What is 'subrogation' in insurance?

Subrogation is a key concept in insurance that allows an insurer to step into the shoes of the insured after compensating a loss. When an insurance company pays out a claim to its policyholder for damages, that company may have the right to pursue recovery from any third party that may have been responsible for those damages. This process helps the insurer recover some or all of the costs associated with the claim.

The right of subrogation is beneficial for insurance companies as it helps them manage costs and keep premiums more stable for policyholders. When an insurer succeeds in recovering damages from a responsible party, that money can be used to offset the costs of claims and maintain the financial health of the insurance pool.

The other options describe different aspects of insurance practices but do not accurately describe subrogation. Increasing premiums after a claim relates to underwriting practices, negotiating lower claim payouts involves adjusting claim amounts based on policy limits or coverage specifics, and a clause restricting coverage pertains to the terms and limitations of the insurance contract itself.