What does the term "subrogation" refer to in insurance?

Subrogation refers to the right of an insurance company to pursue a third party for recovery of the amount it has paid to its insured for a covered loss. This process occurs after the insurance company has compensated the insured for their damages. Essentially, the insurer steps into the shoes of the insured to seek reimbursement from those responsible for the loss. This mechanism helps to prevent the insured from profiting from their insurance while also allowing insurers to recover losses they have paid out, which can help keep premium costs more manageable for all policyholders.

The other options do not accurately capture the essence of subrogation. The first option describes the principle of indemnity, where payment is made to the insured to cover their loss, but it does not address the recovery aspect that subrogation entails. The third and fourth options refer to specific types of policies or coverage, which do not relate to the concept of subrogation in any way. Thus, the correct answer highlights the crucial function of subrogation in the insurance process and its role in cost recovery for insurers.