Developments in insurance law

India’s Doctrine of Subrogation: Evolution, application and practical considerations

Subrogation allows an insurance company to step into the shoes of the insured and recover amounts from third parties responsible for the loss. This article reflects on the origins of this doctrine, its application under Indian law, and practical considerations that are faced in its application.

The origins

Subrogation is most commonly associated with insurance, but the concept itself is not exclusive to the insurance industry. While it is a fundamental principle in insurance law, especially in cases of indemnity insurance, the broader concept of subrogation can apply in various other legal contexts as well.

The origins of this doctrine can be found in English common law. It was developed to prevent an insured from having double benefit of recovery from the insurance company as well as a third party that caused the loss.

In India, subrogation is codified under the Marine Insurance Act of 1963 and its principles have been clarified in Indian jurisprudence, including the landmark judgment of the Supreme Court of India in Economic Transport Organisation (ETO) v Charan Spinning Mills Ltd (2010).

The Supreme Court in ETO clarified that once the insurer settles the claim under the policy it is entitled to recover the compensation paid, but must do so in the name of the assured. The right of subrogation automatically takes effect when an insurer pays a claim.

While the evolution of this doctrine was based on equitable principles, it is now common practice for insurance companies to include specific clauses in their insurance policies giving the insurer the right of subrogation.

In some cases, the parties also execute subrogation-cum-assignment deeds, streamlining the recovery process and detailing each party’s rights and obligations.

Different forms

The Supreme Court, in the ETO case, also clarified that subrogation can take different forms, each with its own method of implementation.

Subrogation by equitable assignment is not formalised through a written document but arises from the insurance policy and the insured’s receipt of the claim amount. In this case, the insured cannot deny the insurer’s equitable right to subrogation, even if there is no written evidence to support it.

On the other hand, subrogation by contract is supported by a formal written agreement, which is typically a letter of subrogation. This written document is used to prevent disputes about the insurer’s right to recover the loss, clarify the priority of competing claims, or confirm the amount of reimbursement due to subrogation.

Finally, subrogation-cum-assignment involves the insured executing a “subrogation-cum-assignment” deed or letter, which allows the insurer to retain any amount recovered from a third party and gives the insurer the option to pursue legal action in either its own name or the insured’s name.

Development in India

In India, subrogation has developed alongside the legal concept of assignment, but these remain distinct legal principles. Both subrogation and assignment permit one party to enjoy the rights of another.

In an assignment of contract, full rights to the claim are transferred to the assignee, granting them the right to sue in their own name and claim the amount paid under the insurance, including any additional/remaining losses that might have been uninsured. In contrast, subrogation allows the insurer to recover only what has been paid to the insured.

The concept of “subrogation-cum-assignment” was explained in ETO as the right allowing the insurer “the choice of suing in its own name, or in the name of the assured … The insured becomes entitled to the entire amount recovered from the wrongdoer, 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.”

Recent judgments

More recently, Delhi High Court made a clear distinction between assignment and subrogation-cum-assignment in the 2022 case of Fresenius Medical Care Dialysis Service India Pvt Ltd v Kerry Indev Logistics Pvt Ltd.

In Fresenius, the insured, after receiving compensation from its insurer, had executed a subrogation-cum-assignment deed in the insurer’s favour and sought compensation from the third party (Kerry), which caused the loss by initiating arbitration under its agreement with Kerry.

Kerry refused to refer the dispute to arbitration, arguing that: (1) since the insurer had already compensated the insured, there was no surviving claim against it; and (2) the arbitration clause under the agreement only covered disputes between the parties, and the insurer was not party to the agreement.

The insured argued that the subrogation-cum-assignment deed did not completely assign the debt to the insurer. Instead, it was subrogation to the extent of the amount paid by the insurer, and the insured still had the right to pursue recovery in its own name.

While ruling in the insured’s favour, Delhi High Court held that in cases of subrogation-cum-assignment, the insurer has the right to recover from a third party any amount paid to the insured, but the insured retains the right to recover any excess amount beyond what was paid by the insurer.

The court clarified that the deed executed between the insurer and insured is not a simple assignment, as it specifies that any recovery must first be applied to the insurer’s payment, with the balance going to the insured. This arrangement allows the insurer to step into the insured’s shoes to recover the amount paid; but does not prevent the insured from pursuing further recovery beyond that.

Thus, subrogation entitles the insurer to recover only to the extent of the indemnity, with any additional recovery going to the insured.

In another Delhi High Court judgment, in the case of Rahul Cargo Pvt Ltd v National Insurance Company Ltd, the insurer had indemnified the insured for the loss caused by the carrier and thereafter initiated arbitration proceedings under the contract between the insured and the carrier.

The court concluded that once the insurer steps into the shoes of the insured, the arbitration clause will be binding between the insurer and the carrier, even though it was not a party to the original contract. It held that the insurer is suing as subrogee and has all the original rights of the insured under its contract with the carrier.

Practical considerations

Subrogation as an option for recovery is still at a nascent stage in India, and while the decision in ETO remains a source of guidance, there might be practical considerations faced by insurers whilst pursuing a subrogated recovery.

For instance, the insured’s proper co-operation during the recovery process is crucial, including proper support while making evidentiary filings and providing documentation critical for the insurer to effectively pursue the recovery. Without proper support, succeeding in a subrogated recovery action could be difficult.

Given the time and cost associated with bringing and pursuing an action in India, the authors believe it is crucial to be satisfied with the level of co-operation that is expected from the insured.

Conclusion

While subrogation is an established concept in insurance law – and a recognised legal right – its practical application in India so far appears to be limited, given the time and costs associated with bringing proceedings and obtaining a final judgment. However, as the severity and frequency of insurance claims rise, interest in subrogated recoveries is expected to grow.

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The regulation of insurance in Japan

Insurance business in Japan is regulated under the Insurance Business Act (IBA), whereby the Financial Services Agency (FSA) takes the main role as the insurance regulator.

Under the IBA, the Japanese Prime Minister has the authority to supervise the entities and people conducting insurance business and related business in Japan. However, the PM delegates most of this authority to the Commissioner of the FSA, excluding certain important powers such as granting or cancelling insurance business licences.

In turn, the commissioner delegates part authority to the directors of the Local Finance Bureau (LFB) of the Ministry of Finance.

Non-admitted insurers

Under the IBA, people or entities permitted to act as agents or intermediaries for the conclusion of an insurance contract in Japan are limited to life insurance solicitors, non-life insurance solicitors, small-amount and short-term insurance solicitors and insurance brokers.

Insurance and reinsurance activities are only permitted to be undertaken by insurance companies, Japanese branches of foreign insurers and small-amount and short-term insurance providers that have obtained licences in Japan.

Foreign insurers not licensed in Japan under the IBA, and without branch offices in Japan cannot conclude domestic risk insurance contracts – that is, insurance for people resident or domiciled in Japan or with property located, or vessels and aircraft registered, in Japan. However, certain insurance contracts are excepted: reinsurance; insurance covering international freight; overseas travel insurance; and insurance for which prior permission from the FSA has been received by the policy applicant.

Intermediaries

Under the IBA, agents or intermediaries for the conclusion of an insurance contract are limited to life insurance solicitors, non-life insurance solicitors, small-amount and short-term insurance solicitors and insurance brokers.

Authorisation

Japanese companies. A person who conducts insurance business must obtain either a life insurance business licence or a non-life insurance business licence from the PM.

The applicant must submit a licence application to the PM through the FSA. It requires information such as articles of incorporation, statement of business procedures, general policy conditions, statement of calculation procedures for insurance premiums and policy reserves, a business plan, documents explaining the status of recent assets, profits and losses, and documents relating to the applicant’s subsidiaries. To protect the public interest, the PM can impose conditions on licences or revise their conditions.

Foreign insurers. For a foreign insurer to conduct insurance business in Japan, its Japanese branch must obtain from the PM either a life insurance business licence or a non-life insurance business licence.

The procedures for foreign insurers to obtain a licence are similar to those for Japanese insurance companies.

Other regulations

Activities and subsidiaries. The IBA allows insurance companies and licensed branches to carry out only the following types of business:

• Underwriting insurance and management of assets (core business);
• Incidental business, such as: representing the business or performing services on behalf of other insurance companies and other entities carrying out financial business; guarantees of obligations; handling private placements of securities; derivative transactions; and business permissible under the IBA and other laws (e.g. certain securities trading business and trust business concerning secured bonds).

Insurance companies cannot hold subsidiaries or affiliates, other than those set out in the IBA, including:

• Companies that engage in financial business (e.g., insurance companies, banks, securities companies and trust companies);
• Companies that engage in business that is dependent on the business of their parent insurance companies and their subsidiaries;
• Companies that engage in business that is incidental or related to financial business;
• Companies that explore new business fields;
• Companies that carry out new business activities that are recognised as contributing to the improvement of management to a considerable extent;
• Companies that carry out business activities that are recognised as contributing to regional revitalisation;
• Holding companies whose subsidiaries are limited to companies listed in the above points.

Ownership. A shareholder of a Japanese insurance company or insurance holding company that holds more than 5% of the total voting rights must file a notification with the LFB or (in certain cases) the FSA, and file a report each time there is a change to the notification. If a person or entity is to acquire directly or indirectly (through other entities) at least 20% of the total voting rights of a Japanese insurance company (or 15% in certain cases) (major shareholder threshold), they must obtain prior approval from the FSA. The IBA provides a certain review standard for the approval to ensure sound and appropriate management of the insurance company’s business.

With respect to insurance holding companies (a holding company set out in the Antimonopoly Act, having an insurance company as its subsidiary), obtaining the prior approval from the PM is required if a company that intends to become a holding company with an insurance company as its subsidiary or a person who intends to establish such a holding company.

Capital and solvency. Japanese insurance companies must hold JPY1 billion (USD6.5 million) or more in either:

• Stated capital (in the case of a stock company); or
• Total amount of kikin (the funds held by a mutual insurance company, equivalent to the capital held by stock companies), including a reserve for redemption of kikin in the case of a mutual company.

The IBA provides for a solvency margin ratio as a standard to assess the soundness of an insurance company’s business. The solvency margin ratio is calculated by dividing the total amount of stated capital, kikin, reserves and other amounts by the amount available to cope with possible risks, exceeding the standard predictions that may occur because of insurance accidents. Under the current regime, insurance companies are required to maintain a solvency margin ratio of at least 200%.

Contract essentials. While the IBA does not define what constitutes an insurance contract, an insurance contract under the Insurance Act is defined as an insurance contract, a mutual aid contract or any other contract in whatever name, under which both of the following apply:

• One party undertakes to pay financial benefits (limited to the payment of money in life insurance contracts and fixed benefit accident and health insurance contracts) to the other party, subject to a certain event occurring.
• The other party undertakes to pay insurance premiums (including mutual aid premiums), the calculation of which is based on the possibility of a certain event occurring.

Solicitation

The solicitation of (re)insurance should be conducted according to the rules provided under the IBA and the Comprehensive Guidelines for Supervision for Insurance Companies, including:

• People carrying out insurance solicitation should provide information and an explanation of important items necessary for the customers to determine whether to conclude an insurance policy.
• No false statement should be made with respect to important items.
• Policyholders and the insured should not be encouraged to make a false statement or be prevented or discouraged from disclosing a material fact to insurers.
• No discounts or rebates on insurance premiums or any other special benefits should be offered to policyholders or insured parties.

The Life Insurance Association of Japan provides clarification of “special benefits” in its voluntary guidelines. Special benefits include not only prepaid payment instruments under the Payment Services Act, such as e-money and coupons for goods, but also points that can be exchanged for money or e-money even if they do not fall under prepaid payment instruments. It states that other types of benefits should be also assessed on the basis of the range of usage of the services, the equality among the policyholders, and whether the economic value and contents of the services exceed social norms.

Future amendment

On 26 June 2020, the Advisory Council on the Economic Value-Based Solvency Framework, appointed by the FSA, issued a report that recommended the introduction of economic value-based solvency regulations in 2025 to enhance policyholder protection, as well as insurance companies’ risk management and discipline.

The FSA assumes that after publishing and implementing the relevant regulations and notices in 2025, it will require insurance companies to calculate and report their economic value-based ratios from the fiscal year ending 31 March 2026.