particular.
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 Case law 2
• National Insurance Co. Ltd. v. Deepak Enterprises &Anr.
(2015)
• Facts: Deepak Enterprises had taken out a fire insurance policy with
National Insurance Company Ltd. for its commercial property.
• A fire occurred, causing significant damage to the insured property.
National Insurance Company settled the claim and
compensated Deepak Enterprises for the loss.
• Legal Issue: The main legal issue in this case was whether National
Insurance Company could exercise its subrogation rights to recover
the compensation paid to Deepak Enterprises from the party
responsible for the fire.

11/22/2024 Principles and Practice of General Insurance 52

• Ruling and Application of the Principle of Subrogation: The court
ruled in favor of National Insurance Company and upheld
its right of subrogation.
• The court held that National Insurance Company, having
compensated Deepak Enterprises for the fire damage, could step
into their shoes and pursue any legal rights or remedies they may
have against the responsible party.
• Outcome: National Insurance Company, exercising its
subrogation rights, pursued legal action against the party
responsible for the fire. The company was able to recover a portion
of the compensation paid to Deepak Enterprises, thereby mitigating
its own financial losses and holding the responsible party
accountable.
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53
 5. CONTRIBUTION

What is Contribution and why it is needed?

• An insured may have two or more insurances on the same subject matter of
insurance.

• Contribution may be defined as the right of an insurer who has paid a loss
under a policy to recover a proportionate amount of loss from other
insurers who are liable for the loss.

• If in the event of a loss, he recovers under each of these policies, the total
amount recovered would be more than his actual loss.

• This would result in a profit to him, which will defeat the object of principle
of indemnity.
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• To support the principle of indemnity, the principle of "contribution” is
evolved under Common Law as corollary of indemnity.
• This principle obliges the insured to recover his full loss within the sum
insured from any insurer he likes.
• Having been fully indemnified, he has no right against another insurer.
• The insurer, who has paid the loss however, has a right to a proportionate
contribution from the other interested insurers.
• If property is insured under two fire policies each for Rs. 10,000/-.
• In the event of a total loss, the insured is entitled to recover his full loss from
any one insurer.
• The insurer having paid the loss, is en­titled to recover from the other insurer
his proportionate share viz. Rs. 5,000/-.

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 Pre-requisites for the application of the
principle of contribution
1. Common subject matter : All policies must cover the same item in respect of which a
claim is made, although, in addition, each policy may covers other items also.
2. Common peril:Peril, which causes the loss, must be common to all policies, although any
or all the policies may also cover other perils in addition.
3. Policies in force and valid: All the policies must be in force at the time of loss and legally
enforceable
4. Common interest :Interest covered under all the policies must be the same. The policies
must be effected in favour of a common insured.
Where the same subject matter is insured under two policies to cover different insurable
interests, there cannot be con­tribution. In practice, where separate interests are involved (e.g.
where banks have advanced loans on property) the insu­rance is effected in the names of the
insured and the bank.

11/22/2024 Principles and Practice of General Insurance 56

 Contribution is one of the
Policy
• The common LawCondition
principle allows the insured to recover the loss from any
insurer.
• Hence its strict application would result in some difficulties for the insurers.
• If contribution clause is not there then, situation may arise where the insured
would be able to recover his loss from any one insurer who then will have the
trou­ble of getting proportionate recoveries from other insu­rers concerned.
• In order to avoid this, Fire Policies and a majority of Accident Policies contain
a contribution con­dition.
• Accord­ing to this condition, whenever contribution applies, the insured is
obliged to prefer claims against all the insurers and each insurer shall pay only
his proportion of the loss.
• This modifies the common law position.

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EXAMPLE 1 Insurers Sum Insured
1. Cosmos Insurance Company Rs 5,00,000
2. Sun Rise Insurance Company Rs 7,00,000
3. Mercury Insurance Company Rs 3,00 000
Total Rs 15,00, 000

If the loss were Rs.1,20,000, each insurer would pay in proportion to respective sum
insured as under:

Share of each insurer = Total Amount of Loss x Respective Sum insured

Total sum insured

1. Cosmos Insurance Company 1,20,000 x 5,00,000= Rs. 40,000

1500000
2. Sun Rise Insurance Company 1,20,000 x 700000 = Rs. 56,000
15,00,000
3. Mercury Insurance Company 1,20,000 x 3,00,000 = Rs. 24,000
11/22/2024 15,00,000
Principles and Practice of General Insurance 58
 Case law 1:
• Oriental Insurance Co. Ltd. v. Reliance General Insurance Co. Ltd.(2008) 10 SCC
722:

• The Supreme Court of India discussed the principles of contribution

among insurers.
• In this case, the court held that when multiple insurance policies cover the
same risk and the same subject matter, each insurer is liable to contribute
ratably to the extent of the sum insured under its policy.
• The court emphasized the need for coordination among insurers to ensure that
the insured does not recover more than the actual loss suffered.

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 Case 2:
• . United India Insurance Co. Ltd. vs Orient Treasures Pvt. Ltd., (2016) SCC 49:
• Principle of contribution was invoked by the Court as two insurance
companies namely, United India Insurance Company and National Insurance
Company shared the same kind of risk in relation to the same subject
matter insured by Orient Treasures Pvt. Ltd.
• Following the principle of contribution, the Court ordered both insurance
companies to pay Orient Treasures Pvt. Ltd. proportionately for the loss
suffered by it.

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 Case Law 3:
New India Assurance Co. Ltd. v. Rama Bai (2008) FACTS:
In this case, Mrs. Rama Bai had two insurance policies covering her property—
one with New India Assurance Company and another with United India Insurance
Company. A fire broke out and caused damage to her property. Mrs. Rama Bai filed
claims with both insurers to recover the losses incurred.
• LEGAL ISSUE: The main legal issue was whether Mrs. Rama Bai was entitled to recover
the full amount of her loss from both insurers or if the Principle of Contribution
applied to limit her recovery.
• RULING AND APPLICATION OF THE PRINCIPLE OF CONTRIBUTION: The court
ruled in favor of applying the Principle of Contribution. The court held that
Mrs. Rama Bai could not recover more than the actual amount of her loss from both
insurers combined.
• JUDGEMENT: New India Assurance Company and United India Insurance
Company were ordered to contribute proportionally to cover the losses suffered by
Mrs. Rama Bai. This applicationPrinciples
11/22/2024 of the and Principle ofInsurance
Practice of General Contribution ensured fairness
61
•THANKS