What is Subrogation in Marine Insurance policy?

Subrogation is also referred to as a substitution. The subrogation in insurance describes the right of the insurance provider to legally pursue a third party for the loss or damage caused to the insured party.

This generally happens when a third party is at fault but does not accept the mistake. By filing a legal case, the insurance provider tries to recover the claim amount that is paid to the insured party.

The term subrogation in marine insurance is used to ease the process of settlement against damages or losses caused by a third party. It is an essential element in a marine policy that helps the insurance company maintain its financial stability by recouping the claim amount.

The principle of subrogation in marine insurance refers to the practice of substitution of a group or person by another in cases of debt claims. In simple words, it enables the insurance provider to take over the policyholder's legal right to recover for damages or loss.

It means the insurance company can recover damages or loss caused to goods from the third party on behalf of the policyholder. Further, it also works for the loss of insured goods that can be recovered later. The act is defined under the Marine Insurance Act of 1963.

The insurance company underwriters generally use the principle to limit the financial risk when it comes to claim settlement.

The subrogation law in insurance is classified into three types.

• Equitable Subrogation: It is one of the essential elements in insurance, where the insurance provider recovers the loss of damage to the policyholder through the third party who caused the damage.

  Equitable subrogation generally involves third or other parties' cases; however, there are some exceptions, such as damages due to earthquakes, floods, etc. This kind of subrogation is not based on any document.

• Contractual Subrogation: It is also known as conventional subrogation, which is evidenced by a contract. In this type of subrogation, the insurance provider stands at the policyholder's place to sue the third party.

  This generally happens when the policyholder doesn't want to file a lawsuit for peace of mind. In that case, a letter of subrogation allows the insurance provider to file for lawsuit or avoid any disputes regarding the right to claim.

• Statutory Subrogation: Statutory subrogation is an insurance element in which the insurance company is not involved in covering the losses or damage caused by the third party.

  Unlike the above two, in this subrogation, the policyholder and third-party agree to compensate for losses among themselves without involving an insurance company.

The process of subrogation in marine insurance policy is straightforward. The very first step is the insurance company settles the claim of the policyholder for the damages caused by the third party.

After the settlement, the insurance company issued a notice of subrogation to a third party. The insurance company has the right to sue the third party on behalf of the policyholder for the claim amount.

For instance, If a cargo is damaged due to the negligence of the port authority or the shipping company. In that case, a cargo owner can file for a claim under their cargo insurance policy to recover the damage cost.

The insurance company will pay the claim amount to the policyholder and under subrogation, they can sue the negligent third party on behalf of the policyholder. This reduces the insurance company's financial risk.

Subrogation offers various benefits to both insurance companies and policyholders. Some of the benefits are listed below:

• It keeps the marine insurance policy premium affordable for policyholders as the insurance company can recoup the claim amount from the negligent party.

• This clause improves the policyholder's rights in case of loss or damage caused by a third party.

• It also helps in preventing fraudulent claim activity. The insurance company will investigate the case thoroughly before settling the claim.

• Lastly, it helps in promoting precaution and safety among all parties to avoid risk as they might be held responsible.

The waiver of subrogation is the term used in policy wording, which means renouncing or giving up the rights of subrogation. It is the provision in the insurance policy where the policyholder waives the right to the insurance provider to seek compensation for the negligent third party.

The insurance company typically charges an additional cost for this policy endorsement. The policyholder generally does this to save their relationship with the third party.

In simple words, if the marine insurance policy has this clause, then an insurance company cannot sue the third party for damages or loss after paying the claim to the policyholder. Due to this clause, insurance companies are exposed to higher risk.

There are some of the crucial points to remember about the subrogation in marine or cargo insurance policy.

• The insurance company needs the policyholder's consent to initiate the subrogation clause.

• It can only be accessed after the policyholder has been paid the claim settlement amount.

• This clause is vital in marine or cargo insurance policy due to the involvement of various parties and valuable goods.

• Policyholders can waive the right of subrogation in a marine insurance policy, but they must pay a higher premium to the insurance company.

• Some laws, like package limitation, can limit the right of subrogation in marine or cargo insurance policies.

Knowing about a subrogation clause will help businesses understand their marine insurance policy. This helps the insurance company recoup the claim amount from the negligent third party. Further, it also helps policyholders settle claims easily.

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- Does subrogation always work?

If the policyholder is not at fault and a third party is, this principle works to recoup the claim amount.

- What is Section 79 of the Marine Insurance Act?

Section 79 of the Marine Insurance Act is the right of subrogation.

- What is the objective of subrogation?

The objective of the subrogation in insurance is to make negligent parties pay for the losses or damages caused to the policyholder.