Final answer:
Subrogation is the term for transferring an insured's legal right of recovery to the insurer after a claim is paid. It prevents double recovery and helps in keeping insurance costs down. This term is key to understanding how insurance claims and responsibility after an event is managed.
Step-by-step explanation:
The process by which an insurer gains an insured's legal right of recovery after paying out a claim is known as subrogation. This occurs in insurance policies, which are methods of protecting a person from financial loss. Policyholders make regular payments to an insurance entity, and in the event of a covered loss, the insurance company pays out to remunerate the affected party.
The concept of coinsurance plays a role in this; it refers to the situation where an insurance policyholder pays a percentage of the loss, and the insurance company covers the remaining cost. Subrogation ensures that the insurance company can recover the amount paid out to the policyholder by stepping into their shoes to claim against any third party responsible for the loss.
This is a mechanism to prevent the insured from recovering the loss amount from both the insurer and a responsible third party, thus avoiding a 'double recovery' or a financial gain from the loss. Subrogation is a critical aspect of the insurance system as it helps in mitigating costs and premiums for policyholders while also helping prevent a moral hazard where insured individuals might not take adequate precautions since they have coverage.