What does the term "subrogation" mean in insurance?

Subrogation is a key concept in the realm of insurance that allows the insurer to step into the shoes of the insured after they have paid a claim. This means that if the insurer compensates the policyholder for a loss caused by a third party, the insurer has the right to pursue recovery of those costs from that third party. The purpose of subrogation is to prevent the policyholder from receiving a double recovery (once from their own insurer and again from the party responsible for the loss) and to allow the insurer to recoup its expenses.

This process is significant in keeping insurance premiums manageable and ensuring that responsible parties are held accountable for their actions. By pursuing third parties for costs incurred, insurers can maintain financial stability and sustainability in their operations, which benefits all policyholders.

Understanding subrogation is crucial for grasping how the insurance system incentivizes accountability and ensures fair compensation practices in the event of a loss. The other options pertain to different concepts in insurance and do not accurately describe the process of subrogation.