Which of the following best describes subrogation?

Subrogation is best described as the substitution of one party for another in a debt or insurance claim. This process occurs when an insurance company pays a claim to its insured and then acquires the right to pursue recovery from the third party that caused the loss. Essentially, the insurer steps into the shoes of the insured to claim reimbursement for the compensation paid out.

This mechanism is critical in the insurance industry as it allows insurers to recover costs and keeps insurance premiums more manageable for policyholders. For instance, if a driver is involved in an accident where another party is at fault, and their insurance company pays for the damages, the insurer can then seek to recover that amount from the at-fault party or their insurance.

The other options do not accurately represent the concept of subrogation, as they refer to different legal or financial processes. Understanding subrogation is vital for a business analyst in the insurance field, as it plays a key role in managing claims and financial recovery.