What is 'subrogation' in the context of insurance?

Subrogation is a key concept in the insurance industry, referring specifically to the process where an insurer seeks reimbursement from a third party that may have caused a loss for which the insurer has already paid the insured. This process allows insurers to recover some or all of the claim amount they have paid to the insured, thereby reducing their overall losses.

When an insured suffers a loss due to the actions of another party, the insurer compensates the insured and then steps into their shoes to pursue the responsible party for recovery. This ensures that the financial burden of the loss does not rest solely on the insurer, and it helps to maintain the principle of indemnity, where the insured should only be compensated to the extent of their loss rather than profiting from the claim.

This mechanism is crucial for keeping insurance premiums in check since it reduces the payouts that insurers have to cover, ultimately benefiting policyholders by keeping costs down. The other options describe processes or concepts that are unrelated to subrogation, which is focused solely on recovery of funds from third parties after a loss has been settled.