(http://optimuminsurance.hubpages.com/hub/Insurance-and-Subrogation ) - Subrogation’ refers to one person stepping into another’s shoes. In the context of insurance, it's when an insurer tries to recoup the expenses it paid out for a claim when a third party was responsible for causing at least some of the damage. 

1. Insurance and Subrogation

2. ‘Subrogation’ refers to one person stepping into another’s shoes. In the
context of insurance, it's when an insurer tries to recoup the expenses it paid
out for a claim when a third party was responsible for causing at least some
of the damage.
There is often considerable confusion as to whether subrogation arises from
equity or contract law. An insurance policy can modify implied contractual
rights and the rights that arise under equity through the express terms of the
contract.
Subrogation only applies if the insured has been fully compensated under
the policy. But even where an ‘average’ or ‘rateable’ clause reduces the
payment, this can still constitute full indemnification under the policy, and
subrogation will apply
Understanding Subrogation

3. When exercising subrogation rights, the insurer has to sue in the name of
the insured. In turn, the insurer’s recovery is limited to what action the
insured could have taken against the third party culpable for the loss.
If the insurer can establish the claim has been paid in good faith, the
company can pursue an action in subrogation.
However, if the policyholder prejudices the insurer’s rights to subrogation
the compensation payable can be reduced. Most policies prevent
subrogation against co-insured parties.
Starting an action

4. When either the insurer or the insured commences proceedings in a recovery
action that involves subrogation, they are obligated to protect the rights of
the other party. That means the insured cannot in its litigation prejudice the
rights of the insurer by only pursuing damages over and above the amount
that has already been compensated under the policy.
So while the insured can settle with a negligent third party for only its
uninsured losses, it cannot prejudice the right of the insurer to proceed to
recover its indemnified loss under the policy. Similar obligations apply to the
insurer.
And if the insured’s loss is greater than the compensation provided under the
policy, they have priority over the insurer to recover their uninsured loss in
any action. In such instances, both the insurer and the policyholder have an
interest in the outcome of the proceedings.
Obligations for both parties

5. Recoveries are an important part of profit for an insurer. Where the insured’s
loss exceeds the amount of cover – and the policy is unhelpful in setting out
each party’s rights in the event of subrogation – careful negotiations are
needed to set out the rights of both parties and prevent further litigation
from eroding a successful recovery.
In Summary

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