Archive / Investment Adviser (Level 2) / Basics of Insurance

nism-series-xb-subrogation-total-loss-motor-insurance[ INVESTMENT ADVISER (LEVEL 2) ]

Under the doctrine of 'Subrogation' in general insurance, what right does the insurer acquire upon settling a total loss claim for a damaged motor vehicle?

[ A ]The insurer steps into the shoes of the insured, acquiring all legal rights to sue the negligent third party or salvage the vehicle wreckage to recover the settled claim amount.[ CORRECT ]

[ B ]The insurer acquires the right to confiscate all personal bank accounts of the insured.

[ C ]The insurer is legally forced to purchase a new luxury villa for the insured.

[ D ]The insurer loses all legal rights forever.

Takeaway

The correct answer is A: subrogation lets the insurer step into the insured's legal shoes to pursue recovery from the negligent third party or the salvage, after having already indemnified the insured for the total loss.

Derivation

Indemnity insurance is meant to restore the insured to their pre-loss financial position -- no more, no less. If a third party caused the accident, the insured could theoretically recover twice: once from the insurer, once by suing the wrongdoer. Subrogation closes that gap: once the insurer pays the total-loss claim, it acquires the insured's right of action against the negligent driver and title to the wreckage/salvage, letting it pursue recovery for its own account. This upholds the principle of indemnity by preventing unjust enrichment, which is exactly why examiners test the concept alongside contribution and indemnity.

Why the others fail

B — The insurer acquires the right to confiscate all personal bank accounts of the insured.

Subrogation transfers recovery/salvage rights against the wrongdoer to the insurer; it has nothing to do with seizing the insured's personal bank accounts.

C — The insurer is legally forced to purchase a new luxury villa for the insured.

Confuses indemnity settlement with an absurd unrelated benefit; insurers settle covered losses, they don't gift real estate.

D — The insurer loses all legal rights forever.

Directly contradicts the doctrine: subrogation is precisely the acquisition, not loss, of legal recovery rights by the insurer.