DOCTRINE OF SUBROGATION, CONTRIBUTION AND RE-INSTATEMENT UNDER FIRE INSURANCE

Fire Insurance implies protection against any misfortune brought about by fire. Fire protection has no immediate connection to sparing yet is consistently an issue of repayment for property. The guideline of repayment, which emerges under common law, guarantees that the insured doesn’t recoup more than actual loss endured by him/her. The standard of repayment offers ascend to the standards of subrogation and commitment which guarantee that the insured doesn’t gain from the insurance contract. The application of these principles to a contract of fire insurance raises imminent questions about concepts such as policy coverage or depreciation, status of salvage value, underinsurance and limited interest. Therefore, the reason for this paper is to give a comprehensible picture with respect to the nature and purpose behind fire protection by considering the utilization of standard of repayment and unexpectedly, the standards of subrogation, contribution re-instatement and commitment to an agreement of fire protection.

In the words of A.H. Willet, “Insurance is a social device for making accumulations to meet uncertain losses of capital, which is carried out through the transfer of risks of many individuals to one person or to a group of persons.”

Protection is of essential significance both in the national economy and international trade. Insurance premium cash-flows generate funds for investment in the economy. Fire Insurance is an indemnity based contract, where the compensation is paid by the insurer for any loss or damage suffered during the policy term but also the compensation amount do not exceed the maximum amount of premium paid. In India, there is no statutory law overseeing fire protection, it is controlled by Indian Insurance Act, 1938. According to section 2(6A) of the Insurance Act 1938, notwithstanding fire, different hazards are additionally clubbed with the protection plan known as the ‘Standard Fire and Allied Perils Policy’. The Policy also covers misfortunes because of lightning, storms, flood, seismic tremors, etc.

In Prudential Insurance Company v. Inland Revenue Commissioner[1], Channel J. said that there must be either some uncertainty whether the event will ever happen or not, or if the event is one which must happen at some time or another, there must be uncertainty as to the time at which it will happen.

Fire protection is essentially an agreement and subsequently is administered by the general laws of contract. The principles of indemnity, insurable interest, uberrima fides (utmost good faith) and the existence of risk are some of the principles having common application in insurance contracts.[2]

The types of losses not covered by a fire insurance policy are:-

• loss due to fire caused by earthquake, invasion, act of foreign enemy, hostilities or war, civil strife, riots, mutiny, martial law, military rising or rebellion or insurrection.

• loss caused by subterranean (underground) fire.

• loss caused by burning of property by order of any public authority.

• loss by theft during or after the occurrence of fire.

• loss or damage to property caused by its own fermentation or spontaneous combustion e.g. exploding of a bomb due to an inherent defect in it.

• loss or damage by lightening or explosion is not covered unless these cause actual ignition which spread into fire.

PRINCIPLES OF SUBROGATION, CONTRIBUTION AND REINSTATEMENT – MEANING & CRITICAL ANALYSIS

A contract of fire insurance is also a contract of indemnity. Principle of indemnity is the cornerstone of the insurance law.[3] According to Black Law’s Dictionary, the term subrogation in the context of insurance means the principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and remedies belonging to the insured against a third party with respect to any loss covered by the policy. The principle of subrogation is an indispensable element to the principle of indemnity.[4] It is subsequently straightforwardly pertinent to fire protection. Diplock, J. clarified the rule of subrogation in Yorkshire Protection Co. v. Nisbet Delivery Co.[5] as “it gives the insurer the right to stand in the shoes of the insured and avail himself of all the rights and remedies of the insured, whether already enforced or not”.

It simply means that the insured should not gain by indemnifying his losses from the insurer as well as a wrongdoer. Subrogation is the right or rights of the insurer to assume the rights of the insured. Subrogation may be defined as the transfer of rights and remedies of the insured to the insurers who have indemnified the insured in respect of the loss.

In case of Economy Fire and Casualty Co. v. Som Prakash, the insurer was not allowed to recover from the insured’s wife as the insured himself had no right to proceed against in wife.

The doctrine of subrogation may be illustrated by the following examples :

• Insured property may be destroyed by fire caused by the negligence of a third party who is at law responsible to make good the loss. The insurers having indemnified the insured, are entitled to the insured’s right of recovery against the third party.

• A private car may be damaged in a collision caused by the rash and negligent driving of a truck. The private car owner’s right of recovery against the truck owner is transferred to the insurers who have indemnified the loss.

Therefore, it should be noted that in cases where due to the operation of the condition of Average and/or the excess clause, the full loss has not been indemnified and if the insurers recover from third parties the full amount of the loss, they can retain only the amount paid over to the insured.

The Principle of Contribution in insurance is inborn from the principle of indemnity. This principle is applicable only to those insurance contracts which are contract of indemnity. It arises in case of multiple insurance. It means that at the time of loss when there is more than one policy against the same interest and for the same peril then all policies should pay the loss proportionately or the insured may claim from any of the insurers up to the amount of loss or the assured sum (whichever is less) and the insurer in turn can claim contribution from the other co-insurers, in proportion to the sums insured by them.[6] If property is insured under two fire insurance policies for Rs. 10,000/ – each, in the event of a total loss, the insured is entitled to recover his full loss from anyone insurer who, there-upon, is entitled to recover from the other insurer his proportionate share of Rs. 50,000/-.

However, this will lead to a situation where, after paying the full loss to the insured, one of the several insurers will have to take the trouble of effecting proportionate recoveries from the other insurers. Besides, the recoveries may be delayed and in the meantime, the funds of the insurer who has settled die loss for the full amount, may get blocked. To avoid all this, the Common Law doctrine is modified by an express condition inserted in fire insurance policies and in a large majority of miscellaneous insurance policies. In terms of this condition, if an insured has obtained several policies of insurance in respect of the same subject-matter, in the event of a claim, the insured is obliged to prefer claims against all the insurers interested but only to the extent of the proportionate share of each insurer. The doctrine of contribution is not applicable to personal accident insurance policies, since these are not contracts of strict indemnity.

Even though there is no contribution condition in the policy, that is to say, that, even if it is not mentioned in the policy that contribution would apply. Nevertheless, it is the legal right of the insurers to get the benefit of contribution. The right is implied by law. However, the position as to when and how the right can be exercised differs at common law and under policy condition. Under common law, the insured can claim the full amount of loss from any of the insurers of his choice when that insurer will have the trouble of asking contribution from the other interested insurers. But under a policy condition, the insurers may require the insured to claim proportionately from all the insurers right at the inception rather than claiming full from the policy subject to this condition.

Fire Insurance policies often come with reinstatement value clause with them. Under the insurance policy with reinstatement clause, in the event of the property insured under the policy being destroyed or damaged, the basis upon which the amount payable under (each of the said items of) the policy is to be calculated shall be cost of replacing or reinstating on the same site or any other site with property of the same kind or type but not superior to or more extensive than the insured property when new as on date of the loss. The insurance company pays more than the actual value of the property destroyed by fire in order to cover the cost of replacement of the said property. The insurer gets option to either to pay cash or replace the property. It is also known as Replacement Policy.

Fire insurance contracts have been the subject of considerable litigation, sometimes with inconsistent results. However, generally cases have not caused concern or confusion, and have been decided under long established contract law. Therefore, there is need for concise arrangement of recent developments in a manner to create brevity and clarity to fire insurance industry.

[1]  (1904)2KB658

[2]  Insurance: Remedy of Insured upon Wrongful Cancellation by the Insurer, 9(8) Michigan Law Review 730,731(1911)

[3]  A. McGee, The Modern Law of Insurance 4 (2006).

[4]  F. James Jr., Indemnity, Subrogation, and Contribution and the Efficient Distribution of Accident Losses. 21 NACCA LJ 360 (1958).

[5]  [1962] 2 QB 330, 339

[6]  M.V. Srinivasan, Principles of Insurance Law 474 (8th ed. 2009).