Property and Casualty Insurance Practice Exam

In which scenario would Subrogation be commonly applied?

1. When the insured wishes to claim under additional coverage

2. When a third party is determined to be liable for the loss

3. When the insured disputes the valuation of the loss

4. When there is a policy lapse and renewal is necessary

The correct answer is: When a third party is determined to be liable for the loss

Subrogation is a legal principle that allows an insurance company to pursue a third party that caused a loss to the insured. This process helps the insurer to recover the amount paid out for the claim from the responsible party. In the scenario where a third party is determined to be liable for the loss, subrogation is commonly applied because it enables the insurer to step into the shoes of the insured and seek reimbursement from the third party whose actions led to the loss. This is a vital aspect of insurance practices as it helps to keep premiums lower by ensuring that responsible parties are held accountable for their actions, ultimately allowing the insurance company to recuperate some of the costs incurred by the claims they have paid out. In contrast, scenarios involving additional coverage claims, disputes over valuation of losses, or policy lapses do not typically invoke the subrogation process. Each of those situations pertains to different facets of the insurance relationship and does not involve a third party's liability directly leading to the loss.