Subrogation entitles an insurance company to transfer risk by successfully recovering a paid loss from a negligent third party — the tortfeasor who caused the loss.
Most everyone would agree getting money back is a good thing, but for many years the subrogation process was the step-child of the claims department and often seen simply as an accommodation to retrieve an insured’s deductible.
Forty years ago the position of a subrogation recovery representative was often perceived as either an entry position or stepping stone in to a more prestigious position in claims — or one to ease out a claims employee into retirement.
A change in emphasis
A few decades ago insurance carriers began recognizing the significant role the subrogation recovery process had to the profitability of their organizations.
They began designing subrogation programs with the sole focus of increasing recoveries and measuring recovery to paid loss. Some companies developed centralized or dedicated departments staffed with highly trained recovery specialists who typically worked in conjunction with the claims department to handle the subrogation function.
Others engaged outside resources to fully or partially support their internal subrogation initiatives. Shortly thereafter, large brokerages and risk managers began educating commercial self-insured policyholders and those carrying significant deductibles about the correlation between subrogation recoveries and improved experience ratings, which may lead to increased savings by way of lower premiums.
As technology has advanced, new and more sophisticated processes and claims platforms have evolved to expedite and enhance claims handling. Some of the new claims platforms address the subrogation function by forcing the claims person to consider a recovery opportunity before the file can be electronically closed. Most recently, predictive analytics have been designed to forecast which losses have the greatest potential for a successful recovery, allowing the person responsible for companywide subrogation results to properly allocate resources.
A source for help
In 2003, the National Association of Subrogation Professionals (NASP) began developing benchmarking studies which allow a company to measure its success against others. These studies help to identify realistic and achievable targets as well as best practices needed to improve company results.
NASP was established in 1998 as a not-for-profit trade association to meet the needs of the subrogation community and to provide educational opportunities for insurance professionals. The association is a great resource, and it has grown substantially over the past 18 years to become the primary source of interactive support for subrogation professionals, which includes educational webinars, chapter meetings and an annual conference which offers continued education to its members.
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Workers' Compensation claims is one area where subrogation can be effective. (Photo: iStock)
Still, many companies and self-insureds frequently leave large quantities of revenue unrecovered each year by failing to properly pursue subrogation interests. Recent studies estimate that up to 15% of carrier claims are closed with a missed subrogation opportunity.
As businesses face constantly increasing insurance premiums, many have chosen to insure their own risk by implementing a self-insurance program, handling claims internally or engaging the services of a third-party administrator.
But few self-insured companies have implemented recovery programs that would include a forensic look-back of their paid losses. This is unfortunate because it would be a win-win at no cost to perform and the probability of finding some degree of missed recoveries is high, especially for companies located in multiple states. Recovery statutes vary widely, which makes it increasingly difficult for a risk manager to have detailed recovery knowledge in all 50 states.
Areas to emphasize
The lines of coverage most typically recognized as having potential recovery are first-party Auto and property claims.
A claims person well trained in Auto claims, theories of liability and rules of negligence can draw a conclusion as to which party is responsible for causing an accident once the investigation has been completed. Many property losses also offer opportunities for successful recoveries, but more-complex issues involving product failure or faulty installation may require a high degree of expertise and take longer to resolve.
Claims payments involving workers injured in the course of their employment can often represent high-dollar payments for medical and indemnity — and much higher for catastrophic injuries.
Workers’ Compensation liens, loss transfer recoveries and direct action subrogation can represent a significant source of revenue, particularly when the injury was a result of an auto accident, faulty product or premises liability. Again, these claims typically require a higher level of expertise to properly investigate and develop a theory of negligence, as well as to articulate the complicated state statutes which exist nationwide.
Taking proper steps
The handling of subrogation claims should begin when the loss occurs. Generally, the faster a recovery opportunity is recognized, the greater the chance for a successful outcome. The preservation of evidence is crucial to success, and it is imperative for policyholders and self-insureds to be informed after a loss about the importance of retaining any evidence which may need to be inspected in the future. Savvy risk managers and brokers should develop a rapport with the claims professionals to keep on top of the recovery possibility as the investigation unfolds.
Not all losses warrant an extensive subrogation effort, but ultimately the subrogation process positively enhances the bottom line of every organization. Subrogation success lies with having a team that understands the concept of subrogation, or more importantly the financial impact of a good subrogation program.
“Subro awareness” training should routinely be conducted to reinforce proper identification of claims with subro potential. Participation in subrogation awareness training can often assist a carrier or self-insured for mere pennies in comparison to not obtaining the knowledge and potentially missing huge recoveries. There are many webinars provided by various subrogation counsel in every state on just about every aspect of recovery, and certainly a well-seasoned recovery vendor can provide such training without cost to the carrier or self-insured entity.
An excellent resource for subrogation education especially for self-insureds is the National Association of Subrogation Professionals. In addition to offering educational conferences each year, NASP has added courses such as Subro College and the Certified Subrogation Recovery Professional designation. NASP’s website has been enriched with the Recovery Specialist Guidebook and Subro Law Corner. Additional membership benefits include a subscription to Subrogator Magazine, access to the NASP Member Forum, free participation in weekly subrogation webinars and access to Benchmark Studies.
Every member of the insurance community including brokers, underwriters and risk managers should be keenly aware of the benefits of a strong recovery program and take initiatives to educate themselves on the process.
Kathleen J. Smith, CSPR, is managing director of Holbrook, N.Y.-based subrogation recovery services company Spartan Recoveries LLC. Donna Geraghty is the business development manager at Spartan Recoveries.
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