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Indemnification & Subrogation

Indemnification

An Indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnifying party (A) may or may not be responsible for the loss suffered by the indemnified party (B).  Indemnity can be defined as placing the Insured in the same financial position as he was before the loss, neither he derives any benefit nor put to any loss on account of the damage due to the operation of an Insured peril.  In common parlance indemnity is often used as a synonym for compensation or reparation.  As a legal concept, it has a more specific meaning. For instance, compensation connotes merely a sum paid to make good the loss of another without regard to the payer's identity, or their reasons for doing so. As the following paragraphs should explain, an indemnity is a sub-species of compensation, in the same way that damages and reparations are.

The obligation to indemnify differs from the obligation to pay damages, or make reparation, in that an obligation to indemnify is a voluntary obligation. If C crashes into B's car and damages it and the crash is due to C's negligence, most legal systems will impose liability upon C to pay B for the damage caused. C's obligation to B arises by force of law irrespective of whether C subjectively wishes to compensate B or not. This is not, therefore, a situation of indemnity; the relationship between B and C is involuntary. In legal terms it is a case of tortious liability.

But, if A had a contract with B under which A agreed to pay for any damage to B's car, then A paying B would be voluntary (even if A subjectively regretted the contract at this point). In legal terms A's liability is contractual and the sum paid is an indemnity. The contract just described between A and B is of course one relatively familiar to most as one of car insurance.

It was stated in the first paragraph that the indemnifying party (A) may also be the party responsible for the loss. This is because while A will probably have a legal duty to compensate B (depending on the rules for damage wrongfully caused in the relevant legal system), A may also have a contractual duty to compensate B. Such indemnity clauses can be found in many contracts aside from those specifically for insurance. For instance, a car rental contract may stipulate that the renter will be responsible for damage to the rental car caused by their reckless driving. In other words the renter will indemnify the rental company.

An obligation to indemnity can also be distinguished from a guarantee granted by one party in regard to the potential debts of another. For example A might agree to stand guarantor (or surety) for her son C (an impecunious law student) so that if C cannot afford to pay his rent to B (his canny landlord), A will be obliged to pay for him. Here, C is the one primarily responsible for payment of the rent. A's liability is only ancillary. The liability of an indemnitor is primary.  In that case, concerned with a guarantee of payment for goods, rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will." By contrast, an indemnity is like saying let him have the goods, I will be your paymaster.

Double Indemnity

Double indemnity is a clause or provision in a life insurance or accident policy whereby the company agrees to pay twice the face of the contract in cases of accidental death. An accidental death is a death that is neither intentionally caused by a human being, such as homicide, nor foreseeable, such as cancer. After an accident, if injury-related death does not occur within a three-month window, most policies will not pay out.In 2004, 4.67% of all deaths in the United States were declared accidental.For this reason, double-indemnity clauses are usually relatively cheap and often aggressively marketed, especially to people over 45. Children and people in dangerous jobs, such as heavy construction, are the exceptions.

Subrogation

Subrogation is the legal technique under the common law by which one party, commonly an insurer (I-X) of another party (X), steps into X's shoes, so as to have the benefit of X's rights and remedies against a third party such as a defendant (D). Subrogation is similar in effect to assignment, but unlike assignment subrogation can occur with any agreement between I-X and X to transfer X's rights. Subrogation most commonly arises in relation to policies of insurance, but the legal technique is of more general application. Using the designations above, I-X (the party seeking to enforce the rights of another) is called the subrogee. X (the party whose rights the subrogee is enforcing) is called the subrogor.

In each case, because I-X pays money to X which otherwise D would have had to pay, the law permits I-X to enforce X's rights against D to recover some or all of what I-X has paid out. A very simple and common example of subrogation would be as follows:

  • D drives a car negligently and damages X's car as a result.
  • X, the insured party, has Collision insurance, and claims (i.e., asks for payment) under his policy against I-X, his insurer.
  • I-X pays in full to have X's car repaired.
  • I-X then sues D for negligence to recoup some or all of the sums paid out to X.
  • I-X receives the full amount of any amounts recovered in the action against D up to the amount to which I-X indemnified X. X retains none of the proceeds of the action against D except to the extent that they exceed the amount that I-X paid to X.
  • If X were paid in full by I-X and still had a claim in full against D, then X could recover "twice" for the same loss. The basis of the law of subrogation is that when I-X agrees to indemnify X against a certain loss, then X "shall be fully indemnified, but never more than fully indemnified ... if ever a proposition was brought forward which is at variance with it, that is to say, which will prevent X from obtaining a full indemnity, or which will give to X more than a full indemnity, that proposition must certainly be wrong."

I-X will normally (but not always) have to bring the claim in the name of X. Accordingly, in situations where subrogation rights are likely to arise within the scope of a contract (i.e. in an indemnity insurance policy) it is quite common for the contract to provide that X, as subrogor, will provide all necessary cooperation to I-X in bringing the claim.

An indemnity insurer in fact has two distinct types of subrogation right. Firstly, they have the classic type of subrogation used in the example above; viz. the insurer is entitled to take over the remedies of the insured against another party in order to recover the sums paid out by the insurer to the insured and by which the insured would otherwise be overcompensated.  Secondly, the insurer is entitled to recover from the insured up to the amount which the insurer has paid to the insured and by which the insured is overcompensated. The latter situation might arise if, for example, an insured claimed in full under the policy, but then started proceedings anyhow against the tortfeasor, and recovered substantial damages.

 
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