What is 'subrogation' in the context of insurance?

Subrogation is an essential principle in insurance that allows an insurer to step into the shoes of the insured after they have paid a claim. This means that if a policyholder suffers a loss and the insurance company compensates them for that loss, the insurer has the right to pursue recovery from any third party that caused or contributed to the loss. This recovery process is crucial for insurers as it helps them manage costs and avoid excessive losses. By exercising subrogation, the insurer can recoup the funds it has paid out, which ultimately helps to keep premiums lower for policyholders.

The other choices do not accurately represent the concept of subrogation. Refusing a claim based on policy exclusions pertains to the claims process rather than the recovery of costs from third parties. An insurance policy clause that limits coverage relates to specific terms within a policy but does not involve the recovery process associated with subrogation. Lastly, documentation required to process a claim is about the administrative aspects of filing and managing claims, not about the rights and processes an insurer has post-claim payment.