When you suffer a financial lose because of negligent or irresponsible actions of a third-party, you have a legal right to be compensated for the loss by this party. However, if you had a life insurance for the loss and you file a claim for it, the legal right of pursuing the third-party responsible for the loss also shifts to the insurer.
Thus, subrogation means surrender of the legal right to receive compensation or slavage the damages in the favour of the insurer. This principle works in the following scenarios:
a) A third party causes the insured loss
b) Certain goods were lost which can be recovered later
Here is how the concept of subrogation works:
a) In case of lost insured goods, insurer pays you for the loss and now owns the right to possess the goods if they are later found or recovered.
b) If a third-party is supposed to compensate you for the insured loss, but insurer pays you, the legal right to receive compensation shifts to the insurer.
c) Only the insurance company has the right to claim reimbursement for the amount that they have paid to you.
Principle of subrogation ensures that insured do not profit from the insurance and the damages are compensated equitably.
For example, suppose you are driving in your car. Some reckless driver came and hit your car thus resulting in both the lights and the rear side of your car getting damaged. Now, the other driver is liable to compensate you for the loss.
Now at this point, if your car is insured, subrogation will come to play. You will be compensated by your insurance provider. The company will step in your shoes and is legally entitled to hold the driver responsible for it. The company will claim the damages from him.
Note that what the company receives from the third party, will not be payable to you.