What does the term 'subrogation' refer to in insurance?

The term 'subrogation' in the context of insurance primarily refers to the process by which insurers seek reimbursement from liable parties after paying a claim to their insured. When an insurance company compensates an insured individual for a loss caused by another party, subrogation allows the insurer to step into the shoes of the insured and pursue recovery from the party that is actually responsible for the damage.

This process is vital for insurance companies as it helps them recover some of the payouts made on claims, thereby maintaining the financial health of the insurance pool and keeping premiums manageable for policyholders. The ability to recoup costs is fundamental to the functioning of the insurance industry.

The other options do not accurately define subrogation. Recovering payments from an insured relates more to the collection of unpaid premiums or the deductible; the obligation to pay claims promptly speaks to customer service and efficiency but does not involve the concept of subrogation; and informing policyholders about changes in policy pertains to communication and transparency in the insurer's relationship with their clients, which is separate from the mechanism of seeking reimbursement afforded by subrogation.