What does subrogation mean in an insurance context?

In the context of insurance, subrogation refers to the insurer's right to pursue a third party that is responsible for causing a loss to the insured after the insurer has paid the claim. When an insured individual suffers a loss and makes a claim, the insurer may compensate the insured for that loss. Following payment, the insurer can step into the shoes of the policyholder and seek recovery of the costs from the party that caused the loss.

This process helps prevent the insured from receiving a double recovery (being compensated by both their insurer and the responsible third party) and allows the insurer to recoup its costs, thereby keeping premiums lower for policyholders. This right of the insurer typically arises out of the principle that a party should not have to bear the financial burden of another party’s negligence or wrongdoing.

The other options do not accurately reflect the meaning of subrogation. Determining a policyholder's fault relates more to liability assessments rather than the recovery from a third party. Cancelling an insurance policy is a different process entirely, focused on terminating coverage. Setting insurance premiums involves evaluating risk and determining the cost of coverage, which is unrelated to the recovery actions associated with subrogation.