What is meant by "subrogation" in insurance?

Subrogation refers to the right of an insurer to step into the shoes of the insured after compensating them for a loss, allowing the insurer to pursue recovery from a third party that may have caused that loss. When an insurance company pays out a claim, it incurs a financial loss, and subrogation serves as a mechanism for the insurer to reclaim those costs from the party responsible for the damage or loss. This process helps keep insurance premiums lower for all policyholders since it encourages accountability on the part of responsible parties and allows insurers to recover some of their expenditures.

The concept of subrogation is vital in the insurance landscape because it ensures that one party is not unjustly enriched and holds the responsible party liable for their actions. It's an essential part of how the insurance system functions effectively, maintaining a balance among all parties involved – the insurer, the insured, and the third party at fault.