What is "subrogation" in insurance?

Subrogation is a crucial concept in the insurance industry that allows an insurer to recover the amount it has paid out in claims from the party responsible for the loss. Once the insurer compensates the policyholder for their loss, they can step into the shoes of the insured and seek reimbursement from the third party at fault. This process not only helps to ensure that the insurer can mitigate its losses but also helps prevent the insured from receiving a double recovery – once from the insurer and again from the responsible party.

For instance, if an insured individual suffers damage to their vehicle due to another driver’s negligence, the insured may file a claim with their own insurance company. After the claim is settled, the insurer can then pursue the negligent driver to recover the costs they incurred for the repairs. This mechanism helps keep insurance premiums manageable by allowing insurers to reduce their overall payout on claims.

While pooling risk among policyholders is an essential function of insurance, it does not capture the intent of subrogation. The initial assessment of an insurance risk refers to underwriting practices rather than the actions taken after a claim is paid. Similarly, the calculation of a policyholder's reimbursement amount relates to the claims adjustment process, not the recovery efforts made by insurers after a payout.