South Dakota Crop Insurance Practice Exam

Under which principle does the insured transfer their right to collect damages to the insurer?

1. Indemnity

2. Subrogation

3. Risk sharing

4. Insurance assignment

The correct answer is: Subrogation

The principle under which the insured transfers their right to collect damages to the insurer is known as subrogation. This principle allows an insurance company that has compensated the insured for a loss to pursue legal action against third parties who may have caused that loss. Essentially, once the insurer pays the claim, they gain the right to "step into the shoes" of the insured and seek recovery from the party at fault, thus preventing the insured from collecting damages twice for the same loss. Subrogation is essential in the workings of insurance because it helps to keep costs down. If insurers are able to recover some of the amounts they’ve paid out from the party responsible for the loss, it can help keep premiums lower for all policyholders. In contrast, principles like indemnity focus more on restoring the insured to their pre-loss financial position, while risk sharing typically involves spreading the risk among multiple parties. Insurance assignment refers to the transfer of rights or benefits under an insurance policy, which is a separate concept from what subrogation entails.