In insurance terminology, what does "subrogation" refer to?

Subrogation is a crucial concept in insurance that refers to the right of an insurer to pursue a third party to recover costs it has paid on behalf of the insured. This process occurs after the insurer has compensated the insured for a loss caused by another party's liability. By pursuing subrogation, the insurer attempts to recoup the amount paid by taking legal action against the responsible party or their insurance provider.

This mechanism helps keep insurance costs manageable, as it allows insurance companies to recover some financial losses associated with claims. Thus, the insurer can maintain lower premium rates for policyholders. Understanding subrogation is essential for both adjusters and policyholders, as it illustrates the relationship between liability, compensation, and the mitigation of costs within the insurance framework.