What is the process of "subrogation"?

Subrogation is a critical concept in the insurance industry that allows an insurance company to step into the shoes of the insured after it has paid for a loss. In this process, once the insurer compensates the insured for a covered loss, it gains the right to pursue recovery from any responsible third party. This helps the insurer to recoup some or all of the payout it made to the policyholder, thereby reducing its overall losses and potentially lowering premiums for all policyholders.

For instance, if a driver is involved in an accident that is the fault of another driver, and the insured’s insurance company pays for the damages to the insured's vehicle, the insurer has the right to seek compensation from the at-fault driver (or their insurance). This process is beneficial not only to the insurer but also reinforces accountability among parties involved in accidents by ensuring that those at fault bear the financial responsibility for the damages caused.

Understanding the mechanics of subrogation is essential for both insurers and insured individuals, as it impacts claims handling, pricing strategies, and the overall functioning of the insurance market.