Principle of Subrogation

What is the Doctrine of Subrogation

Overview :

Subrogation in mortgages is a legal concept that allows a subsequent mortgagee to be substituted for and acquire the rights and remedies of a prior mortgagee. It ensures that the subsequent mortgagee is entitled to the same priority and security interests that the original mortgagee held.

Essentially, the subsequent mortgagee "steps into the shoes" of the prior mortgagee, preserving their rights and enabling them to enforce the mortgage against the property.

The principle of subrogation is based on the idea that it is unfair for one party to benefit from the payment of a claim by another party without reimbursing that party for the payment. It allows the subrogee to seek reimbursement from the party who is ultimately responsible for the loss.

Subrogation meaning in law:

The term subrogation is said to be derived from the Latin root sub rogo subrogatum from sub and rogo to ask, meaning substitution.

Dr. Oglive explains that subrogation is a term of civil law meaning the substitution of one person in the place of another giving him his right, but in the general sense it implies a succession of the kind either of a person to a person or a person to a thing.

Subrogation Definition:

The Law Commissioners in their report say that technically the term is confined to cases where the right arises by operation of Law. In Roman law, a creditor who lent money to the debtor for the purpose of paying off a mortgage on condition that he was to be substituted in the place of the mortgagee, was entitled to claim the benefit of the security discharged with his money, and this right has been recognized in all modern systems derived from Roman law. The principle of subrogation, however, ought to apply generally to all cases other than those of a mortgagor who pays off his own debt or of a mere volunteer.

This important doctrine of equity, in simple language, means to say that one who removes another’s burden is entitled to step into his shoes, the characteristic features being that reimbursement is the foundation of this principle and the encumbrance that is paid off is treated as alive and not as one extinguished.

Principles Governing Subrogation

There are several principles that govern the application of subrogation in the law of contracts:

The subrogee must have paid the claim in good faith and without any obligation to do so.
The subrogee must not have contributed to the loss or damage.
The subrogee must not have any conflicting interests with the subrogor.
The subrogor must not have released the party who is potentially liable for the loss.
The subrogor must not have any defenses to the claim that the subrogee does not also have.

The doctrine of Subrogation is the doctrine of equity jurisprudence.

It does not depend on private contracts, expressed or implied, except insofar as equity may be supposed to be imported into the transaction and thus raise the contract by implication. It is founded on the facts and circumstances of each particular case and on the principles of natural justice. While therefore the doctrine will be applied in general,

(i) wherever any person other than a mere volunteer pays a debt or a demand which in equity or good conscience should have been satisfied by another, or
(ii) where the liability of one person is discharged out of a fund belonging to another, or
(iii) where one person is compelled for his own protection or that of some interest which he represents to pay a debt for which another is primarily liable, or
(iv) wherever a denial of the right would be contrary to equity and good conscience, it will never be permitted, where the application of it would work injustice to the rights of those having equal or superior equities.

Test of the Doctrine of Subrogation:

The test of the right of subrogation is found in an answer to the inquiry:

(i) Whether the person who paid the mortgage debt is the one whose duty it was to pay it first of all,
(ii) If the debt was not primarily his, and he only occupied the position of a surety to the mortgagor, he is entitled to be subrogated to the position of the mortgagee when he has paid the debt,
(iii) But if the debt is the debt of the person who paid it, or is a debt which he has covenanted to pay, his payment of it raises no right of subrogation, but is simply a performance of his obligation or covenant.

Co-Mortgagor Redeeming whole mortgage:

When one of several mortgagors redeemed the whole mortgage then he becomes the mortgagee for other mortgagors by the principle of subrogation. In other words Co-sharer redeeming the whole mortgage, becomes mortgagee of other co-sharers. Subrogation procedure does not come into existence unless whole mortgage is redeemed. Redemption of whole mortgage by co-sharer merely means extinguishing whole connection of original mortgagee.

Mortgagor passing on equity of redemption to mortgagee

Mortgaged property put to sale and purchased by mortgagee Mortgagee, held, no longer a mortgagee but the owner of the land.

Types of Principle of Subrogation:

Subrogation is of two types, legal and conventional.

Legal subrogation:

It comes into existence when mortgage debt is paid off by one who has to protect his interest. It is subrogation by law or legal subrogation. Legal subrogation does not end the liability of the property, the liability herein is simply transferred in favor of one who pays off the mortgage debt.

Conventional subrogation:

A conventional subrogation which may be said to be consensual subrogation or subrogation by agreement is an act of parties.

Payment made to an infant for necessaries, necessaries supplied to a deserted wife, and examples wherein subrogation on the business of his testator, are well-known examples wherein subrogation on principles of equity have been allowed. The Transfer of Property Act, Section 92, and the Indian Contract Act, Section 69 incorporate this principle.

Application of Doctrine of Subrogation in Mortgages:

Subrogation can apply in situations where the mortgage lender requires the borrower to purchase insurance to protect the lender's interest in the property. For example, a mortgage lender may require a borrower to purchase homeowner's insurance to cover damages to the property or property insurance to cover the loss or damage of business property. If the insurance policy covers a loss or damage, and the insurer pays out a claim to the borrower or business, the insurer may be subrogated to the rights of the borrower or business and the mortgage lender to pursue a claim against the party who caused the loss or damage.

For example, if a homeowner has a mortgage on their property and the property is damaged by a fire that is caused by a negligent neighbor, the homeowner's insurance policy may cover the damages. If the insurer pays out a claim to the homeowner, it may be subrogated to the rights of the homeowner and the mortgage lender to pursue a claim against the negligent neighbor. This helps to ensure that the party who caused the loss is held accountable and that the cost of the loss is not unfairly borne by the homeowner or the mortgage lender.

The principle of subrogation allows the insurer to seek reimbursement from the party who is ultimately responsible for the loss or damage, rather than the homeowner or business that has suffered the loss. This helps to ensure that the party who caused the loss is held accountable and that the cost of the loss is not unfairly borne by the homeowner or business.

Examples of Doctrine of Subrogation:

Here are some examples of how the principle of subrogation might apply in different situations:

Insurance Claims:

Let's say John's house suffers extensive damage due to a fire. John has homeowner's insurance and files a claim with his insurer, who reimburses him for the loss and repairs. However, it is later discovered that the fire was caused by a faulty electrical wiring installed by a contractor. In this case, the doctrine of subrogation allows the insurer to step into John's shoes and pursue legal action against the contractor to recover the amount they paid out to John.

Mortgage Transactions:

Suppose Sarah owns a property and has a mortgage with Bank A. She decides to refinance her mortgage and applies for a new loan with Bank B. As part of the refinancing process, Bank B pays off the existing mortgage to Bank A. In this scenario, the doctrine of subrogation allows Bank B to step into the shoes of Bank A and assume the same rights, remedies, and security interests that Bank A had in the property. If Sarah defaults on her mortgage payments to Bank B, they can exercise their subrogated rights and initiate foreclosure proceedings.

Surety Bonds:

Consider a construction project where the owner requires the contractor to provide a surety bond as a form of financial protection. If the contractor fails to complete the project or breaches the terms of the contract, the owner can make a claim on the surety bond to recover their losses. The bonding company, after paying the claim, becomes subrogated to the owner's rights and can pursue legal action against the contractor to recoup the amount paid out.

Personal Injury Claims:

In a car accident case, Sarah is injured due to the negligence of another driver, Mark. Sarah's medical expenses and other damages are covered by her health insurance company, which pays the bills on her behalf. Subsequently, Sarah decides to file a personal injury lawsuit against Mark to seek further compensation for her pain, suffering, and other non-economic damages. However, the doctrine of subrogation allows Sarah's health insurance company to assert its subrogation rights and recover the amount they paid for her medical expenses from any settlement or judgment obtained in the lawsuit.

Conclusion:

The doctrine of subrogation is a vital principle in insurance law, particularly under the framework of the Third Party Act in motor vehicle insurance. It allows insurers to seek recovery from negligent third parties after compensating their insured individuals for losses. By preventing double recovery, promoting fairness, controlling costs, and encouraging risk mitigation, subrogation ensures a balanced and equitable system for all parties involved. Insurers must be aware of the intricacies of subrogation to protect their interests effectively and maintain the viability of the insurance industry.

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