Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What does subrogation allow an insurer to do?

1. To deny a claim after payment is made

2. To pay the claim and then assume the legal rights of the insured against a third party

3. To increase the premium after a loss

4. To share the claim amount with other insurers

The correct answer is: To pay the claim and then assume the legal rights of the insured against a third party

Subrogation is a critical principle in insurance that allows an insurer to step into the shoes of the insured after a claim has been paid. This means that once an insurer has compensated the insured for their loss, they gain the right to pursue any third party that may have contributed to or caused that loss. This process is essential as it helps the insurer recover the amount they paid to the insured, thereby minimizing their overall financial loss. For example, if an insured individual suffers property damage due to the negligence of another party, the insurer can pay the claim to the insured and then seek reimbursement from the responsible party. This not only protects the financial interests of the insurer but also helps keep insurance costs stable by preventing the insurer from absorbing the entire claim amount. The other options do not accurately reflect the purpose of subrogation. Denying a claim after payment contradicts the principle of indemnity, while increasing premiums does not relate to the recovery aspect of subrogation. Sharing claims with other insurers is also not relevant to subrogation, which focuses on the recovery from a third party rather than reallocating claim responsibilities among various insurers.