Indemnity and Its Corollaries: Subrogation and Contribution
The insured gets back what was lost, no more. Two rules stop anyone collecting twice.
Indemnity is the promise at the centre of general insurance: after a loss, the insurer puts you back in the financial position you were in just before it, no better and no worse. Chapter 3 of S-01 calls subrogation and contribution its corollaries because both exist to protect that promise. Each stops the insured from collecting more than the loss.
This is the chapter where S-01 turns into arithmetic. A surveyor's report has to show how the payable amount was reached, and every step below is one a surveyor is asked to comment on.
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The Three Terms
- Indemnity
- Payment of the actual financial loss, proved by the insured, up to the policy limit. If the provable loss is smaller than the sum insured, the provable loss is what is paid.
- Subrogation
- After paying a claim, the insurer steps into the insured's shoes and can pursue the third party who caused the loss. Its rights are no higher than the insured's own.
- Contribution
- When the same loss is insured with more than one insurer, they share it in proportion to their cover. An insurer that pays in full can recover the others' shares from them.
Worked Example 1: Indemnity Net of Salvage
A fire damages stock in a Surat textile shop. Sum insured ₹10 lakh; stock value on the day ₹10 lakh.
| Step | Amount |
|---|---|
| Value of stock damaged | ₹4,00,000 |
| Less: salvage (damaged cloth sold as seconds) | - ₹50,000 |
| Net loss | ₹3,50,000 |
| Payable as indemnity | ₹3,50,000 |
The shop gets ₹3.5 lakh from the insurer and ₹50,000 from selling the seconds: ₹4 lakh in all, exactly the value of the stock it lost. Paying ₹4 lakh and letting the shop also sell the seconds would leave it better off than before the loss, which indemnity forbids. That is why IRDAI's duty list asks surveyors to comment on salvage and its disposal, and to recommend depreciation where an old item is replaced.
Worked Example 2: Under-insurance
Same fire, but the stock was worth ₹10 lakh and insured for only ₹6 lakh. The usual pro-rata average formula: claim = loss x (sum insured / value at risk).
| Step | Amount |
|---|---|
| Net loss | ₹3,50,000 |
| Sum insured / value at risk | ₹6,00,000 / ₹10,00,000 = 0.6 |
| Payable | ₹3,50,000 x 0.6 = ₹2,10,000 |
| Borne by the insured | ₹1,40,000 |
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Why Average Is Fair
The shop paid premium on ₹6 lakh of a ₹10 lakh risk, so it is treated as carrying the other 40% itself. The surveyor's duty list asks them to comment on "excess/under insurance" for exactly this reason: it changes the payable figure.
Worked Example 3: Contribution
A trader insures the same ₹10 lakh stock with Insurer A for ₹6 lakh and Insurer B for ₹4 lakh. A ₹5 lakh loss follows.
Insurer A
Cover
₹6,00,000
Share of cover
60%
Pays
₹3,00,000
Insurer B
Cover
₹4,00,000
Share of cover
40%
Pays
₹2,00,000
Total
Cover
₹10,00,000
Share of cover
100%
Pays
₹5,00,000
| Insurer | Cover | Share of cover | Pays |
|---|---|---|---|
| Insurer A | ₹6,00,000 | 60% | ₹3,00,000 |
| Insurer B | ₹4,00,000 | 40% | ₹2,00,000 |
| Total | ₹10,00,000 | 100% | ₹5,00,000 |
The trader receives ₹5 lakh in total, the size of the loss, not ₹5 lakh from each insurer. If Insurer A had paid the whole ₹5 lakh first, it could recover ₹2 lakh from Insurer B.
Worked Example 4: Subrogation
A transporter's truck reverses into an insured warehouse wall. The insurer pays the owner ₹3 lakh.
| Who | What happens |
|---|---|
| Insurer | Pays ₹3 lakh, then takes over the owner's right to claim against the transporter |
| Transporter | Is still liable for the damage; the insurer now pursues it |
| Owner | Cannot also collect ₹3 lakh from the transporter for the same damage |
| If the owner had already recovered from the transporter | The insurer can claim that money back from the owner (strictly called recoupment) |
Points S-01 Tests
- check_circleIndemnity does not apply to life insurance: a life policy pays the sum assured, whatever the economic loss.
- check_circleSubrogation arises only after the insurer pays, and gives the insurer no more rights than the insured had.
- check_circleInsurers can agree in advance to waive their subrogation rights.
- check_circleContribution only arises when more than one policy covers the same loss.
- check_circleLoss minimisation goes with indemnity: the insured must take reasonable steps to limit a loss, and the surveyor advises both sides on loss control.
FAQs
What are the corollaries of the principle of indemnity?expand_more
Subrogation and contribution. Both stop the insured from recovering more than the actual loss: subrogation by passing recovery rights to the insurer, contribution by sharing one loss across several insurers.
How is contribution calculated between two insurers?expand_more
In proportion to each insurer's cover. With ₹6 lakh and ₹4 lakh policies on the same stock, a ₹5 lakh loss splits ₹3 lakh and ₹2 lakh.
What rights does an insurer get through subrogation?expand_more
After paying the claim, it stands in the insured's shoes and can pursue the third party who caused the loss. Its rights are derivative: no higher than the insured's own.
Does indemnity apply to life insurance?expand_more
No. A life policy pays its sum assured on a covered death. Indemnity applies to general insurance such as fire, marine, motor and property.
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