What is subrogation in the context of insurance?

Subrogation in the context of insurance refers to the right of the insurer to pursue a third party for damages after they have compensated their insured for a loss. This process occurs after the insurance company pays a claim to the insured, and it allows the insurer to recover the amount of that claim from the responsible party.

This concept is critical in insurance because it helps keep the insurer from bearing the total financial burden of a loss that is ultimately the fault of another party. For instance, if a driver who has collision coverage is involved in an accident caused by another driver, the insurer will pay for the damages to the insured's vehicle. Later, the insurer may seek subrogation against the at-fault driver (or their insurance company) to recover the amount spent on the claim.

Understanding subrogation is essential for both insurers and policyholders, as it affects the overall cost of claims and the management of risk within the insurance industry. The other choices do not accurately describe subrogation; they refer to different aspects of insurance processes such as policy management, financial restitution, and claims assessment.