If the principle of indemnity says that I must be restored to the condition I was before I suffered the loss, it would be wrong for me to accept an agreed sum in compensation and then continue to have any other rights as well. A few examples will illustrate this
Example 1. My car is wrecked in an accident. I agree to accept RM40,000 in settlement of my claim. The wreck is worth RM3,500 when sold to the workshop for use as spare parts. If I received this RM3,500 as well as the RM40,000 I would be getting more than the true indemnity for my loss. The insurance company therefore steps into my shoes as owner of the wreck, and the RM3,500 returns to the pool. The word ‘subrogate’ means ‘to step into the place of’, or ‘to find a substitute for’. One could say that when they pay out the claim the insurance company inherits all the rights of the person accepting settlement of the claims. This means that they also inherit the right to sue other parties in the accident for any share of the loss which their negligence may have caused.
Example 2. A celebrated American racehorse which had won many classic races broke his leg on a Californian track. The owner had insured the horse for $250,000 with a British insurance firm, who had take the precaution of sending a representative to the track. The owner was about to give the veterinary surgeon permission to destroy the animal when the insurance representative declared his interest. He would not permit the animal to be destroyed, and soon the rare sight of a horse with a leg in plaster could be seen in the stables where the insurance company were trying to cure the animal. They paid out the claim for the racehorse and although he never raced again he was put to stud and had many fine descendants. The insurance company eventually recovered from breeding fees more than the sum paid out, and restored to the ‘pool’ all its losses. Subrogation had taken place in the nick of time to prevent the destruction of the animal.
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