Property and Casualty Insurance Practice Exam

What does Subrogation allow an insurer to do?

1. Negotiate a lower claim amount

2. Recover payment from the insured after a loss

3. Recover loss payments from a third party responsible for the loss

4. Increase premiums based on loss statistics

The correct answer is: Recover loss payments from a third party responsible for the loss

Subrogation is a critical concept in insurance that enables an insurer to recover costs after paying a claim. When an insurer pays for a loss suffered by the policyholder, subrogation allows the insurer to seek reimbursement from a third party that is found to be responsible for that loss. This process helps maintain the insurer's financial stability and ensures that the responsible party ultimately bears the financial burden of the loss, rather than the insurer or the insured. For instance, if a driver’s vehicle is damaged in an accident caused by another driver, and the insured files a claim to their own insurer, that insurer will pay for the damages. The insurer can then pursue the other driver (or their insurance company) to recover the costs it incurred in paying the claim. This mechanism helps prevent double recovery for the insured and encourages accountability among parties who cause damages.