What does "subrogation" refer to in insurance?

Subrogation refers to the process by which an insurance company, after paying a claim to its insured, seeks to recover costs from a third party that may have been responsible for the loss. This is significant because it allows insurers to regain some of their expenses associated with the claim, effectively ensuring that the financial responsibility does not rest solely on the insurer when the fault lies with another party.

For instance, if an individual is involved in a car accident where another driver is at fault, the insured's own insurer may pay for the damages to their vehicle. Subsequently, the insurer can pursue that other driver (or their insurance) for reimbursement of the expenses incurred. This process not only helps keep insurance costs manageable but also helps uphold the principle of indemnity—ensuring that the insured does not profit from the insurance claim but is instead restored to their prior financial position.

The other options provided do not align with the definition of subrogation. Settling a claim pertains to how a claim is finalized, policy cancellation involves terminating a policy, and policy add-ons refer to additional coverages purchased by a policyholder. None of these capture the essence of subrogation, which is fundamentally about reimbursement and the transfer of the right to collect damages from one entity to