What does "subrogation" mean in the context of insurance?

Subrogation refers to the right of an insurer to pursue a third party to recover costs after they have paid a claim on behalf of their insured. This legal principle allows the insurer to stand in the shoes of the policyholder to claim back the amount of the loss from those responsible for it.

In practice, when an insurer compensates a policyholder for damages caused by a third party, the insurer gains the right to seek reimbursement from that third party. This process helps to ensure that the financial burden of the loss ultimately falls on the party who was at fault, rather than on the insurance pool and, by extension, the premium-paying public.

This concept is crucial in managing claims costs and helps to maintain the balance of the insurance system, where losses are ideally funded by the party responsible for the loss, rather than the insurer.