What does the term 'subrogation' mean in insurance?

The term 'subrogation' in insurance refers to the insurer's right to pursue a third party to recover the amount paid to the policyholder for a claim. This concept allows an insurance company to step into the shoes of the insured after they have compensated them for a loss. For example, if an auto insurer pays a claim for damages caused by another driver who was at fault in an accident, the insurer can then seek reimbursement from the at-fault driver's insurance company or from the driver directly.

Subrogation serves several important purposes within insurance practices. It helps to keep insurance premiums lower by allowing insurance companies to recover some of their costs after making a payout. It also prevents insured individuals from receiving compensation twice for the same loss—once from their insurer and again from the responsible party.

Other options do not correctly describe the function of subrogation. The right to cancel a policy pertains to the policyholder's rights and not related to recovery processes. Underwriting new insurance applications is an entirely separate aspect of the insurance process that focuses on evaluating risk before issuing a policy. Determining policy premiums involves assessing factors such as risk and coverage options but does not pertain to the concept of subrogation.