Marine Insurance

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Subrogation means substituting one creditor for another. In insurance contracts, except personal accident, health, and life, subrogation is applied to recover the loss from the errant party if any.

It is a right of the person enduring the loss to legally pursue the party causing the loss. But when the loss is insured, and the insurer pays the amount of loss, the party receiving the insurance benefit must forfeit the right to pursue the errant party.

marine insurance

Similarly, in the case of marine insurance, the damaged ship or goods has to be surrendered to the insurer if the claim has been paid for the replacement of the same.

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 has the right to be compensated from the third party liable to compensate the insured.

There are four main characteristics of subrogation in marine insurance:

  1. The insurer gets all the rights, remedies, and liabilities of the insured after payment of the compensation.
  2. The insurer can pay the amount of loss after reducing the sum received by the insured from the third party.
  3. The right of subrogation arises only after payment to the insured.
  4. The insured must assist the insurer in getting compensated from the third party.

Subrogation is one of the basic principles of marine insurance, however, it can be 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 was deemed 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.

The ship was later found 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, got struck by a hurricane while in the middle of Atlantic and beached on one of the islands formed after the storm.

The cargo from the ship had to be loaded on to other smaller ships, however much of it was lost 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 the ownership of the goods.

After a few weeks the reported ship was in a much better situation and could be floated again. However, since all claims for the cargo and the ship had already been paid by the insurance company, the insurer now took the ownership of the ship and cargo.

The salvage value of the material aboard helped the insurer in recovering about 40% of the claim paid.