What does a subrogation clause allow an insurer to do?

A subrogation clause is a vital component of insurance policies that grants the insurer the right to take legal action against a third party that is responsible for a loss. This means that if an insurance company pays a claim to the insured for damages caused by someone else, it can then pursue recovery from that third party to recoup the costs incurred.

This process serves multiple purposes: it helps to reduce the overall cost of claims for the insurance company, ultimately benefiting policyholders through potentially lower premiums, and it helps hold the responsible parties accountable for their actions. By using subrogation, insurers can recover funds they paid out, which allows them to maintain the financial integrity of their operations.

The other choices do not accurately reflect the function of a subrogation clause. Adjusting policy premiums, canceling the insurance policy, and modifying the terms of the coverage involve different processes and considerations that are not connected to the concept of subrogation.