Property and liability insurance is based on the principle of indemnity—an insured should not be allowed to profit from his losses. If an insured could sue and collect damages for a loss and collect insurance for the same loss, then the insured would profit from the loss. Subrogation prevents this. Subrogation in insurance is the substitution of the insurer as a claimant for a loss suffered by the insured. Thus, the right to sue for the losses sustained by the insured is transferred to the insurance company, which can seek reimbursement for the payment to the insured from the party who caused the loss.
Subrogation prevents a guilty party from being absolved of their negligence simply because the victim has insurance—the guilty party still must pay for the loss that they caused.
Subrogation also keeps insurance rates down, since the insurance company can pay for the loss from reimbursements from guilty parties rather than from premiums.
However, the right of subrogation is not part of life insurance policies, because life insurance is not based on indemnity. Therefore, if your spouse is killed because of the negligence of a 3rd party and you are the beneficiary of her life insurance, then you can collect both the life insurance proceeds and sue the 3rd party for negligence. Likewise, for health insurance and disability insurance. So if you are seriously injured because of a negligent driver, and you have disability insurance, you can collect the disability insurance and still sue the negligent driver. The main reason that life insurance and health and disability insurance policies are not contracts of indemnity is because most people would not willingly give up their lives or cause themselves serious injuries simply to collect some money, either for the beneficiaries or for themselves.
Corollaries of Subrogation
The characteristics of subrogation are aligned with the principle and purpose of insurance, which is to cover losses suffered by the insured.
One contractual obligation of the insured is that the insured cannot impair the insurer's right of subrogation. Doing so will relieve the insurer of paying for the loss. In many losses, there is a duty of the insured to obtain evidence about the loss, and preserve any such evidence. So, if you are in an auto accident, your insurance contract may require you to call the police, get the name and address of all others involved, and their insurance companies. If you waive your right to sue the negligent parties, for whatever reason, then you also waive your right to collect under your insurance policy.
An insurance company can waive its right to subrogation by contract for a loss that has not occurred yet. Or it may not exercise its right because it would not be able to recover its legal expenses, or it may be subject to a counterclaim, or it may be bad publicity, so the insurance company refrains from suing for good public relations.
Generally, the insurance company should not keep more of any subrogation recovery than it paid the insured for the loss. Any additional amount is paid to the insured, which helps to pay for deductibles, underinsurance, and other expenses created by the loss. Many policies state specifically how the subrogation recovery is to be shared between the insurer and the insured.
An insurer cannot subrogate a claim by an insured against the insured, when the insured was negligent in causing his loss. A person does not have the right to sue himself, and, therefore, there is no right to subrogate. Furthermore, because many property and liability losses are caused by the insured's negligence, the value of insurance would be greatly diminished if the insurer could sue the insured for claims paid.