What is subrogation in insurance?

Subrogation in insurance refers to the process through which an insurer seeks to recover costs from a third party who is responsible for a loss after the insurer has already paid a claim to the insured. When an insurance company compensates its policyholder for a covered loss, it may acquire the right to pursue recovery from the responsible party. This allows the insurer to recoup some or all of its payouts, thus preventing the policyholder from receiving a double recovery from both the insurer and the liable party.

This mechanism is important because it helps to maintain the financial integrity of the insurance system by ensuring that those responsible for damages ultimately bear the financial burden, rather than the insurer alone. Subrogation prevents fraud and helps keep premiums lower for policyholders. The other options mentioned do not accurately represent the concept of subrogation; for example, transferring risk to a third party relates more to insurance policies that involve risk management strategies rather than the recovery of costs after a claim.