Property & Casualty Insurance Exam (National Portion)Casualty InsuranceEasy
A client's commercial building is damaged by a fire caused by a faulty electrical system installed by a contractor two years prior. The client's property insurance policy pays for the damages. Afterward, the client's insurer seeks to recover the amount paid from the at-fault contractor. This process is known as:
- AContribution
- BAppraisal
- CSubrogation
- DArbitration
Show answer & explanationAnswer & explanation
Correct answer: C. Subrogation
Subrogation is the legal right of an insurer to step into the shoes of the insured and pursue a third party who caused the loss, in order to recover amounts paid out under the insurance policy. This prevents the insured from recovering twice (once from their insurer and once from the at-fault party) and places the financial burden on the responsible party.
Why the other options are wrong
- A. Contribution refers to how multiple insurers share a loss, not an insurer recovering from a third party.
- B. Appraisal is a process to resolve disagreements about the value of a property loss.
- D. Arbitration is a dispute resolution method where a neutral third party makes a binding decision.
Subrogation
Subrogation is the legal right of an insurer to pursue a third party that caused an insurance loss to the insured. It allows the insurer to recover the amount of the claim paid to the insured from the responsible party.
- Transfers the right to sue from the insured to the insurer.
- Prevents the insured from collecting twice for the same loss.
- Places financial responsibility on the negligent party.
- Common in property and liability claims.
Memory trick: SUBROGATION: The insurer STEPS IN to chase the CULPRIT for money.