Insurance Principles: Indemnity, Subrogation and Contribution
The principle of indemnity means that the insured must be placed in the same financial position as he was just before the loss occurred. This principle is illustrated by the case of Leppard vs Excess Insurance Company Ltd (1979), where the subject matter was a cottage. As a result of a conflict with the farmer owning all the surrounding land, Mr Leppard could not sell the cottage as no one could access the cottage. He had to drop the price of the cottage excluding land from £8694 to £3000. A loss occurred just then, and the indemnity amount paid to Leppard was £3000 which was the value just before the fire, not the £8694 cost of rebuilding.
In the case of a total loss of property, its financial value at the time and place of loss must be paid. Deductions are made for wear and tear and betterment. The indemnity principle may be adjusted in three ways:
1) Valued policies for subject matters which do not have a measurable value
2) Allowing more than indemnity, for example in cases of new-for-old where no deduction for depreciation is made, or in cases of property insurance covering architects’ and surveyors’ fees after fire damage to ensure that rebuilding complies with local legislation
3) Allowing less than indemnity, for example in cases of underinsurance where the insured is deemed to be his own insurer for the proportion of the underinsured loss, or excess which is the first part of a claim paid by the insured.
Subrogation is the insurance principle which allows insurers to stand in the place of the insured and avail themselves of all rights and remedies of the insured. This principle enforces indemnity. The leading case here is that of Castellain vs Preston (1883) where Preston recovered fire damage loss from his insurers and also the full purchase price after completion of the sale, making a profit out of this situation. Castellain, the insurers, were given the right to stand in the place of Preston and recover the amount paid in the claim to Preston.
The basic concepts are that the insured cannot make a profit out of a loss by recovering twice, the insurer can recover the amount paid in claim to the insured from the third-party responsible for the loss, and that subrogation only applies to contracts of indemnity not to benefit policies (such as life assurance).
Subrogation rights start operating even before the insurer indemnifies the insured. These may derive from tort (eg: damage on property by third-parties), contract (eg: contract to receive compensation for damage by a contractor), statute (eg: right to sue police authority for riot damages) or salvage (eg: insurer paid for stolen jewellery, then the jewellery is recovered and must be passed to the insured).
Another principle linked with indemnity is Contribution, which involves the scenario where there are two or more insurance policies and the insurers must share the cost of indemnity payment. For contribution to apply, the policies must be contracts of indemnity, and the party holding insurable interest in the property must be the same, the perils causing the damage must be common, and the subject matter must also be the same. The case here is known as the King and Queen Granaries case where there were two indemnity policies, one by the owner and the other by the bailee (different insurable interest), covering grain (common subject matter) which was then damaged by fire (common cause), were in force but contribution did not apply due to the lack of common interest in the grain.