What does the term “subrogation” mean in the context of insurance?

Subrogation is a key principle in insurance that allows an insurer to take legal action against a third party that may be responsible for a loss after the insurer has compensated the insured for their claim. When an insurer pays a claim to the policyholder, they may seek to recover the amount paid from the party that caused the damage or loss. This process serves multiple purposes, including ensuring that the liable party ultimately bears the financial responsibility for the loss and preventing the insured from receiving a double recovery for the same incident. It also helps keep premiums lower by allowing insurers to recoup costs associated with claims.

The other options do not accurately reflect the meaning of subrogation. The right to cancel a policy pertains to an insurer's authority to terminate a contract under certain conditions, while underreporting claims refers to the intentional misrepresentation of claim amounts. Lastly, the adjustment of policy premiums is an entirely separate process related to how insurers set and modify coverage costs, which does not involve the pursuit of third-party liability.