Los Angeles Claims Adjuster Property and Casualty Practice Exam 2026 - Free Claims Adjuster Exam Questions and Study Guide

Subrogation is a legal process in the insurance industry where an insurance company gains the right to pursue a third party to recover costs it has paid out on behalf of the insured. This concept is crucial because it allows insurers to recover the amount they have compensated the insured for their loss, particularly in situations where another party is at fault.

The correct answer highlights that subrogation involves transferring recovery rights to the insurer. When policyholders receive compensation for their losses, they may not always be in the best position to pursue a recovery from the negligent party. By transferring these rights, the insurer can take the necessary legal action to seek reimbursement. This process not only helps the insurer mitigate its losses but also keeps insurance premiums more stable for policyholders by allowing insurers to recoup expenditures.

In contrast, the other options do not accurately reflect the nature of subrogation. Providing a lump sum to the insured pertains to initial compensation rather than recovery, defaulting on repair costs does not relate to the concept of subrogation, and payment for breaches in contract doesn't directly connect with how recovery works in the context of claims. Thus, focusing on the transfer of recovery rights accurately captures the essence of subrogation in insurance claims.