What is "subrogation" in the context of insurance?

Subrogation refers to the right of an insurer to pursue a third party that may have caused an insured loss after the insurer has paid out a claim to the insured. This legal process allows the insurance company to recover some or all of the costs incurred in settling the claim. For instance, if a driver's insurance company pays for damages resulting from an accident caused by another driver, the insurance company can seek reimbursement from the other driver's insurer.

Understanding subrogation is crucial because it helps keep insurance premiums lower; when insurers can recover losses from third parties, they can reduce the overall costs that are ultimately passed on to policyholders. This concept emphasizes the responsibility and recourse options available to insurers to mitigate their financial exposure after payouts.