Property & Casualty Insurance Exam (National Portion)Casualty InsuranceHard
A client's business is sued for product liability. Their Commercial General Liability (CGL) policy contains a standard subrogation clause. After settling a claim for $500,000 with the injured party, the insurer discovers that a component manufactured by a third-party supplier was defective and directly caused the injury. What action would the insurer likely take next, based on the subrogation clause?
- ADeny future claims related to that product line.
- BRequire the client to pay a portion of the settlement amount.
- CIncrease the client's premium for the next policy period.
- DSeek reimbursement from the third-party component manufacturer.
Show answer & explanationAnswer & explanation
Correct answer: D. Seek reimbursement from the third-party component manufacturer.
Subrogation is the insurer's right to pursue a third party that caused an insurance loss to the insured. After paying the insured's claim, the insurer steps into the shoes of the insured to recover the amount paid from the responsible third party (the component manufacturer in this case).
Why the other options are wrong
- A. Denying future claims is not a direct action of subrogation; it relates to underwriting decisions or policy exclusions.
- B. The client would only pay a portion if there was a deductible or coinsurance, which is not related to the insurer's subrogation rights against a third party.
- C. Premium adjustments are based on risk and claims history, not directly on a subrogation opportunity.
Subrogation
The right of an insurer, after paying a claim to the insured, to legally pursue a third party that caused the loss to recover the amount paid. It prevents the insured from collecting twice for the same loss and places the burden of loss on the responsible party.
- Insurer steps into insured's shoes.
- Recovers from at-fault third party.
- Prevents double recovery by insured.
- Common in property and liability insurance.
Memory trick: Insurer pays, then chases the real culprit.