Arizona Adjuster Practice Exam

In terms of insurance claims, what does the term "subrogation" refer to?

1. The process of denying a claim

2. Seeking recovery from a third party

3. Compensating the insured directly

4. Mediate a settlement

The correct answer is: Seeking recovery from a third party

Subrogation refers to the process where an insurance company seeks to recover the amount it has paid to its policyholder for a loss from a third party that is responsible for that loss. This typically occurs after the insurer has compensated the insured for their claim, and it allows the insurer to pursue the liable party to recover those costs. By engaging in subrogation, the insurance company can recoup its expenses, and this process helps keep insurance premiums lower for all policyholders by preventing losses from being absorbed exclusively by the insurer. This concept is crucial in risk management; it ensures that the party at fault ultimately bears the financial responsibility for the damages. For instance, consider a scenario in which a driver causes an accident and the victim's insurance pays for the repairs. Through subrogation, the victim's insurance will seek repayment from the at-fault driver's insurance, ensuring that the financial burden is placed on the correct party. The other options do not accurately describe subrogation. Denying a claim involves the refusal of coverage by the insurer, compensating the insured directly refers to paying out a claim without seeking recovery from others, and mediating a settlement pertains to negotiating an agreement between parties, none of which reflect the nature of subrogation. This