What happens when subrogation demands come into your organization? If you are like many in the industry, then responding is not necessarily a high priority. In the eyes of some handling these types of claims, it is often viewed as being just another carrier on the other end of the demand.

But what happens when the subrogation demand comes in and sits untouched for a month, resulting in an arbitration or litigation filing? What if the demand is reviewed, but improperly negotiated? What if it is simply rubber stamped, despite the demanding carrier overpaying the cost of repairs, loss of use, towing, rental or storage? What if they paid items often not even owed, such as diminished value or administrative fees?

During my tenure as a claims and quality assurance business leader with multiple Top 10 property and casualty (P&C) insurers, subrogation response was a source of significant leakage. It also provided a tremendous opportunity to implement a process that resulted in timely and accurate resolution.

While there are no hard and fast rules for subrogation response, there are steps that can be taken to dramatically improve results. In looking at the industry as a whole, there are three prevailing methods for handling auto subrogation response:

Liability Adjuster Review and Pay. The subrogation demand goes to the liability adjuster who reviews the claim for payment. The challenge in this model is that many liability adjusters don't have experience in the material damage or auto repair side of the business. In some cases, these “low priority” demands are simply rubber stamped.

Estimate Re-keying. In this model, the inbound demands are sent to a material damage adjuster or appraiser to re-key. While this can result in some estimate reduction, it is a time-consuming process and often lacks a containment mechanism for excessive rental, diminution of value, or administrative fees.

Estimate Redlining. Adjusters will review the estimate and redline certain items that stand out. While quicker than re-keying, this solution is less comprehensive and often limited in effectiveness, especially when one is seeking out alternative parts or attempting to adjust labor hours.

In many instances, the savings found through re-keying or redlining aren't realized when the claim is sent back to the liability adjuster to negotiate. While the identified savings may be captured, the more important metric is the realized savings. For example, if an insurer uses a re-keying method and the appraiser reduces the estimate by 10 percent, then how much of that savings is actually realized after the negotiation process? In addition, is the realized savings taking into account the time it takes to re-key the estimate?

Another critical oversight is comparative negligence. When reviewing claims in your organization, does there appear to be a disproportionate number of liability decisions at either zero or 100 percent? If my experience spanning more than 20 years of claims leadership is any indication, then the answer is “yes.”

The reality is that far more accidents have shared culpability than most people realize. According to Jury Verdict Research, a national organization that tracks such data, rear-end auto accidents accounted for only 45 percent of auto cases adjudicated, with intersection collisions, lane changes, chain reactions, and parking lot scenarios comprising the remainder. In other words, a lot of claims in which there was shared liability.

As an insurer, you certainly should not expect to set a benchmark quite so high, as very few claims actually make it to trial. What you can do, however, is bank on the fact that money is being left on the table if fewer than 35 percent of your collision claims in pure comparative states are closing without comparative fault. Of course, this benchmark should be adjusted downward for modified comparative and contributory jurisdictions.

To attain improvement in this area, the challenge is to effectively train your staff to not only identify opportunities, but to also effectively negotiate. When considering subrogation response, there are seven key areas where your organization can benefit while gaining a competitive edge in the marketplace.

1. Estimatics opportunities. While this can be partially accomplished by re-keying or redlining, why not take the next step and utilize automation to identify opportunities? This step can provide an improvement in both opportunity recognition and productivity.

2. Historical alternative parts identification. Subrogation responses can be significantly impacted by identifying if used or aftermarket parts were available on the date in history when the claimant carrier wrote their estimate.

3. Adjust the fluff. How much are you being billed to tint paint, feather edge, cover cars and dispose of hazardous waste. While not the bulk of the estimate, fluff can really add up.

4. Diminution of Value. There are rarely statutory guidelines that govern how much is owed, if anything, due to diminution of value. After all, is there really any diminished value until the owner sells the car, discloses the accident and suffers diminished value as a result of the disclosure?

5. Comparative Negligence. This is arguably one of the most overlooked aspects of the subrogation response process. By effectively understanding the principles of shared liability, claims adjusters can more effectively apply the laws in their given states. This is also an aspect of the claims process that can be measured and continually improved upon.

6. Loss of use. Did the claimant really need their rental vehicle for thirty days when the estimate called for 16 hours of repair time? The reality in many claims organizations is that rental is not well managed. In some cases, the process of overseeing rental is even outsourced to the rental company who is in the business of increasing their own revenue, not yours. By applying a reasonable standard, such as one day of rental for every few hours of repair, one can effectively reduce what is owed in this regard.

7. Towing and storage. A basic premise of indemnification includes the concept of mitigation of damages. It is incumbent upon all claim parties to ensure that vehicles are not incurring excessive towing and storage and that they take reasonable steps to mitigate these costs.

While there are sometimes other critical aspects of the process worthy of consideration, these six key areas will provide carriers with the fundamental building blocks for process improvement. Of course, the ultimate success will be determined by the negotiation skills of the adjusting team. Remember, it is easy to say what you think something is worth; it's an entirely different story to convince others.

As subrogation demands come in, consider the steps that are being taken to identify opportunities. While there are many aspects of claims that can often be improved to benefit the organization, subrogation response provides an immediate financial gain because those effectively handling this process will gain a competitive edge over those who are not.

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