What is "subrogation" in insurance?

Subrogation is a fundamental principle in insurance that allows an insurer to recover costs from a third party who is responsible for a loss, after the insurer has already compensated the insured. This process is crucial for preventing the insured from receiving a double recovery for the same loss. When an insurance company pays a claim to their policyholder for a loss caused by another party, the insurer obtains the right to pursue the responsible party to recoup the funds paid out.

This mechanism not only helps insurers manage their financial responsibilities but also encourages accountability by ensuring that the party at fault is held liable for their actions. It serves the overall purpose of maintaining fair practices in the insurance industry and helps to keep premiums in check by limiting losses that insurers might otherwise incur.

The other options do not accurately reflect the function of subrogation. For instance, denying a claim is a distinct process and not related to recovering costs. The negotiation process between the insurer and the policyholder is typically associated with claims handling rather than subrogation. Finally, the adjustment of premiums based on risk pertains to underwriting practices and not the recovery of costs post-claim.