In my earlier article, ‘The Implications of Drafting the Letter of Subrogation,’ I mentioned (while referring to the case Oberai Forwarding Agency Vs. New India Assurance Company Ltd and Another 2000) that an insured can land himself in trouble by signing a defective Subrogation Letter provided by an insurer.
In this article, I will refer to the case ‘Economic Transport Organisation Delhi vs. M/s Charan Spinning Mills (P) Ltd. & Anr. (2010)’, which offers a different perspective on the concept of Subrogation.
Facts of the case
M/S Charan Spinning Mills (P) Ltd, also referred to as `Assured’ or the `consignor. It is a manufacturer of cotton yarn. It took a policy of insurance from the National Insurance Co. Ltd to cover transit risks between 11.5.1995 and 10.5.1996 in respect of cotton yarn sent by it to various consignees by rail or road against theft, pilferage, non-delivery and/or damage. M/S Charan Spinning Mills (P)Ltd, handed over a consignment of hosiery cotton yarn of the value of Rs. 7,70,948/- to Economic Transport Organisation Delhi – the carrier on 6.10.1995 for transportation and delivery to a consignee at Calcutta. The goods vehicle carrying the said consignment was involved in an accident, and the consignment was damaged entirely.
Subsequently, a survey was carried out to assess the damage. The surveyor assessed the loss at Rs. 447,436/- on 9.2.1996. National Insurance paid the above amount to M/S Charan Spinning Mills (P) Ltd, who, in turn, executed a Letter of Subrogation-cum-Special Power of Attorney in favour of National Insurance Company on 15.2.1996.
Thereafter, M/S Charan Spinning Mills (P) Ltd and National Insurance Co. Ltd filed a complaint under the Consumer Protection Act, 1986, against the Economic Transport Organisation Delhi before the District Consumer Disputes Redressal Commission, Dindigul. Both the insured and the insurer claimed Rs. 447,436/- against the carrier, with interest at 12% per annum. They claimed against the carrier for deficiency in service, attributing the damage to the consignment to the carrier’s negligence and that of its servants. The District Consumer Dispute Redressal Commission allowed the claim on 08.11.96. Subsequent appeals by the carrier were dismissed by the State Consumer Disputes Redressal Commission, Madras, on 02.04.98, and by the National Commission on 19.07. 99 respectively. The carrier obtained special leave to appeal to the Supreme Court. First, the case was referred to the Two-Judge Bench, which in turn referred it to the Three-Judge Bench, which finally referred it to the Constitution Bench, as there was a need to revise the judgment in Oberai Forwarding Agency Vs. New India Assurance Company Ltd (2000) 2 SCC
Issues raised and discussed
1. Whether the inclusion of the word assignment in a Letter of Subrogation adversely affects the conventional meaning of the word ” subrogation ” and it ceases to be a subrogation and becomes just an assignment?
2. Whether the insurer, after having paid the claim and obtained the Subrogation right, can file a claim as a subrogee – in the name of the insured or jointly with the insured as co-complainants?
3. Where the insurer, as an assignee by virtue of a letter of subrogation-cum- assignment, can file a complaint either in its own name?
4. Whether, in the absence of any proof of negligence, can a court provide relief against the carrier/service provider under the Consumer Protection Act,1986?
The appellant, Economic Transport Organisation, the carrier, argued that, once the insurer paid the claim to the assured/insured, the assured had no surviving claim against the carrier. The insured also had no subsisting interest or enforceable right as soon as his rights were transferred to the insurer.
The other argument put forward by the carrier was that the Insurer did not entrust the consignment to the carrier for transportation. As such, there was no privity of contract between the Insurer and the appellant/carrier. The claim was not maintainable as the insurer was not a consumer.
The constitution Bench of the Supreme Court classified subrogations under three broad categories: (i) subrogation by equitable assignment; (ii) subrogation by contract; and (iii) subrogation-cum- assignment.
Subrogation by Equitable Assignment – Subrogation is an equitable assignment. ( equitable here means rights recognised by principles of equity, i.e. fairness- often doesn’t require a formal written transfer). It is therefore inherent, incidental, and collateral to a contract of indemnity. It occurs automatically when the insurer settles the claim under the policy by paying the insured the full loss. As mentioned earlier, it need not be evidenced by any writing.
In the first category, the insurer can sue the wrongdoer in the insured’s name only upon full payment of the claim amount to the insured. But in the case of partial settlement of the claim, the insurer can’t use the insured’s name. The insured can recover the money only from the wrongdoer and appropriate such amount as not paid by the insurer, including the recovery cost. The insurer can recover any amount that remains after the insured’s claim is fully settled.
Subrogation by Contract – In the second category, an instrument evidences subrogation. The insurer obtains a written letter of subrogation specifying its rights vis-à-vis the insured and confirming the assured’s co-operation in suing the wrongdoer to recover the loss.
The letter of subrogation is a contractual arrangement that manifests the rights of the insurer in relation to the assignee. On the performance of a letter of subrogation, the insurer can recover a sum equivalent to the amount paid by it under the contract of insurance. It has to sue in the insured’s name. Even where the insurer has made a partial payment of the insured’s claim, if the letter of subrogation so authorises, the insurer can first take back the amount it has paid to the insured from the amount recovered from the wrongdoer and pay only the balance, if any, to the insured.
Subrogation-cum- Assignment. In this case, the insured executes a letter of subrogation-cum-assignment. It allows the insurer to retain the entire amount recovered, even if it exceeds what it has paid to the insured. The above instrument also provides an option to sue in the name of the insured or in its own name.
In all the above types of subrogation, the insurer can sue the wrongdoer in the insured’s name. The insurer has to request the insured to file the suit. There is another option: the insurer can join the insured as a co-plaintiff for filing the suit. The third option available to an insurer is to obtain a Special Power of Attorney from the insured and then sue the wrongdoer in the name of the assured/insured as his attorney.
The Court further clarified that the insured has no right to deny the insurer’s equitable right of subrogation, even in the absence of a writing supporting it. But the insured, who the insurer has partly paid the loss, may insist that he first recover the amount of the loss that the insurer has not paid from the amount recovered from the wrongdoer. One may note here that the insured has the right not to execute a subrogation-cum- assignment which takes away his right to receive the balance of the loss. But once a written subrogation is in place, the terms agreed upon will govern the rights between the insured and the insurer.
Assignment, on the other hand, is the transfer of property rights. If it stands alone, it will become void under Section 6(e) of the Transfer of Property Act, 1882 as it is merely a right to sue. Clause (e) of the said section provides that the mere right to sue cannot be transferred.
Section 130 of the above Act throws light on the manner of transfer of actionable claims. Section 3 defines an `actionable claim’ as : (i) any debt (other than a debt secured by a mortgage of immovable property or by hypothecation or pledge of movable property) or (ii) any beneficial interest in movable property not in the possession, either actual or constructive of the claimant, which the civil courts recognise as affording grounds for relief’. Similarly, the above Act clarifies that ‘ A `debt’ refers to an ascertained sum due from one person to another, as contrasted from unliquidated damages and claims for compensation which require ascertainment/assessment by a Court or Tribunal before it becomes due and payable’.
The Court observed that ‘ a transfer or assignment of a mere right to sue for compensation will be invalid, having regard to section 6(e) of the TP Act. But when a letter of subrogation-cum-assignment is executed, the assignment is interlinked with subrogation, and not being an assignment of a mere right to sue, will be valid and enforceable’.
The Court summarised the principles relating to subrogation as : (i) There is an equitable right of subrogation as soon as the insurer settles the total claim of the assured. This instrument allows the insurer to stand in the shoes of the assured and enforce the assured’s rights against the wrongdoer. (ii) Subrogation safeguards the right of the assured to sue the wrongdoer and recover the damages for the loss. Subrogation only entitles the insurer to recover the amount paid to the assured, in accordance with the principles of subrogation.
One may note here that where the insured effects a subrogation-cum- assignment in favour of the insurer (as against a mere subrogation), the insured is devoid of his right or interest in the subject matter of insurance. As a result, the insured can’t sue the wrongdoer in his own name or for his own benefit.
But the beauty of subrogation- cum-assignment, is that it is not a mere assignment. The insurer may sue in its own name or in the insured’s name, if the instrument so provides. The insurer pockets the entire amount recovered from the wrongdoer, not merely the amount paid to the insured, but any other amount exceeding the claim amount paid to the insured.
Illustrations –
The Court provided several illustrations to clarify the above-mentioned concepts :
Example: The insured’s loss is Rs. 1,00,000/-. The insurer settles the insured’s claim for Rs. 75,000/-. The wrongdoer is sued for recovery of Rs. 1,00,000/-
Scenario 1– In the absence of a letter of subrogation, the insurer banks on the equitable doctrine of subrogation. In this case, the suit is filed by the insured. If Rs. 1,00,000/- is allowed, the Insured would take Rs. 25,000/- to recoup his total loss of Rs. 100,000/- and the doctrine of subrogation would enable the insurer to claim and receive the balance of Rs.75,000
If in the above example, as against Rs. 100,000/-, the insured is only able get Rs.50,000/- from the wrongdoer or Judgment-Debtor
The insured is entitled to retain Rs. 25,000/- to meet his shortfall (Rs. 100,000/- being the total loss), and the insurer will be entitled to receive only the balance of Rs. 25,000/-, even though it had paid Rs. 75,000/- to the insured. Nothing more than that.
Think of another scenario: the suit is filed for recovery of Rs. 100,000/-, but the Court assesses the loss actually suffered by the insured at precisely Rs. 75,000/-, as against Rs. 100,000/- as claimed by the insured. In this case, the insurer retains the full award of Rs 75,000/-, plus costs (if incurred by it), under the doctrine of subrogation. The underlying point is that the Court also assesses the loss at 75,000/-, as evaluated by the insurer.
Example – 2 This is a scenario in which the insured issues a letter of subrogation entitling the insurer to recover Rs.75,000/- In this case, the insured himself, or jointly with the insurer, files the suit.
Scenario -2 – If the suit is filed for recovery of Rs.1,00,000/-, and if the Court grants Rs.1,00,000/-, the insurer retains Rs.75,000/- and the insured takes Rs.25,000/-. However, if the insurer sues using the insured’s name for Rs. 75,000/- and recovers Rs.75,000/-, the insurer will retain the entire sum of Rs.75,000/- in keeping with the Letter of Subrogation. The fact remains that the insured has not fully recovered his total loss of Rs. 1,00,000/ as he has received only Rs. 75,000/- from the insurer. In order to ensure that the insured gets the balance unpaid amount of Rs 25,000/-, the insured should ensure that the claim is preferred against the wrongdoer for the entire sum of Rs.100,000/- by bearing the proportionate expenses, or else, left alone, the insurer will sue in the name of the insured for only Rs 75,000/-.
It requires expertise to draft a letter of subrogation that favours the insured or customer, thereby enabling the actual benefit to be derived.
Please consider the scenario in which the insured issues a letter of subrogation after his claim is settled. The letter uses the words that the “assured assigns, transfers and abandons unto the insurer, the right to get Rs. 75,000/- from the wrongdoer”. The document will be a `subrogation’ despite the use of words `transfers, assigns and abandons’. The reason is that the insurer has settled the claim for Rs.75,000/-, and the instrument merely entitles the insurer to recover the amount it has paid to the insured, and nothing more.
Example -3 Where the assured executes a letter of subrogation-cum- assignment for Rs.100,000/-
Scenario 3 – The insured, having been paid his claim for Rs.75,000/-, effects a document in favour of the insurer stating that the assured/insured has transferred and assigned, by way of subrogation and assignment, his right to recover the entire value of the goods lost. The insurer can retain the whole amount without being accountable to the assured for any excess recovered exceeding Rs. 75,000/-. It also provides that the insurer may sue in the insured’s name or in its own name independently.
Think of another scenario – Where an insured issues a letter of assignment in favour of a third party (other than the insurer) to sue and recover from the carrier – the value of the consignment, such a document will be treated as an Assignment. The assignee ceases to be a consumer. Further, such a document is rendered void and unenforceable as a mere transfer of a right to sue, as per section 6(e) of the Transfer of Property Act, 1882. The Court observed, ‘ It is well settled that a right to sue for unliquidated( meaning unspecified) damages for breach of contract or for tort, not being a right connected with the ownership of any property, nor being a right to sue for a debt or actionable claim, is a mere right to sue and is incapable of being transferred.
Whether, in the absence of any proof of negligence, can a court provide relief against the carrier/service provider under the Consumer Protection Act, 1986?
In this context, the meaning of the word ‘ Consumer’ needs to be understood as per the provisions of the Consumer Protection ACT 1986. As per section 2(d) of the Act “Consumer” means any person who – x x x x x (ii) hires or avails of any services for a consideration which has been paid or promised or partly paid any partly promised, or under any system of deferred payment and includes and beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised or partly paid and partly promised, or under any system of deferred payment, when such services are availed of with the approval of the first mentioned person…”
Similarly, according to section 2(g) of the Act).”Deficiency” means any fault, imperfection, short-coming, or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under anylaw for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service”.
The District Forum held that the failure to deliver the consignment in sound condition was a deficiency in service, in view of the unrebutted presumption of negligence ( meaning a legal presumption that a party was negligent, which is accepted as no contrary evidence was produced to disprove it )arising under sections 8 and 9 of the Carriers Act, 1865.
The Constitution Bench observed that the assured/insured entrusted the consignment for transportation to the carrier, which he also insured. The goods were damaged in an accident, and the assured, who was at the same time a consignor and consumer, could certainly maintain a complaint under the Act. The insured/assured, as a consumer, can seek compensation for negligence.
Even if the assured or the insured was entirely or partly paid, the claim does not expunge or reduce the liability of the wrongdoer. The assured or the insured as a consumer could file a complaint under the Act, even after the insurer had settled its claim regarding the loss
A contract of insurance is a contract of indemnity- subrogation flows from it, which in turn is based on two principles of equity: a) No tort-feasor should get away with the wrong it committed ; (b) No unfair enrichment accrues to the injured by way of recovery of compensation for the same loss, from sources more than one. The doctrine of subrogation allows the insurer to step into the shoes of the assured and to apply the rights and remedies available to the assured.
Conclusions
The Constitution Bench of the Supreme Court found the judgment of Oberai Forwarding Agency Vs. New India Assurance Company Ltd. is erroneous for treating a composite document as a pure assignment.
On the issue of negligence, the Court reiterated that Section 9 of the Carrier’s Act creates a presumption of carrier negligence. The carrier must defend against the negligence claim if it wants to disown its liability. In the above case, it failed to do so.
To be Continued
About the Author:
By Abhijit K Chattoraj – Chartered Insurer
