What does "subrogation" mean in the context of insurance?

Subrogation in the context of insurance refers to the insurer’s right to step into the shoes of the policyholder and pursue recovery from a third party that may be responsible for a loss after the insurer has paid out a claim. This process allows the insurance company to recover costs from the party at fault and can help keep premiums lower for all policyholders by recouping some of the payouts made on claims.

When an insurer pays a claim to a policyholder, they may have incurred costs due to the wrongful actions of another party. In cases where the insurer can demonstrate that a third party was liable for the insured loss, they will initiate subrogation to retrieve the amount they’ve paid. This not only enables the insurer to regain financial balance but also holds the responsible party accountable for the damages caused.

In contrast, the other options do not capture the definition of subrogation. The first option deals with the policyholder's responsibility for transparency, while the third option involves assessing coverage but does not relate to recovery efforts post-claim. The last choice pertains to the methods used to determine costs for policies rather than any recovery process post-payment. Thus, understanding subrogation is crucial, as it highlights a key element of risk management within the insurance