What does 'subrogation' in insurance mean?

Subrogation in insurance refers to the insurer's right to pursue a third party to recover costs after it has paid a claim to the policyholder. When an insurer pays out a claim for a loss sustained by the insured, it can then step into the shoes of the insured and seek reimbursement from the party that is at fault for the loss. This process is essential because it allows insurers to minimize their losses and ultimately help keep premium rates more stable for policyholders.

For instance, if a driver is hit by another driver and their insurance pays for the repairs, the insurer then has the right to pursue the at-fault driver or their insurance company to recover the amount it paid for the claim. This reflects the fundamental principle of indemnification in insurance—ensuring that the insured is made whole while also holding the party responsible accountable for their actions.

Understanding subrogation is crucial for insurance professionals, as it impacts claims handling and the financial dynamics between insurers and third parties.