Principle of Subrogation
Subrogation means substituting one creditor for another.
Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies to all contracts of indemnity.
According to the principle of subrogation, when the insured is compensated for the losses due to damage to his insured property, then the ownership right of such property shifts to the insurer.
This principle is applicable only when the damaged property has any value after the event causing the damage. The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to the insured as compensation.
We take the same example we have seen in the last topic, with a difference that the fire has been caused, due to some explosion in the next ship in a port and your ship is totally damaged. Your company will get the insured value of 15 million USD from the insurance companies. Now these insurance companies can file a suit against the next ship where the explosion has destroyed your ship and claim a market value for your ship say 16 million USD. After getting this money, the insurance companies will retain 15 million USD, which has been paid to your company already and of the balance 1 million, will settle the expenses for the law suit, court fees etc and if there is a balance that will be paid to your company.
On some occasions the insured gets an opportunity to claim twice for his loss. Subrogation clause prevents the insured party to get a profit out of insurance policy. The insured transfers the rights to insurance company to claim from a third party through a legal document who in their opinion is responsible for the loss.