Indemnity, contribution and subrogation

1. The principle of indemnity

A contract of indemnity is one by which one party promises to save the other from loss (section 124, Indian Contract Act, 1872). In insurance it means that the insured is to be put, as nearly as money can do it, in the same financial position after the loss as before it, and no better. In Castellain v. Preston (1883) Brett L.J. said that the contract of fire or marine insurance is one of indemnity and of indemnity only, and that any rule which would give the insured more than a full indemnity must be wrong. Section 3 of the Marine Insurance Act, 1963 defines marine insurance as an undertaking to indemnify.

Consequences of the principle:

• The insured recovers his actual loss, measured by market value at the time and place of loss, subject to the sum insured.
• Under-insurance: if the property is insured for less than its value, the insured bears a proportion of the loss himself (the average condition in fire policies; s.81 of the Marine Insurance Act deems him his own insurer for the uninsured balance).
• Over-insurance gives no profit: the insured cannot recover more than the loss, however many policies he holds.
• Contribution, subrogation and the insurer’s right to salvage follow from it.

2. Contracts that are not contracts of indemnity

“Indemnity is the controlling principle in insurance contract, but all insurance contracts are not contracts of indemnity” (June 2025). The answer:

• Life insurance is a contract to pay a fixed sum on death or maturity. Loss of life cannot be valued in money, so there is nothing to measure. The beneficiary recovers the full sum assured whatever his actual loss, and may hold several policies on the same life.
• Personal accident benefits for death or disablement are also fixed (benefit) policies, though medical-expense covers within them are indemnity.
• Valued policies in marine insurance: the agreed value is conclusive between the parties in the absence of fraud (s.29(3), Marine Insurance Act), even if the actual value turns out different. This is a limited departure from indemnity.
• Reinstatement value fire policies pay the cost of replacement as new, without deduction for depreciation, if the insured actually reinstates.

Health insurance sits in between: hospitalisation covers indemnify actual expenses; fixed benefit covers (critical illness, hospital cash) pay a fixed sum.

3. Indemnity and guarantee distinguished

• Parties. Indemnity has two parties, indemnifier and indemnity-holder (s.124). Guarantee has three: creditor, principal debtor and surety (s.126).
• Nature of liability. The indemnifier’s liability is primary and independent. The surety’s is secondary; he pays only if the principal debtor defaults.
• Number of contracts. Indemnity is one contract. A guarantee involves a primary debt and the contract of guarantee.
• Purpose. Indemnity protects against loss from any cause covered; guarantee secures the performance of a debt or promise.
• Rights after payment. A surety who pays steps into the creditor’s shoes against the debtor (s.140). An insurer’s similar right arises by subrogation.

An insurance contract is an indemnity, not a guarantee, even when it covers credit risk: the insurer pays the insured on his own contract, not as surety for a third party’s debt. (Fidelity and credit insurance are sometimes described as guarantee insurance, but the insurer still contracts only with the insured.)

4. Contribution

Double insurance arises where the same subject matter is insured with two or more insurers against the same risk for the same interest, and the total sums insured exceed the value. The insured may claim from any insurer, but cannot recover more than the loss. The insurers then share the loss between themselves. That right of an insurer who has paid more than its share to recover from the others is contribution.

Section 80 of the Marine Insurance Act states it: where the assured is over-insured by double insurance, each insurer is bound, as between himself and the other insurers, to contribute rateably in proportion to the amount for which he is liable, and an insurer who pays more than his proportion may sue the others for contribution like a surety who has paid more than his share. Fire policies carry a contribution condition limiting each insurer to its rateable proportion.

Conditions for contribution (from North British and Mercantile Insurance Co. v. Liverpool and London and Globe Insurance Co., 1877):

• two or more policies covering the same subject matter;
• the same interest of the same insured (in the case itself, a wharfinger’s policy and the merchant-owners’ policy on the same grain covered different interests, so there was no contribution);
• the same peril; and
• all policies in force at the time of loss and the loss caused by a peril common to all.

Contribution does not apply to life insurance, which is not indemnity.

5. Subrogation

Subrogation is the right of an insurer who has indemnified the insured to stand in the insured’s place and enforce every right and remedy the insured had against third parties in respect of the loss. It prevents double recovery and puts the loss where it belongs, on the wrongdoer.

In Castellain v. Preston a vendor of a house insured it, contracted to sell it, and it was damaged by fire before completion. He recovered from his insurer and then received the full price from the buyer. The insurer was held entitled to recover what it had paid, because otherwise the vendor would have been paid twice for one loss.

Rules:

• The right arises only after payment of the loss.
• The insurer gets no more than it paid; any surplus recovered belongs to the insured.
• The insurer takes the insured’s rights as they are, subject to the same defences; it has no better right than the insured.
• It applies to indemnity policies only, not to life insurance.
• In marine insurance, s.79 distinguishes total and partial loss: on paying a total loss the insurer may also take over what remains of the subject matter; on paying a partial loss it acquires no title but is subrogated to the insured’s rights to the extent of the indemnity.

Indian procedure: the insurer usually takes a letter of subrogation from the insured. In Economic Transport Organisation v. Charan Spinning Mills (P) Ltd., 2010 INSC 103, (2010) 4 SCC 114, a Constitution Bench considered goods damaged in transit. The insurer had paid the consignor and taken a letter of subrogation-cum-special power of attorney. The Court held that subrogation is an equitable assignment of rights; the insurer, as subrogee, may file a consumer complaint against the carrier either in the name of the assured as its attorney, or jointly with the assured, but not in its own name alone, because the insurer is not itself a consumer of the carrier’s service.

6. Problem

X insures his stock worth ₹10 lakh with Insurer A for ₹6 lakh and with Insurer B for ₹9 lakh. A fire caused by the negligence of a neighbour destroys stock worth ₹5 lakh. How is the loss borne?

Issue. How much X recovers, how A and B share it, and who may sue the neighbour.

Law. Indemnity limits X to his loss of ₹5 lakh. Under the contribution principle each insurer bears a rateable share in proportion to its sum insured. After paying, the insurers are subrogated to X’s claim against the neighbour.

Application. Total cover is ₹15 lakh, so there is double insurance. A’s share is 6/15 of ₹5 lakh = ₹2 lakh; B’s share is 9/15 = ₹3 lakh. If X claims the whole ₹5 lakh from B, B pays and recovers ₹2 lakh from A. (This assumes neither policy carries an average condition; if one does, that insurer’s liability is first scaled down by the ratio of its sum insured to the value, and the shares are worked out on the reduced figures.) Having paid, A and B together may sue the neighbour in X’s name for ₹5 lakh; anything recovered above what they paid goes to X.

Conclusion. X recovers ₹5 lakh in all, A bears ₹2 lakh and B ₹3 lakh, and both may recover from the negligent neighbour by subrogation.

How this is examined

“Discuss the principles of contribution and subrogation” (January 2026) and “Discuss the doctrines of subrogation and contribution in fire insurance” (June 2025) are answered from sections 4 and 5, with the problem as illustration. The indemnity essay (June 2025) uses sections 1 and 2. The difference between indemnity and guarantee is a short note.