What does "subrogation" refer to in the context of insurance?

Subrogation in the context of insurance refers to the right of an insurer to step into the shoes of the insured to recover costs from a third party that caused a loss. When an insurance company pays out a claim to its policyholder, it may seek reimbursement from a party that was responsible for the damage. This process helps prevent the insured from collecting twice for the same loss and encourages the responsible party to pay for the damages they caused.

This mechanism is an essential part of insurance, as it allows insurers to maintain more stable rates and keep premiums lower for policyholders, knowing they can recover some of their costs from third parties. It demonstrates how insurance operates collaboratively to manage risk and losses effectively, thus enhancing the overall efficiency of the insurance system. The other options do not accurately describe this legal and financial process, focusing instead on different aspects of insurance related to claims handling or premium calculations.