Property & Casualty Insurance Exam (National Portion)Casualty InsuranceEasy
A client's business property is damaged by a burst pipe. Their own property insurance policy covers the damage. However, the client's insurer determines that a negligent third-party contractor was responsible for the faulty installation of the pipe. What process allows the client's insurer to seek recovery from the at-fault contractor?
- AArbitration
- BSubrogation
- CAppraisal
- DContribution
Show answer & explanationAnswer & explanation
Correct answer: B. 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 it paid to the insured from the at-fault party.
Why the other options are wrong
- A. Arbitration is a method of dispute resolution, not a process for an insurer to recover from a negligent third party.
- C. Appraisal is a process to determine the amount of loss when the insured and insurer disagree on the value of damaged property.
- D. Contribution relates to how multiple insurers share a loss, not how an insurer recovers from a negligent third party.
Subrogation
The legal right of an insurance company to seek recovery from a third party that caused a loss to the insured, after the insurer has paid the insured for that loss.
- Prevents the insured from collecting twice for the same loss.
- Transfers the insured's right to sue the at-fault party to the insurer.
- Common in property and casualty insurance.
- Helps keep insurance costs down by recovering losses.
Memory trick: Subrogation: Step In, Sue, Recover.