Why is it necessary for an insurer to have the right to subrogate?

Subrogation is an essential principle in insurance that allows an insurer to step into the shoes of the insured following a loss. When a claim is paid to the insured for a loss that was caused by a third party's negligence or wrongful act, the insurer has the right to pursue that third party to recover the amount it has paid out. This process is critical for several reasons.

First, subrogation helps to ensure that the responsible party ultimately bears the financial burden of their actions, thereby promoting accountability. This is particularly important in maintaining fair practices within the insurance industry, as it prevents the insured from receiving a windfall from a claim while also allowing the insurer to reclaim funds from the responsible party.

Moreover, the practice of subrogation assists insurance companies in managing their financial resources. By recovering costs from third parties, insurers can mitigate their losses and keep premium rates stable for their policyholders. Consequently, having the right to subrogate is vital for the insurer's financial health and operational sustainability.

In contrast, options regarding reducing the number of claims, cancelling policies, or controlling premium rates do not directly relate to the fundamental purpose of subrogation, which specifically focuses on recovery of funds from third parties. Understanding the concept of subrogation is crucial