Hawaii Insurance License Practice Exam

What does subrogation allow one party to do after paying for the loss of a second party?

1. Transfer their claim to a third party

2. Seek repayment from the responsible third party

3. Files a claim against the second party

4. Negotiate lower coverage premiums

The correct answer is: Seek repayment from the responsible third party

Subrogation is a legal concept that allows an insurance company or party that has paid for a loss to step into the shoes of the insured party in order to seek reimbursement from the party responsible for the loss. In this context, when one party pays for the damages or losses incurred by a second party, subrogation allows that first party to pursue recovery from the responsible third party. This process is essential in ensuring that the insurance company or the paying party can recover some or all of the expenses incurred due to someone else’s negligence or fault. It effectively helps to reduce the overall cost of claims in the insurance industry, ultimately benefiting all policyholders by preventing a cycle of increased premiums. The other options do not accurately describe the purpose or function of subrogation. Transferring claims to a third party is not the essence of subrogation, nor does it involve filing claims against the second party or negotiating lower premiums. These actions fall outside the specific legal mechanisms that define subrogation in the context of insurance.