Final answer:
The transfer of the right of recovery from the insured to the insurance company after a loss is compensated is known as subrogation. This allows the insurance company to take steps to recover the paid amount from the responsible party, which is essential for upholding the principle of indemnity.
Step-by-step explanation:
The transfer of the right of recovery from the insured to the insurance company is known as subrogation. This concept is a fundamental principle in the insurance industry where, after compensating the insured for a covered loss, the insurance company steps into the shoes of the insured to recover the amount paid from the party responsible for the loss. Subrogation is crucial as it allows insurance companies to hold the at-fault party accountable and helps in mitigating the costs of insurance claims, which can help keep insurance premiums lower for policyholders.A simple example of this is when your insurance company pays for the damages to your car after an accident, and then pursues the other driver's insurance company to recover those costs if the other driver was at fault.In conclusion, subrogation is a key component of the insurance process. It supports the principle of indemnity, ensuring that insured individuals are compensated for their losses, while also allowing the insurance company to recoup funds from the party responsible for the loss.