What does 'subrogation' refer to in insurance terminology?

Subrogation is a critical concept in insurance that refers specifically to the right of an insurer to step into the shoes of the insured and pursue a third party responsible for a loss. This process allows the insurer to recover the amount it has paid out on a claim from the party that caused the loss. Once the insurance company compensates its policyholder for their loss, they gain the legal rights to seek reimbursement from anyone who may have been at fault for that loss.

This mechanism helps to prevent the insured from receiving a double recovery for the same loss while also allowing insurers to mitigate their own losses. For instance, if a driver is involved in an accident caused by another driver and the first driver’s insurance pays for repairs, the insurance company can then seek to recover those repair costs from the at-fault driver’s insurance.

The other choices highlight terms and processes that, while relevant to insurance, do not accurately define subrogation. The cancellation of an insurance policy involves ending the insurance coverage, the process of settling claims is about the resolution of claims and payments, and negotiating premiums pertains to the pricing of the policy rather than recovering costs after a claim. Thus, the correct understanding of subrogation is key to grasping how liability and recoveries work