How does the insurance concept of "subrogation" work?

The concept of "subrogation" is a fundamental principle in insurance that allows an insurer to step into the shoes of the insured after the insurer has compensated the insured for a loss. This means that once the insurance company pays the claim to the insured, it gains the right to pursue recovery of those costs from any third party that caused the loss. This process helps to hold the responsible party accountable and prevents unjust enrichment, ensuring that the insurer can recover some or all of the funds it disbursed to the insured.

For instance, if a policyholder is involved in a car accident caused by another driver, the insurance company may pay the claims to the policyholder. Following this, the insurance company can seek to recover that amount from the at-fault driver's insurer. This mechanism not only helps in managing losses for the insurer but also keeps premiums in check by avoiding unnecessary out-of-pocket expenses for insurance payouts that can be recovered from responsible parties.

Other choices do not accurately reflect the true nature of subrogation. For example, the option regarding collecting multiple benefits from different insurers misrepresents how insurance compensation works, as subrogation solely focuses on the right of recovery from third parties rather than multiple payouts from different insurers for the same loss.