Subrogation means substituting one creditor for another. In insurance contracts, except for personal accident, health, and life, subrogation applies to recover the loss from the errant party. So, in this concept, we’ll get to know about the subrogation in marine insurance.
It is the right of the person enduring the loss to legally pursue the party causing the loss. But when insured the loss, and the insurer pays the amount of loss, the party receiving the insurance benefit must forfeit the right to pursue the errant party.
Similarly, in the case of marine insurance, the insurer pays the claim for the replacement of the damaged ship or goods.
The purpose behind subrogation is that the insured should not get more than the damages incurred to him. After paying for the loss, the insurer rightfully receives compensation from the third party liable to compensate the insured.
There are four main characteristics of subrogation in marine insurance:
- The insurer gets all the rights, remedies, and liabilities of the insured after payment of the compensation.
- The insurer can pay the amount of loss after reducing the sum received by the insured from the third party.
- The right of subrogation arises only after payment to the insured.
- The insured must assist the insurer in getting compensation from the third party.
Subrogation is one of the basic principles of marine insurance, which can be, however, waived in certain circumstances.
Case on Subrogation in Marine Insurance
M/s Rainbow Shipping Ltd. suffered a loss of Rs. 15 crore due to one of its ships getting stuck in the sand, in shallow waters. The cost of recovering and re-floating the vessel, however, deeming exorbitantly high (higher than the value of a new ship of the same capacity and make).
When the marine insurance claim was filed, the insurer decided to compensate M/S Rainbow for the cost of a new ship after depreciation, and in return received the rights to recover and salvage the beached vessel.
Later found the ship floating in the Arabian sea after a local cyclone. The staff of M/s Rainbow spotted the ship afloat and reported it to the management, but the management refused to recover the ship and in turn informed the insurer to do the same.
The insurer recovered the ship and later sold it to a scrapyard and recovered Rs. 50 lakhs from it.
In a similar accident, a large cargo ship belonging to the shipper Sulphur Magnet Lines, struck by a hurricane. While in the middle of the Atlantic and beach on one of the islands formed after the storm.
Loading the cargo from the ship onto other smaller ships, however, lost much of it due to shallow water near the ship. The company had marine insurance and they reported the claim. The insurer after assessing the claim paid for the goods not recovered or recoverable and took ownership of the goods.
After a few weeks, the reported ship was in a much better situation and would float again. However, since the insurance company paid all claims for the cargo and the ship, the insurer now took ownership of the ship and cargo.
The salvage value of the material aboard helped the insurer in recovering about 40% of the claim paid.