Property & Casualty Insurance Exam (National Portion)Casualty InsuranceMedium
A client's commercial building is damaged by a fire caused by a faulty electrical system in an adjacent building. The client's commercial property insurance pays for the repairs. Subsequently, the client's insurer seeks reimbursement from the owner of the adjacent building's liability insurer. This process is known as:
- AContribution
- BApportionment
- CSubrogation
- DIndemnification
Show answer & explanationAnswer & explanation
Correct answer: C. Subrogation
Subrogation is the legal right of an insurer to pursue a third party that caused an insurance loss to the insured. This is done to recover the amount of the claim paid to the insured. In this scenario, the client's insurer pays the client and then steps into the client's shoes to pursue the negligent party (the adjacent building owner) or their insurer.
Why the other options are wrong
- A. Contribution typically refers to how multiple insurers covering the same risk share a loss.
- B. Apportionment is the method of dividing losses among multiple parties or insurers, often related to contribution or pro-rata clauses.
- D. Indemnification is the principle by which an insured is restored to their pre-loss financial condition, which the client's insurer does by paying the client.
Subrogation
Subrogation is the legal right of an insurer to recover the amount of a claim paid to an insured from the third party who caused the loss.
- Prevents the insured from collecting twice for the same loss.
- Allows the insurer to step into the insured's shoes.
- Common in property and casualty insurance.
- Helps control insurance costs.
Memory trick: Insurer pays me, then goes after them.