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 property. The client's property insurance policy pays for the $150,000 in damages. After paying the claim, the client's insurer seeks to recover the $150,000 from the owner of the adjacent property or their insurer. This action is an example of:
- AEstoppel
- BContribution
- CSubrogation
- DArbitration
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.
Why the other options are wrong
- A. Estoppel is a legal principle preventing someone from asserting a fact or right inconsistent with a previous position.
- B. Contribution relates to how multiple insurers share a loss, not recovery from a negligent third party.
- D. Arbitration is a method of dispute resolution, not the act of recovering a payment.
Subrogation
The legal right of an insurer to legally pursue a third party that caused an insurance loss to the insured. This is done to recover the amount of the claim paid by the insurer to the insured.
- Prevents the insured from collecting twice for the same loss.
- Transfers the insured's right to recovery to the insurer.
- Aims to hold the negligent party responsible and control insurance costs.
Memory trick: Subrogation is when your insurer 'steps into your shoes' to chase the true culprit for the money they paid you.