A simple example involving health insurance illustrates how subrogation works. Two individuals, Innocent Ann and Negligent Ned, are involved in an automobile accident. Ned is clearly at fault and the accident resulted in injuries to Ann. Ann goes to the hospital to receive treatment, and her health insurance pays the medical bills for this treatment, totaling $500. By paying Ann’s bills, Ann’s insurance company “steps into the shoes” of Ann and may seek damages against Ned as if Ann herself were seeking damages against Ned.
It should be noted that, in that example, Ann’s insurance company cannot recover from Ned all damages Ned is liable for. Ann’s insurance company is subrogated only to the extent of what it paid. In other words, it may only recover $500, the amount it paid for Ann’s medical bills. Any other damages for which Ned is liable to Ann, the insurance company may not recover.
Subrogation serves two purposes in law. First it furthers the “principle of indemnity” which simply means that the insured does not recover more than his loss. In the example above, subrogation prevents Innocent Ann from receiving a windfall. If there were no subrogation, Ann would, in a sense, be paid twice for one loss: once from her insurance company by its payment of her bills, and again from Ned after trial or settlement for those same bills. The law frowns upon these types of situations.
The second purpose is that subrogation makes sure that those who cause a loss or ultimately responsible for it. If there were no subrogation, Ned might end up not paying anything. Ann might decide not to recover from Ned because her insurance paid her bills. If the insurance company cannot go after Ned, then Ned gets off scot free. Obviously, the law, and society at large, does not want negligent drivers to escape responsibility.