State Farm Insurance License Practice Exam

What is the function of subrogation in insurance?

1. To enable direct payment to the insured

2. To prevent double recovery of a loss

3. To collect interest on unpaid claims

4. To allow insurers to pay out larger claims

The correct answer is: To prevent double recovery of a loss

Subrogation serves the vital purpose of preventing double recovery of a loss. When an insurance company pays a claim to the policyholder for a covered loss, the insurer often has the right to pursue recovery from any third party that may have been responsible for causing that loss. This process ensures that the insured is compensated fully for their loss without receiving more than what is just. If subrogation did not exist, an insured person could potentially claim damages from both their insurer and the liable third party, leading to financial gain beyond their actual loss. By enabling insurers to recover amounts they have paid out, subrogation helps maintain fairness in the insurance system and ensures that each party is held accountable for their role in the situation that caused the loss.