Liability Insurance

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Yes, the principle of subrogation applies in the case of product liability insurance as well. If a product liability insurance company settles the claim, the insurer shall be subrogated to all of the policyholder’s rights of recovering the claim amount if the loss or damage happens due to the fault of the third party.

It means if the claim arises not because of the fault of the policyholder but because of the third party. The insurer will settle the claim on behalf of the policyholder but later recover the amount from the third party. It is called the principle of subrogation.

Once the insurer has met its legal obligation of paying compensation, it can seek to recover its loss in respect of that claim from any other party who may be liable to pay the loss.

Although product liability insurance companies must agree to indemnify the insured in respect of various costs which are associated with bringing the subrogated claims, insurance policies will have an express term that will give insurers the right to control various proceedings are filed against a third party.

However, the insurer will not exercise the rights of subrogation against any employee of the policyholder. Unless it proves the employee acted fraudulently. Also, the insurer can’t fill in the shoes of the policyholder unless the insured has been fully indemnified.

Here, it is important to note that if the policyholder seeks recovery from the third party after the insurer has indemnified in respect of the claim, then the insurer will have the right to recover the amount from the policyholder. If the policyholder recovers the money from the insurance company and third party, it would be against the insurance principle.

Case of the principle of subrogation applies to Product Liability insurance

Established in 2012, T.J Confectionery has made a name itself for itself in the confectionery business. The company is supplying its confectionery items not only in India but some other nations of the world. Like Sri Lanka and Maldives.

Last company, the company found itself in a legal suit when one of its buyers filed a case against it over the quality of its chocolates. The buyer reported that he bought ten packs of chocolate made by T.J Confectionery from a nearby shop. However, the consumption of chocolate leads to diarrhea and constipation. Due to his ill-health, he had to cancel his trip to London. The buyer held T.J Confectionery responsible for all the losses and damages.

In this case, T.J Confectionery had a product liability insurance policy. And, therefore, when filing a legal case against it, the company approached the insurer. Here, the insurer scrutinized the case and after reviewing documents, like medical reports, etc.; agreed to settle the claim and compensate the buyer.

Once paid the compensation, the insurance company started the investigation and found that it wasn’t the fault of T.J Confectionery. But, the shopkeeper from where the buyer purchased the chocolates. The shop owner neither kept chocolates in a safe place nor took the necessary steps to prevent them from moisture. As a result, their condition deteriorated.

In this case, the product liability insurance company filed a case against the shop owner for the recovery of the claim amount. And paid on behalf of T.J Confectionery to the buyer.

It was the fault of the shop owner who paid the compensation.

Here, it is important to note,

  • Once the product liability insurance company paid the claim, T.J Confectionery lost all its rights to recover the money from the shop owner who was actually at fault
  • In case, T.J Confectionery can’t recover money from both the shop owner and product liability insurance company
  • Any amount recovered by T.J Confectionery from the shop owner  should give to the insurance company, who settled the claim

In any case, T.J Confectionery can’t recover money more than the actual loss.