The lien on the settlement (that's what is in play here) is a part of the subrogation process.
but subrogation is a specific action that allows them to seek recompense from a 3rd party on behalf of their beneficiary. The insurance company is taking no action against the 3rd party so it is not an act of subrogation. It is merely seeking recompense from their beneficiary because their beneficiary is being paid for a claim they have made for damages due to medical expenses.
In other words: the injured party cannot utilize the benefits of their insurance company AND be paid for those medical costs by the at fault party. Any money paid to the injured party to compensate them for costs incurred for anything the insurance company actually paid belong to the insurance company.
Utilizing the benefits of the insurance company AND being compensated for those expenses (and keeping it) from the at fault party would be double dipping.
from the FA wealth of knowledge:
What Are Subrogation Rights?
To understand what subrogation rights are, it is best to start with an example. When an insurance company pays out benefits to you in a situation where the other party caused the accident in question, you must subrogate your rights to the insurance company. This means you give the insurance company the legal right to sue the person who caused the accident to recoup the money paid to you for the damages.
beyond that though; if the settlement is not intended to compensate the injured party for medical expenses paid by the insurance company, the insurance company would have no claim to any of the settlement money. It's a game played in how the demand is made that makes it so the insurance company does not have a right to make a claim against a negotiated settlement.
If this went to court and the court specified the award would be $XXXXX. for medical expenses, then the insurance company would have a right to make a claim to that money. Any compensation made specifically for pain and suffering or other damages would not be rightfully claimable by the insurance company as that portion of the award is for a specific reason.