As insurers and self-insured employers struggle to manage their expenses, it is ironic that billions of dollars are paid out unnecessarily each year because of badly managed claims. Generally, the claim management process consists of three phases: investigation, settlement, and payment. Yet, a fourth phase, recovery, lags behind or is often ignored, causing insurers to leave money on the table every year.

Recovery, or subrogation, is the process by which insurers or self-insured companies seek reimbursement of their claim losses from responsible third parties. Properly executed, subrogation can help payors recoup substantial amounts. Unfortunately, payors often fail to pursue recovery, either because they are unaware of the opportunities it affords or because they have concluded that the activity is too burdensome or costly for staff to pursue aggressively. Others may have programs in place that are ineffective.

Workers' Compensation

State workers' compensation laws require employers to pay benefits to injured employees without consideration of fault and within a mandated time frame. Consequently, the workers' comp claim adjuster's primary concerns will be to determine whether the claim is work-related, to ensure that medical bills and lost time benefits are paid, and to return the claimant to work as quickly as possible. Not surprisingly, an investigation focused on determining whether the accident was work-related often lacks sufficient information to determine cause, resulting in a loss of subrogation dollars. To further complicate matters, the adjuster may be uncomfortable conducting a liability investigation, especially a more complex investigation into product liability.

Workers' compensation subrogation results can be greatly improved by training workers' compensation professionals to identify claims with subrogation potential, and allowing subrogation team members to become involved in claims as early as possible. The efficacy of this is shown in the following examples:

oA fall-down claim was reported by the employer's operational staff as, “Employee wasn't watching where he was going.” Case closed? Perhaps not. The subrogation investigation revealed that, although the accident took place on the employer's premises, the employee had slipped on a wet floor cleaned by a contractor who had failed to post proper warnings. A successful subrogation claim was pursued against the contractor.

oInjured employees routinely are reported as having caused accidents, but further investigation may indicate that third parties were responsible. For example, in the case of an employee whose hand was amputated, common sense suggested that the employee caused his injuries by misusing equipment and placing his hand in a dangerous location. The subrogation investigation revealed, however, that the equipment manufacturer had not taken all necessary precautions to prevent injury and ensure the product was as safe as possible. A successful subrogation claim was pursued against the manufacturer.

Automobile first party payments for collision, comprehensive, uninsured motorist, underinsured motorist, PIP, and medical payments may be subrogated in most states. Collision claims make up the largest part of automobile subrogation, and it is critical to have processes in place to identify all accidents for potential subrogation, and to efficiently pursue recovery as early as possible.

Automobile recovery is more effective when the adverse party has sufficient insurance and both the payor and adverse party are insurance carriers who are signatories to inter-company arbitration. Here, the challenge is to gather the proofs and prepare effective arbitration submissions.

When the adverse party is uninsured, automobile recovery is quite a different matter, and many insurers choose to outsource this service. These claims require subrogation professionals who can efficiently perform asset checks and locate missing parties, and who can pursue subrogation with relatively low recovery rates in a cost-effective manner.

Successful Subrogation

Failure to identify subrogation potential is the largest area of leakage. Here are some tools that insurers can use to assure that potential subrogation is identified early and implemented effectively.

Training Claim adjusters should receive specific training in the identification and basic investigation of subrogation claims. Adjusters should be left with reference documents that list subrogation red flags and describe the process to refer claims to the subrogation department. In a decentralized operation, in which the same adjuster handles the subrogation claim, complete training in how to manage the subrogation process is necessary.

Easy referral The early referral of claims and the involvement of subrogation professionals in the investigation phase set the foundation for successful subrogation. To encourage adjusters to go the extra mile to identify potential subrogation, the referral process should be made as easy as possible. Automated referrals within a claim system are ideal. Early referral also guards against a frequent source of subrogation leakage: loss of subrogation opportunities that eventually become time-barred through the application of statutes of limitation.

Incentives The subrogation process is a team effort between claim professionals and subrogation professionals. Ideally, claims that display the potential for recovery or exceed a dollar threshold amount should be referred to the recovery team within 24 hours of receipt. The efforts of the field claim professionals should be recognized and rewarded.

Automated referral Claim data is used to flag cases that meet certain criteria that are characteristic of subrogation files. Cause of loss and injury coding can be used to create specific criteria by line of business. For instance, for workers' compensation, all claims involving machinery (cause of loss) or amputation (injury) may be flagged. Incurred dollar thresholds also may be established for review of a file for subrogation potential. Software is available that constantly analyzes recovery data.

Auditing for missed subrogation Electronic claim audits will act as safety nets to collect any cases not identified by field claim personnel or system edits. Generally, electronic audits should be conducted monthly, weekly, or even daily.

Thorough investigations Once the potential for recovery has been identified, the field and subrogation claim professionals should collaborate to develop plans to investigate the loss and, if warranted, to pursue subrogation. This may consist of contacting and interviewing traffic accident witnesses and examining skid marks, retaining cause and origin experts for fire losses, photographing and examining potentially defective products, obtaining pertinent contracts related to premises falls, or obtaining other physical evidence.

Recovery resource partnerships Depending on the complexity of the claim, and to complete the process of actually recovering money, subrogation professionals may form partnerships with other professionals who focus on subrogation, including lawyers who specialize in certain types of subrogation and engineers who specialize in accident reconstruction, traffic engineering, fire and explosions, and engine failures.

Adherence to best practices Protocols should be established for each type of subrogation claim. These should be based on industry best practices and the claim administrator's own expertise and experience in handling a wide variety of claims. By adhering to best practices, specialists stay focused on maximizing recoveries in the shortest time possible.

Innovative technology Subrogation programs may benefit from technology for early detection and referral, systematic follow up, and tracking of individual claims. Claims that result in periodic payment through payment plans are best managed with software specifically designed for that purpose, such as software that will flag late payments and automatically generate letters to adverse parties. For high volume subrogation with low payments, software that automatically generates form letters is efficient and makes the pursuit of smaller recoveries economically feasible. Scanning and a claim system that supports a paperless environment also reduce the need for administrative staff, shortening the lives of claims and increasing workload capacities for adjusters. Through careful and thorough tracking, the program's performance will be made clearer and process improvements can be more easily identified.

Centralization

The benefits of a centralized subrogation function, as compared to a decentralized function in which claim management personnel also handle subrogation, are well recognized. Although inextricably linked, subrogation is inherently different from claim management. The focus of subrogation is to restore money to clients that is rightfully theirs, whereas the goal of claim management is to achieve timely and fair claim resolution. Claim management personnel who may specialize in a single type of claim, such as workers' compensation, may not have the time, skills, or proper resources to effectively pursue subrogation.

Larger companies with high claim volumes, strong internal claim management infrastructures, and a commitment and history of remaining in certain markets and lines of business that produce similar subrogation claims will best be served by investing in in-house subrogation programs with subrogation claim professionals. Many companies, however, can benefit from outsourcing.

Companies who seek the ability to move quickly into and out of markets and lines of business should consider outsourcing for overall claim management and subrogation. When subrogation is outsourced, carriers or self-insured clients are freed from the burden of establishing new claim infrastructures and employee education and training programs. Companies that outsource their subrogation activities are better able to keep their focus on their continuing business.

Small insurance carriers and self-insured companies with insufficient volume to support an effective subrogation program also will benefit from outsourcing the subrogation function. For carriers who have all or part of their business in run-off, outsourcing the claims related to the discontinued business may improve results and maintain focus on their continuing core business. Carriers and self-insured employers should consider outsourcing subrogation auditing on closed files to identify missed opportunities, especially if they have not established effective subrogation programs.

Outsourcing also presents challenges and may not be appropriate for all companies. For example, relationships will need to be built between the payor's internal claim service and the external subrogation service. Data migration between the two entities may involve HIPAA compliance, introducing a host of privacy and transaction code issues.

With today's focus on financial results, efficiency, and market adaptability, insurers and self-insured employers must not overlook the benefits to be gained from comprehensive recovery service programs. Fortunately, for those who lack the resources to develop their own in-house programs, all or part of these services can be outsourced successfully to claim administrators that specialize in subrogation.

Jay Garcia is vice president of Cambridge Recovery Services. He can be reached at jay_garcia@cisgi.com.

Special Reports /

Effective Subrogation Prevents Unnecessary Loss

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