What is subrogation in the context of insurance contracts?

Subrogation in the context of insurance contracts refers to the process by which an insurance company takes over the rights of its insured to seek damages from a third party who is responsible for a loss. When an insurer pays a claim to an insured individual, the insurer gains the right to pursue recovery from the negligent party who caused the loss. This right to pursue the responsible third party is what is termed "subrogation."

This mechanism protects the financial interests of the insurer by allowing them to recover the amount they paid out to the insured. Additionally, it helps to ensure that the negligent party ultimately bears the financial responsibility for their actions, rather than the insurance company or the insured. This process supports the principle of indemnity, ensuring that the insured does not profit from a loss but is restored to their original financial position before the loss occurred.

The other options do not accurately capture the essence of subrogation. For instance, the duty to renew a policy annually relates to the continuation of insurance coverage rather than the rights to claim against third parties. An agreement to lower premium costs does not have a connection to the process of recovering damages after a loss has been paid. Finally, a method of determining policy limits speaks to the scope of coverage provided by the insurance