Dr.

RAM MANOHAR LOHIYA NATIONAL LAW

UNIVERSITY
ACADEMIC SESSION: 2022-2023

BANKING & INSURANCE LAW

SUBROGATION: APPORTIONMENT OF
RECOVERY BETWEEN INSURER & INSURED

Submitted to: Submitted by:

Dr. Arpana Singh Saddhvi Nayak

Assistant Professor (Law) Enrolment No. 200101114

Dr. RMLNLU 6th Sem. B.A.LL.B. (Hons.)

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 TABLE OF CONTENTS

Contents
DECLARATION......................................................................................................................3

ACKNOWLEDGEMENT.......................................................................................................4

INTRODUCTION....................................................................................................................5

APPORTIONMENT OF RECOVERY.................................................................................7

Majority rule: Insured whole..............................................................................................8

Minority Rule: Insurer whole............................................................................................10

POSITION IN INDIA............................................................................................................13

Economic Transport Corporation Case Followed..........................................................18

CONCLUSION: LITIGATION AGREEMENT IS THE SOLUTION............................20

REFERENCES.......................................................................................................................21

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 DECLARATION

I hereby declare that the project work titled “Subrogation: Apportionment of

Recovery between Insurer & Insured” submitted to the Dr. Ram Manohar Lohiya
National Law University, Lucknow is a record of an original work done by me under
the guidance of Dr. Arpana Singh, Assistant Professor (Law), Dr. Ram Manohar
Lohiya National Law University. This project work is submitted in the partial
fulfilment of the requirements for the award of the degree of B.A. LL.B. (Hons.). The
results embodied in this paper have not been submitted to any other University or
Institute for the award of any degree or diploma.

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 ACKNOWLEDGEMENT

This term paper would not have been accomplished without the generous contributions of
individuals. First of all, I express my gratitude to the Almighty, who aided me with his
strength, wisdom and patience to complete this term paper.

Additionally, I express my gratitude and deep regards to my teacher for the subject Dr.
Arpana Singh for giving me freedom to work on the interesting topic of “Subrogation:
Apportionment of Recovery between Insurer & Insured” and also for her exemplary
guidance, monitoring and constant encouragement throughout the course of this term paper.

I would also like to thank the librarians of Dr. Madhu Limaye Library who extended their
assistance to me by helping me out consult the relevant books on the online platform and
provided me with research material and good books to work upon and the distinguished
authors and journals for providing in the public domain such invaluable information.

Finally, I also thank all of my friends and seniors who aided me along the way, and my
family and friends for their constant encouragement without which this assignment would not
have been possible.

I know that despite my best efforts some discrepancies might have crept in which I believe
my humble Professor would forgive.

Thanking You All.

Saddhvi Nayak.

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 INTRODUCTION

The doctrine of subrogation enables an insurer that has paid an insured’s loss pursuant to a
policy of property insurance to recoup the payment from the party responsible for the loss.
Essentially, the principle of subrogation permits one who is legally obligated to pay the debt
of another to “stand in the shoes” of the person owed payment and enforce that person’s right
against the actual wrongdoer.1

Several policy considerations underlie the doctrine of subrogation. First, subrogation 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. Subrogation prevents an insured from obtaining one
recovery from the insurer under its contractual obligations and a second recovery from the
tortfeasor under general tort principles. Additionally, subrogation rights enable the insurer to
recover payments to the insured, who theoretically should have been made whole through
those payments. Finally, subrogation advances an important policy rationale underlying the
tort system by forcing a wrongdoer who has caused a loss to bear the burden of reimbursing
the insurer for indemnity payments made to its insured as a result of the wrongdoer’s acts and
omissions.2

Modern legal principles have divided subrogation into two basic categories, i.e., legal
subrogation and conventional subrogation, reflecting how the right of subrogation arises.
Legal subrogation, also known as equitable subrogation, arises by operation of law. The right
to legal subrogation arises when an insurer fulfils its obligations to an insured pursuant to the
contract of insurance and, in fact, that obligation should have been paid by another, i.e., the
tortfeasor. This right arises in the absence of contractual language granting a right of
subrogation. Conventional subrogation, also known as contractual subrogation, arises by
virtue of a contract or agreement. Conventional subrogation arises when an insurance policy
specifically grants a right of subrogation to the insurer. In this regard, insurance policies
routinely include a provision entitling the insurer, on paying a loss, to be subrogated to the
insured’s right of action against any person whose act or omission caused the loss or who is
legally responsible to the insured for the loss caused by the wrongdoer. Conventional
subrogation also may arise when the insured specifically assigns its claim to the insurer by
way of a subrogation receipt.

1
James M Mullen, ‘The Equitable Doctrine of Subrogation’ (1939) 3 MD L Rev 201
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2
Powell v Blue Cross & Blue Shield 581 So 2d 772, 775 (Ala. 1990)

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Now, a situation of conflict arises when the insurance proceeds do not compensate fully for
damages sustained as a result of a loss which happens frequently. When this occurs, the
insurer has a right to subrogate against a third party deemed responsible for the loss; the
insured also is entitled to seek full compensation for its losses from the third-party tortfeasor.
In such a case a fundamental issue arises as to the apportionment of any recovery between the
insured and the insurer. While the language of the standard property insurance policy and
subrogation receipt provides for a right of subrogation, these documents are unfortunately
silent on the issue of how to allocate any subrogation recovery between an insured and
insurer if the insured has suffered an uninsured loss.

When the insured has obtained a judgment against the tortfeasor in a third-party action, the
judgment is said to establish conclusively the full scope of the insured’s damages. 3 In such
circumstances, several courts in foreign countries have held that the insurer is entitled to full
reimbursement of the payments made to the insured, less its proportionate share of costs and
legal fees.4 These courts have found that an insured should not be allowed to defeat the
insurer’s subrogation claim by contending that his or her damages were greater than the sums
received from the tortfeasor by way of the judgment.5

In the absence of a judicial determination of damages, it is much more difficult to apportion a

recovery obtained from a third-party tortfeasor when the insured contends that he or she is
not fully compensated. An insured often settles with a third-party tortfeasor for an amount
less than the total loss. Several courts addressing these circumstances have held that the
amount of the settlement is not necessarily coextensive with the amount of damages given the
exigencies that may have warranted a settlement.6 Because an insured, under these facts,
should not be deemed to have been fully compensated simply because of the settlement, the
apportionment issue necessary will arise.

3
Florida Farm Bureau Ins Co v Martin 377 So. 2d 827, 831 (Fla. Dist. Ct. App. 1979)
4
Associates Hosp Serv v Pustilnik 396 A.2d 1332, 1338 (Pa. Super. Ct. 1979)
5
Mark S Rhodes, Couch Cyclopedia of Insurance Law (1983)
6
Hill v State Farm Mut Auto Ins Co 765 P.2d 864 (Utah 1988)

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 APPORTIONMENT OF RECOVERY

When the insured is not fully reimbursed for the loss, there’s not much jurisprudence in the
Indian courts. In foreign courts (for instance in the United States), however, there is a split of
authority among the jurisdictions as to whether the insurer or the insured has a superior
interest in amounts recovered from third-party tortfeasors. Professor Robert Keeton, the well-
known commentator on insurance law, has summarized the various approaches to
apportionment of subrogation recoveries between the insurer and insured as follows:

First Rule (Insurer Whole Plus): The insurer is the sole beneficial owner of the claim against
the third party and is entitled to the full amount recovered, whether or not it exceeds the
amount paid by the insurer to the insured.

Second Rule (Insurer: Whole): The insurer is to be reimbursed first out of the recovery from
the third party, and the insured is entitled to any remaining balance.

Third Rule (Proration): The recovery from the third person is to be prorated between the
insurer and the insured in accordance with the percentage of the original loss for which the
insurer paid the insured under the policy.

Fourth Rule (Insured: Whole): Out of the recovery from the third party the insured is to be
reimbursed first, for the loss not covered by insurance, and the insurer is entitled to any
remaining balance, up to a sum sufficient to reimburse the insurer fully, the insured being
entitled to anything beyond that amount.

Fifth Rule (Insured: Whole Plus): The insured is the sole owner of the claim against the third
party and is entitled to the full amount recovered, whether or not the total thus received from
the third party and the insurer exceeds his loss.7

In general, the courts have avoided the rules providing either the insurer (Rule 1) or the
insured (Rule 5) with exclusive rights because of the windfall effect these rules would have.
Surprisingly few courts have utilized the proration formulation (Rule 3), despite its apparent
logic. Instead, most jurisdictions have adopted the insurer-whole (Rule 2) or the insured-
whole (Rule 4) formulation.

Leading legal commentators generally agree that the insurer should have no right of recovery
until the insured is made whole (Rule 4). One authority states that “in contrast with the
situation

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7
Robert E Keeton, Basic Text on Insurance Law (West Pub Co, 1971) 160

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in which the insurer has not discharged its obligation in full, the insurer may in a given case
have made the full payment required of it by its contract of insurance but this amount is not
adequate to indemnify the insured in full. In such an instance, it has been held, in absence of
waiver to the contrary, that no right of subrogation against the insured exists upon the part of
the insurer where the compensation received by the insured is less than his loss.”8

Similarly, another commentator has expressed the rule like, “As a general rule, the insurer
has no right to reimbursement until the insured’s entire loss has been paid. This is true even if
the insurer is liable for only a part of the loss and pays its entire obligation. An insurer cannot
recoup any part of its loss while the insured is still less than whole.”9

Despite the generality of these axioms, there remains a substantial split of authority among
the jurisdictions as to the efficacy of the insured-whole proposition. Although most
jurisdictions have adopted the insured-whole rule, some follow the insurer-whole rule.

Majority rule: Insured whole

Most courts have held that the insured must be fully compensated for any uninsured loss
before the insurer may share in the proceeds of a recovery from the tortfeasor. The United
States Supreme Court may be partially responsible for this widespread adoption of the
insured-whole rule through its decision in American Society Co. v. Westingbouse Electric
Manufacturing Co.10 In Westingbouse Electric the Court held that “a surety liable only for a
part of the debt does not become subrogated to collateral or to remedies available to the
creditor unless he pays the whole debt or it is otherwise satisfied.”11

The decision most frequently cited in support of the insured-whole doctrine was rendered by
the Wisconsin Supreme Court in Garrity v. Rural Mutual Insurance Co.12 The Garrity
decision is significant in that the policy in question was a standard 165-line fire insurance
policy containing the standard subrogation provision. Moreover, the insurer in Garrity
obtained from the insured a subrogation receipt providing that the insurer would be
subrogated “to all of the rights, claims, and interest which the (insureds) may have against
any person or corporation liable for the loss The insureds in Garrity suffered a fire loss
and were paid $67,227.12 by
their insurer. This payment represented the policy limit. The insureds sought damages in the

8
Supra note 5, at 61, 64
9
Allan D Windt, Insurance Claims And Disputes (6th edn, 1982)
10
American Society Co v Westingbouse Electric Manufacturing Co 296 U.S. 133 (1935)
11
Id, at 137 (citing United States v National Sur Co, 254 U.S. 73, 76 (1920))
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12
Garrity v Rural Mutual Insurance Co 253 N.W.2d 512 (Wis. 1977)

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amount of $110,000 from a third-party tortfeasor. The tortfeasor’s available assets were
limited to liability insurance coverage of $25,000.

The Garrity court began its analysis by reviewing the common law regarding subrogation.
Under common-law subrogation, the court found, the insured must be made whole before the
insurer may recover anything from the tortfeasor because the insurer assumed the risk of loss
by accepting the insured’s premiums.13 The court concluded, without discussion, that the
subrogation provisions in the standard fire insurance policy and the subrogation receipt did
nothing to change the substantive common-law rights of the insured. 14 Accordingly, the court
held that the insureds were entitled to be made whole before any monies were paid to the
insurer pursuant to its right of subrogation. In concluding that the insurance contract and
subrogation receipt did not alter the common-law rule, the Garrity court specifically rejected
the insurer- whole rule adopted by the Ohio Supreme Court in Peterson v. Ohio Farmers
Insurance Co.15 The Peterson court had recognized that the subrogation receipt assigned to
the insurer all rights of recovery against the tortfeasor up to its pay-out, thus according a
priority of recovery to the insurer.

In reaching the conclusion that the insured’s right to be made whole takes precedence, the
Garrity court stated: “Where either the insurer or the insured must to some extent go unpaid,
the loss should be borne by the insurer for that is a risk the insured has paid it to assume.” 16 It
is not at all clear, however, that the risk of a large uninsured loss is one that the insurer has
been paid to assume. In fact, a strong argument can be made that such a risk is one that the
insured has agreed to assume in exchange for the payment of lower insurance premiums.

Another case frequently cited in support of the insured-whole proposition was rendered by
the Montana Supreme Court in Skauge v. Mountain States Telephone & Telegraph Co.17 The
policy involved in this case also contained the standard subrogation provision indicating that
the company could require an assignment of the insureds’ claim against any party liable for
their loss. Despite this policy provision, the court applied the general principles of legal
subrogation and determined that absent specific contractual terms giving the insurer the right
of first indemnity, the insured must be made whole before the insurer could participate in any
recovery. As in Garrity, the Montana Supreme Court disregarded the policy provision and

13
Id, at 514
14
Id
15
Peterson v Ohio Farmers Insurance Co 191 N E 2d 157 (Ohio 1963)
16
Id, at 514 (citing St. Paul Fire & Marine Ins Co v WP Rose Supply Co, 198 S.E.2d 482)
17
Skauge v Mountain States Telephone & Telegraph Co 565 P 2d 628 (1977)

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concluded that the insurer’s legal right to subrogation made the policy provision unnecessary
and of no effect.

Minority Rule: Insurer whole

A number of courts have recognized that an insurer will be entitled to be made whole first
under certain circumstances, even though the jurisdiction’s general rule would entitle the
insured to be made whole first.

The most frequently cited decision supporting the insurer-whole doctrine was rendered by the
Ohio Supreme Court in Peterson v. Ohio Farmers Insurance Co.18 The insureds suffered a
fire loss to their barn and other property. They signed a proof-of-loss and standard
subrogation receipt and received payment from the carrier in the amount of $7,814. The
insured’s loss, however, totalled $17,629.56. After the insurance settlement, the insurer and
the insureds commenced an action against the tortfeasor. Each party employed its own
counsel, who collaborated in conducting the litigation, and each party paid its own
expenditures. The insurer and insureds obtained a joint verdict of $11,514. The parties
disputed the division of the proceeds, however, and the insureds filed a declaratory judgment
action seeking indemnification up to the full amount of their loss, plus counsel fees and costs.

Relying on the policy provisions regarding assignment of right of recovery and the
subrogation receipt signed by insureds the Ohio Supreme Court found that the insureds had
assigned their entire right of recovery, to the extent of payment, to the insurer. Because the
court determined that the policy provision and subrogation receipt amounted to an
assignment, the court held that the words “all right of recovery” in the policy would be
without meaning if the insurer were not accorded priority as to the funds received from the
third-party tortfeasor.

If an insurer paying a claim for a loss caused through the negligence of a third person
requests that the insured prosecute his claim against the tortfeasor, and bears its share of the
burden in preparing the case for trial, it is entitled out of the judgment recovered, to the
amount which it has paid on account of the loss, notwithstanding the judgment recovered is
not, according to the insured’s claim, equal to the full value of the property destroyed.19

The insurers would receive first and total indemnification from the recovery obtained from
the tortfeasor before the insureds would be entitled to participate in that recovery. The
insurer- whole rule also has arisen in cases in which the insured has impaired or prejudiced
the insurer’s

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18
Peterson v Ohio Farmers Insurance Co 191 N E 2d 157 (Ohio 1963)
19
Travelers Indemnity Co v Ingebretsen, 113 Cal Rptr 679 (Ct. App. 1974)

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rights. In such circumstances several courts have held that the insurer is entitled to be made
whole first from any recovery from a third-party tortfeasor, even though the jurisdiction’s
general rule is to the contrary. 20 In North River Insurance Co. v. McKenzie,21 for example, the
insureds suffered property damage and received $ 2,537. This payment constituted the limit
payable under the policy. The insureds then started an action against the tortfeasor, alleging
total property damage of $7,500. Without notice to the insurer, the insureds subsequently
settled their claim against tortfeasor for $ 5,982.15. The insurer subsequently commenced an
action against the insureds, seeking repayment of the $2,537 paid under the insurance
contract.

The Alabama Supreme Court held that equitable principles dictated that the insured
reimburse the insurer for the payment made under the policy. In effect, the court held that
when an insured accepts from the insurer the amount of the policy for damage to his property
and thereafter settles his claim against the tortfeasor to the detriment of the insurer, the
insurer is entitled to recover from the insured the amount paid on the policy without
necessarily demonstrating that the settlement exceeded the actual loss less the amount paid on
the policy. The insurer-whole rule also has been recognized when the insured receives full
payment for only a portion of his or her total damages in an action against a third-party
tortfeasor.

Certain subrogation provisions in an insurance policy may be sufficient to modify the

insured- whole rule. In Mutual Hospital Insurance, Inc. v. MacGregor22 the insured was
injured in an automobile accident and incurred medical expenses in the amount of $5,168.58.
These were paid by the insurer. The insured then commenced an action against the tortfeasor,
which was subsequently settled for $10,000. The settlement amount equalled the limit of the
tortfeasor’s liability coverage. The insurer, Blue Cross-Blue Shield, brought suit against the
insured to recover the $5,168.58 payment.

The policy at issue provided in part: “In the event of any payment for services under this
policy, Blue Cross-Blue Shield shall, to the extent of such payment be subrogated to all the
rights of recovery of the Member or Dependent arising out of any claim or cause of action
which may accrue because of the alleged negligent conduct of a third-party.”23

20
North River Ins Co v McKenzie 74 So. 2d 599 (Ala. 1954)

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21
Id
22
Mutual Hospital Insurance, Inc v MacGregor 368 N E 2d 1376 (Ind. Ct. App. 1977)
23
Id, at 1377

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The court noted that “an insurance policy is a contract and the rules governing the
construction of contracts generally apply to the construction of a policy or contract of
insurance.”24 Considering the insurance policy at issue, the court held that the insured was
obligated to reimburse the insurer from any monies received from the tortfeasor.

Notwithstanding the result in the Mutual Hospital case, many courts have found similar
policy provisions insufficient to modify the insured-whole rule.25 Moreover, several courts
have found that any contractual attempt to modify the insured-whole rule is fundamentally
inequitable and will not be permitted.26

This split of authority demands a solution. But before going to the solution, the position in
India must also be analysed.

24
Id at 1379
25
Willard v Auto Underwriters, Inc 407 N.E.2d 1192 (Ind. Ct. App. 1980)
26
Powell v Blue Cross & Blue Shield 581 So. 2d 772, 775 (Ala. 1990)

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 POSITION IN INDIA

The position of the courts in India on the issue of apportionment of proceeds is that as the
insurer shall indemnify the insured against the loss claimed, the insurer will only be entitled
to recover to the amount paid by it. In case where the amount recovered by the insurer is
more than what was paid by it to the insured, it must only retain the recovered amount to the
extent it paid to the insured and the balance should be refunded to the insured.

If the insurer directly recovers the entire loss from the third party, then subrogation does not
come into picture. This principle is based on the idea that the insured must be allowed to
recover only to the extent of loss suffered by it and not more than that. When the insured
receives the loss claimed from the insurer as well as the third party, it shall return the excess
to the insurer, subject to the payment limits of the insurer.27 So, the general rule is that the one
who files the case for recovery from the tort-feasor under tort law gets the right to reimburse
himself fully first and then give the remaining amount to the insurer or the insured, as the
case may be.

The case of Economic Transport Organisation, Delhi v Charan Spinning Mills Pvt Ltd 28
decided by the Indian Supreme Court is a landmark case in the settlement of apportionment
issue. The court first referred to the ‘Right of Subrogation’ as statutorily recognized and
described in Section 79 of the Marine Insurance Act, 1963 and Section 140 of Contract Act,
1872. Differentiating subrogation from assignment, the court said:

“By subrogation, the insurer gets no better rights or no different remedies than the assured
himself. Subrogation and its effect are therefore, not to be mixed up with those of a transfer
or any assignment by the assured of his rights and remedies to the insurer. An assignment or a
transfer implies something more than subrogation, and vests in the insurer the assured’s
interest, rights and remedies in respect of the subject matter and substance of the insurance.”

Subrogation, as an equitable assignment, is inherent, incidental and collateral to a contract of

indemnity, which occurs automatically, when the insurer settles the claim under the policy,
by reimbursing the entire loss suffered by the assured. But where the insurer does not settle
the claim of the assured fully, by reimbursing the entire loss, there will be no equitable
assignment of the claim enabling the insurer to stand in the shoes of the assured, but only a
right to recover

27
Mitansha Chopra, ‘Subrogation: The Enigma Simplified For Insurer And Insured’ (Mondaq, 4 August 2020)

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< https://www.mondaq.com/india/insurance-laws-and-products/972530/subrogation-the-enigma-simplified-for-
insurer-and-insured>
28
Economic Transport Organisation, Delhi v Charan Spinning Mills Pvt Ltd (2010) 3 Mad LJ 1347

19 | P a g e
from the assured, any amount remaining out of the compensation recovered by the assured
from the wrongdoer, after the assured fully recovers his loss. To avoid any dispute with the
assured as to the right of subrogation and extent of its rights, the insurers usually reduce the
terms of subrogation into writing in the form of a Letter of Subrogation which enables and
authorizes the insurer to recover the amount settled and paid by the insurer, from the third
party wrong-doer as a subrogee-cum-Attorney.29 When the insurer obtains an instrument from
the assured, on settlement of the claim, whether it will be a deed of subrogation, or
subrogation- cum-assignment, would depend upon the intention of parties as evidenced by the
wording of the document.

For better understanding of the issue, the Court then classified subrogation under three broad
categories:30

(i) subrogation by equitable assignment;

(ii) subrogation by contract; and
(iii) 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,

29
A Mitchell Polinsky & Steven Shavell, ‘'Subrogation and the Theory of Insurance When Suits Can Be
Brought for Losses Suffered’ (2018) 34 J L Econ & Org 619
30
Elaine M. Rinaldi, ‘Apportionment of Recovery between Insured and Insurer in a Subrogation Case’ (1994)
20 | P a g e
29 Tort & Ins LJ 803

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specifying its rights vis-a-vis the assured. 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 than 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.

The decision of the Supreme Court in Economic Transport Organisation sums up succinctly
the principles involved thus:

(i) 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.
(ii) Subrogation neither terminates 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

22 | P a g e
insurer to receive back the amount paid to the assured, in terms of the principles of
subrogation.

23 | P a g e
 (iii) Where the assured executes a Letter of Subrogation, reducing the terms of
subrogation, the rights of the insurer vis-a-vis the assured will be governed by the
terms of the Letter of Subrogation.
(iv) 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.
(v) 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 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, i.e.,
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.

These principles can be understood by the following illustration: The loss to the assured is Rs
1,00,000. The insurer settles the claim of the assured for Rs 75,000. The wrong-doer is sued
for recovery of Rs 1,00,000.

Where there is no letter of subrogation and insurer relies on the equitable doctrine of
subrogation (The suit is filed by the assured):

(i) If the suit filed for recovery of Rs 1,00,000/- is decreed as prayed, and the said
sum of Rs 1,00,000 is recovered, the assured would appropriate Rs 25,000 to
recover the entire loss of Rs 1,00,000 and the doctrine of subrogation would
enable the insurer to claim and receive the balance of Rs 75,000.
(ii) If the suit filed for recovery of Rs 1,00,000 is decreed as prayed for, but the
assured is able to recover only Rs 50,000 from the judgment-Debtor (wrong-doer),
the assured will be entitled to appropriate Rs 25,000 (which is the shortfall to
make up Rs 1,00,000 being the loss) and the insurer will be entitled to receive
only the balance of Rs 25,000 even though it had paid Rs 75,000 to the assured.

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(iii) Where the suit is filed for recovery of Rs 1,00,000 but the Court assesses the loss
actually suffered by the assured as only Rs 75,000 (as against the claim of the
assured that the value of goods lost is Rs 1,00,000) and then awards Rs 75,000
plus costs, the insurer will be entitled to claim and receive the entire amount of Rs
75,000 in view of the equitable doctrine of subrogation, since by paying Rs.
75,000, the insurer had settled the claim of the assured for the entire loss.

Where the assured executes a letter of subrogation entitling the insurer to recover
Rs 75,000 (The suit is filed in the name of the assured or jointly by the assured and
insurer):

(iv) If the insurer sues in the name of the assured for Rs 75,000 and recovers Rs
75,000, the insurer will retain the entire sum of Rs 75,000 in pursuance of the
Letter of Subrogation, even if the assured has not recovered the entire loss of Rs
1,00,000. If the assured wants to recover the balance of the loss of Rs 25,000 as he
had received only Rs 75,000 from the insurer, the assured should ensure that the
claim is made against the wrongdoer for the entire sum of Rs 1,00,000 by bearing
the proportionate expense. Otherwise, the insurer will sue in the name of the
assured only for Rs 75,000.
(v) If the letter of subrogation executed by the assured when the insurer settles the
claim of the assured uses the words that the assured assigns, transfers and
abandons unto the insurer, the right to get Rs 75,000 from the wrongdoer; the
document will be a subrogation; in spite of the use of words transfers, assigns and
abandons. This is because the insurer has settled the claim for Rs 75,000 and the
instrument merely entitles the insurer to receive the said sum of Rs 75,000 which
he had paid to the assured, and nothing more.

Where the assured executes a letter of subrogation-cum-assignment for Rs 100,000:

(vi) If the document executed by the assured in favour of the insured provides that in
consideration of the settlement of the claim for Rs 75,000, the assured has
transferred and assigned by way of subrogation and assignment, the right to
recover the entire value of the goods lost and retain the entire amount without
being accountable to the assured for any excess recovered (over and above Rs
75,000) and provides that the insurer may sue in the name of the assured or sue in
its own name without reference to the assured, the instrument is a subrogation-
cum-
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 assignment and the insurer has the choice of either suing in the name of the assured
or in its own name.

Economic Transport Corporation Case Followed

This landmark case of Economic Transport Organisation, Delhi v Charan Spinning Mills Pvt
Ltd, has settled the issue of apportionment of recovery between insurer and insured in a
subrogation. But the cases where such an issue has arisen are not as frequent in India as they
are in the United States.

Though the Economic Transport Organisation case has been followed in several cases, its
main application has not been in the cases of apportionment of proceeds but in cases of
subrogation only. For instance, in Taj Mahal Hotel v. United India Insurance Co. Ltd. and
Ors.,31 Respondent No. 2’s car was stolen from hotel premises. Respondent No. 1 (car
insurer) settled the insurance claim raised by the car owner in respect of the stolen car.
Thereafter, Respondent No. 2 (actual consumer/assured) executed a Power of Attorney and a
letter of subrogation in favour of the insurer. Consequently, the complaint before the State
Commission was filed by Respondent Nos. 1 and 2 as co-complainants. On the issue of
maintainability of the complaint, the Supreme Court referred to the Economic Transport
Organisation case and observed that even though a consumer complaint filed by an insurer in
its own name is not maintainable, a complaint filed by the insurer acting as a subrogee is
maintainable if it is filed by the insurer in the name of the assured, wherein the insurer acts as
the attorney holder of the assured; or the insurer and the assured as co-complainants. Since
both the conditions were squarely applicable to this case, the complaint was held to be
maintainable.

Another instance is of T. Viji and Ors. v. K. Ramachandran Pillai and Ors., 32 wherein Sajith
Chandran died in consequence of a motor accident when he was hit down by a bus while
riding on his motorcycle. Initially, while he was undergoing surgery for treatment after the
accident, he had filed for compensation for his injuries in the Motor Accidents Claims
Tribunal. After his death, additional petitioners viz., wife, children and the mother got
impleaded and the claim was enhanced to Rs. 55 lakhs. But since the quantum of
compensation under various heads was disputed, the case went to the Kerala High Court. The
Insurance Company pointed out the fact that around Rs. 5,07,456 of medical reimbursement
was paid to the injured by the authorities.

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31
Taj Mahal Hotel v. United India Insurance Co. Ltd. and Ors AIR 2020 SC 597
32
T. Viji and Ors. v. K. Ramachandran Pillai and Ors MANU/KE/3155/2021

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Thus, the Insurance Company asked for the medical reimbursement received by the plaintiffs
to be deducted from the total claim amount.

The Kerala High Court while referring to the Economic Transport Organisation case
observed that the law of insurance recognises an equitable corollary of the principle of
indemnity that when the insurer had indemnified the insured, the rights and remedies of the
insured against the wrong doer stand transferred to and vested in the insurer. While observing
that when the injured or his legal heirs received some amount due to be paid by the insurer
from any other person, normally the insurer is entitled to get it recovered from the person
who paid for this, the Court deducted the total reimbursed amount from the final claim
amount which the Insurance Company had to pay to the plaintiffs.

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 CONCLUSION: LITIGATION AGREEMENT IS THE SOLUTION

Though the Economic Transport Organisation case33 has settled the issue in India, there may
be divergent and often untenable rationales employed by the courts in apportioning
recoveries. Therefore, the insured and the insurer should enter into a litigation agreement
when pursuing claims against a tortfeasor. Known as a proration agreement, it is the soundest
method of resolving the apportionment of damages issue. Like any contract, a litigation
agreement is negotiable, but it typically provides for the sharing of recovery and expenses
based on the percentage each party’s recoverable loss bears to the entire recoverable loss. For
example, when the insured has sustained a total loss of $100,000 and the insurer has paid the
insured the limit of a $60,000 policy, a litigation agreement would provide for a sharing of
any recovery, as well as expenses, on the basis of a 40 percent share for the insured and a 60
percent share for the insurer.

This would not be untenable since in Rahee Industries Ltd. v. Export Credit Guarantee
Corporation of India Ltd. and Ors,34 the Apex Court of India observed that the parties to an
insurance contract may express and define the terms of subrogation in the insurance policy
which may be at variance from the ordinary principles of subrogation. Only in case of
ambiguity or doubt in the construction of the insurance policy, the parties may invoke the
principles of subrogation as a controlling authority or guide.

In the subrogation context the consideration typically is found when the insurer promises to
pay for all expenses associated with the attempts to recover the damages caused by the actual
wrongdoer. Such expenses may include fees paid to expert witnesses, travel expenses, and
copying costs. A good litigation agreement also should provide that the insured will
cooperate fully with the insurer in the pursuit of a recovery and, most importantly, that the
insurer may prosecute any lawsuit in the name of the insured alone.

To avoid future misunderstandings and possible conflicts of interest, a litigation agreement

also should address all possible contingencies that may arise in the litigation, such as attorney
fees; uninsured damages; litigation costs; punitive damages; and authority to settle, litigate,
and counterclaim. So, having a separate proration agreement or having elaborate clauses in
the insurance deed itself, dealing with the apportionment of recovery are the solution to the
issue of who should be made-whole, the insurer or the insured.

33
(2010) 3 Mad LJ 1347
34
Rahee Industries Ltd v Export Credit Guarantee Corporation of India Ltd and Ors 2009 (1) SCC 138

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 REFERENCES

Books

 Allan D Windt, Insurance Claims And Disputes (6th edn, 1982)

 Mark S Rhodes, Couch Cyclopedia of Insurance Law (1983)
 Robert E Keeton, Basic Text on Insurance Law (West Pub Co, 1971)
 MN Srinivasan & K Kannan, Principles of Insurance Law (10th edn, Lexis Nexis 2017)
 KSN Murthy & Dr KVS Sarma, Modern Law of Insurance, (6th edn, Lexis Nexis 2019)

Cases

 American Society Co v Westingbouse Electric Manufacturing Co 296 U.S. 133 (1935)

 Associates Hosp Serv v Pustilnik 396 A.2d 1332, 1338 (Pa. Super. Ct. 1979)
 Economic Transport Organisation, Delhi v Charan Spinning Mills Pvt Ltd (2010) 3
Mad LJ 1347
 Florida Farm Bureau Ins Co v Martin 377 So. 2d 827, 831 (Fla. Dist. Ct. App. 1979)
 Garrity v Rural Mutual Insurance Co 253 N.W.2d 512 (Wis. 1977)
 Hill v State Farm Mut Auto Ins Co 765 P.2d 864 (Utah 1988)
 Mutual Hospital Insurance, Inc v MacGregor 368 N E 2d 1376 (Ind. Ct. App. 1977)
 North River Ins Co v McKenzie 74 So. 2d 599 (Ala. 1954)
 Peterson v Ohio Farmers Insurance Co 191 N E 2d 157 (Ohio 1963)
 Powell v Blue Cross & Blue Shield 581 So. 2d 772, 775 (Ala. 1990)
 Rahee Industries Ltd v Export Credit Guarantee Corporation of India Ltd and Ors
2009
(1) SCC 138
 Skauge v Mountain States Telephone & Telegraph Co 565 P 2d 628 (1977)
 T Viji and Ors v K Ramachandran Pillai and Ors MANU/KE/3155/2021
 Taj Mahal Hotel v United India Insurance Co Ltd and Ors AIR 2020 SC 597
 Travelers Indemnity Co v Ingebretsen, 113 Cal Rptr 679 (Ct. App. 1974)
 Willard v Auto Underwriters, Inc 407 N.E.2d 1192 (Ind. Ct. App. 1980)

Articles

 A Mitchell Polinsky & Steven Shavell, ‘'Subrogation and the Theory of Insurance
When Suits Can Be Brought for Losses Suffered’ (2018) 34 J L Econ & Org 619
 Elaine M. Rinaldi, ‘Apportionment of Recovery between Insured and Insurer in a
Subrogation Case’ (1994) 29 Tort & Ins LJ 803

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 James M Mullen, ‘The Equitable Doctrine of Subrogation’ (1939) 3 MD L Rev 201
 Mitansha Chopra, ‘Subrogation: The Enigma Simplified For Insurer And Insured’
(Mondaq, 4 August 2020) < https://www.mondaq.com/india/insurance-laws-and-
products/972530/subrogation-the-enigma-simplified-for-insurer-and-insured>

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