Property and Casualty Insurance Basics Practice Test 2025 - Free Practice Questions and Study Guide

Subrogation refers to the insurer's right to pursue a third party that caused an insurance loss to the insured. Essentially, once the insurer pays a claim to the policyholder for a covered loss, the insurer gains the right to "step into the shoes" of the insured and seek recovery of the amount paid from the party at fault. This process helps prevent the insured from receiving a double recovery (i.e., being compensated by both their insurer and the party responsible for the loss).

This mechanism is important because it allows insurers to manage the costs associated with claims, ultimately helping to keep premiums lower for policyholders. The ability to subrogate also encourages accountability, as it holds responsible parties liable for their actions, which can lead to more equitable outcomes in the event of an insurance loss. By understanding subrogation, policyholders can better appreciate how their insurance operates behind the scenes to recover costs and ensure that claims are handled fairly.