What does subrogation allow an insurer to do?

Subrogation is a crucial principle in insurance that allows an insurer to step into the shoes of the insured after paying out a claim. This mechanism enables an insurer to pursue recovery from third parties who are responsible for causing the damages for which the insurer has compensated the insured.

When an individual files a claim due to an accident or loss and the insurer pays for the damages, subrogation permits the insurer to seek reimbursement from the party at fault. The idea is that the insured should not receive a windfall from insurance; therefore, if a third party is responsible for the loss, the insurer can recoup its costs by taking legal action against that party. This recovery process helps keep insurance premium costs lower for all policyholders, as it allows insurers to recover some of what they pay out in claims.

The other options do not accurately describe the purpose of subrogation. For instance, canceling a policy due to concealed risks pertains to underwriting issues rather than recovery. Modifying contract terms involves negotiations or amendments, not the recovery of costs from third parties. Additionally, issuing payments directly to policyholders relates to the payment process rather than the insurer's right to recover funds from a responsible third party.