What does "subrogation" mean in insurance?

Subrogation in insurance refers to the right of an insurer to step into the shoes of the insured after the insurer has paid out a claim. This allows the insurer to pursue recovery from a third party that may have caused the loss for which the claim was made. Essentially, once the insurer compensates the insured for a loss, they can seek reimbursement from the responsible party, thereby recovering some or all of the amount paid out.

This mechanism serves a dual purpose: it helps to reduce the overall costs to the insurer, which can, in turn, potentially benefit all policyholders through lower premiums; and it enables the responsible party to be held accountable for their actions. By exercising the right to subrogation, the insurer effectively maintains the principle that the insured should not profit from a loss, but rather have their actual losses compensated.

The other options describe different concepts within the insurance industry. Pooling of risks relates to the fundamental operation of insurance companies, where they group together many policies to spread financial risk. Estimating claim losses is part of the claims process but does not involve the recovery of costs from a third party. The agreement of policy terms pertains to the initial contract between the insurer and insured but does not capture the essence of subrog