Though there are a few definitions of subrogation, this writeup will focus on the term as applied to insurance. The insurance industry usually defines subrogation as "the right of a person or a company to seek compensation for a claim against a third party for loss."
As an example situation, suppose you've been involved in an automobile accident, one in which your car was damaged through no fault of your own. You'll naturally want the damage to be repaired, and there are two possible ways to proceed:
1. You can seek to have the cost of repairs borne by either the at-fault driver or by their insurance carrier.
2. You can use your own insurance (assuming you carry collision coverage) to pay for the repair, minus any deductible. At this point, your insurance carrier will seek to recover the cost of repairs to your car.
In either case, either you or the insurance carrier involved will ultimately seek to recover the costs from the party-at-fault - the other driver in this example. In the first scenario, it will be you, the "injured" party, seeking reimbursement from the at-fault driver. If you're successful in recovering your costs, the matter is ended. If your efforts are unsuccessful, you may choose to have your insurance carrier take over. At this point, you have subrogated your claim and you may ask your insurance carrier to recover costs for you.
The second scenario is similar to the first, except that you have chosen not to become involved at all with the recovery process. Instead, your insurance carrier will negotiate with the at-fault driver, his insurance carrier, or both in an attempt to resolve the claim.
In either case, your insurance carrier's goal is to recover not only the cost of repairs, but also any deductible you may have paid (and part or all of that deductible will be returned to you). If the subrogation process is unsuccessful, the claim may be placed in arbitration, if both carriers belong to an arbitration forum. At that point, both carriers can attempt to resolve differences through negotiation. Failure to reach an agreement, or the failure of an uninsured motorist to the results of arbitration, almost always results in the claim going to litigation.
Afni, Inc. Upword! (Afni Company Newsletter)
, Edition 1, Volume 2. Bloomington, Illinois
: Afni, Inc., January 2004.
interviews with subrogation analysts and support personnel