Subrogation has long been misunderstood, under-utilized, often under-capitalized in the insurance industry. It is sometimes even derided as a drain on otherwise valuable claim department resources. However, the current economic climate has forced a re-evaluation of all potential revenue streams -- and that's what subrogation is, after all -- to ensure they are being implemented with utmost efficiency and delivering maximum returns.

This has led to a critical re-examination of how subrogation is perceived and pursued; the role subrogation recovery can play in the life and health of an insurer; and the numerous benefits subrogation can provide, especially to an insured. The results are revealing. Many are reconfiguring several old and axiomatic principles underlying many core concepts in subrogation, and rightfully so, as they are misaligned or counterproductive.

Let's examine some core concepts and how certain misconceptions have insinuated themselves into popular paradigms so thoroughly that now what were once considered "best practices" actually work to minimize subrogation's effectiveness and neutralize its benefits. We will also explore how to approach subrogation so that it can be a vibrant source of revenue for any organization.

Myth: Subrogation Is Just Another Part of the Claim Process

In fact, pursuing a subrogation claim is an altogether different animal than adjusting a first-party claim. Not only is the fundamental nature of the claim very different, but that fundamental distinction creates a ripple effect, giving rise to a different primary focus for each adjuster and requiring distinct core competencies that are not interchangeable. In reality, the differences between the two types of claims are so fundamental and pervasive as to require not only segregated, dedicated subrogation recovery specialists.These specialists, however, have distinct training and expertise apart from the typical claim environment to maximize the potential return of an organization's subrogation opportunities.

Unfortunately, the crucial distinction between the essential nature of each type of claim is not only the most critical, but is also the most fundamentally misunderstood. A first party adjuster's (FPA) primary function is essentially ameliorative, in that he is trying to resolve a claim and restore the insured to its pre-loss position while conscientiously balancing the employer's expectations. The subrogation recovery specialist's (SRS) primary function, on the other hand, is more adversarial. In effect, it is the exact opposite. He is creating claims by attempting to recover damages from whatever entity the investigation has determined is liable for a loss. Invariably either his liability call or the amount (or valuation) of damages -- and more often than not, all of them -- are being hotly contested by the targeted entities.

This is a quantum shift in focus, which necessarily affects how each party approaches and pursues duties from the earliest stages. In fact, it is this initial strategic distinction that gives rise to all the other distinctions in its wake. Everything else flows from the basic fact that the FPA tries to resolve a claim as quickly, efficiently, cooperatively and cost-effectively as possible, within a closed circuit of players. Meanwhile, the objective of the SRS is to create and then pursue first-party claims against a whole new and expanding set of adverse FPAs.

It is unreasonable to expect an FPA to shift easily from the mind set of a claim adjuster, which he needs to perform his job, and to that of one who is typically an adversary, the plaintiff, or even worse, to maintain both simultaneously. Such a responsibility would boarder on the schizophrenic, and to expect such mental gymnastics would be unreasonable. However, that is exactly the mind set an SRS needs in order to be most effective. They must "think like plaintiffs" because they are plaintiffs.

This distinction is best illustrated by drawing an analogy to the difference between a marriage counselor and a divorce attorney. For the FPA and the marriage counselor, the optimal outcome is a restoration of the parties previous position via amicable resolution. Typically, the primary focus is not to find fault for whatever damages have occurred, but to instead examine those damages as they exist and get them remediated as quickly as possible. The longer this takes, the less likely an optimal resolution becomes. Therefore, significant effort is not usually expended on liability, and indeed, it may be counter-productive to do so.

Also, in this scenario, the number of parties involved is usually relatively small and fixed. There is pre-existing relationship that can be built upon -- even if, in the case of the FPA, it is contractual and less interpersonal. Typically the parties are participating with a mindset, at least initially, conducive to amicable resolution. Ultimately if such resolution is not possible, then the parties can agree to dissolve the relationship. Litigation is a dreaded last resort; usually an indicator that something has gone dreadfully wrong, where optimal resolution is no longer possible.

Now, let us turn to the SRS, who is more akin to the divorce lawyer. The SRS's primary focus in the earliest stages is exactly the opposite: he must seek to determine fault. Moreover, liability must be established to a higher, legal standard as his claims will most likely result in litigation. This means, though, that how the claim is built and supported will contain a whole catalog of practical problems and jurisdictional requirements the FPA does not usually have to face.

By contrast, in subrogation the essential parties' interests are clearly opposed to one another and are adversarial from the outset. Also, the number of parties and their degree of involvement cannot be contained in a closed circuit. The parties can be expanded not only by the SRS, but also by entities over which he has no control (third-party actions and impleaders). Amicable negotiation is possible, but it is less likely, as both liability and damages must be agreed upon before settlement can be negotiated. As with a marriage dissolution (or human nature in general), where one party must accept fault before the matter can be concluded, it becomes difficult to proceed in an amicable, non-confrontational manner.

Moreover, having to apportion liability among multiple parties -- some of whom may be absent or uncooperative -- may make this stage even more troublesome. An SRS must expect litigation (at times, multiple, concurrent suits); plan for it from the beginning; and prepare for it accordingly. As a result, the timeline for resolving the claim is usually not in the hands of the parties alone (not that such a condition would guarantee significant cooperation or timely resolution). Instead, the claim is subject to the vicissitudes of the court's calendar and the possibility that some party will take advantage of a venue's loose enforcement of its discovery deadlines to delay and obfuscate the resolution of a claim for a prolonged or protracted period of time.

Lastly, both the SRS and the divorce attorney have the same objective: to obtain the maximum recovery for their principal. However, this is done with the implicit understanding that it will take longer to resolve than the average first-party claim and that it will cost money to pursue. Yet, this would clearly run afoul of the fixed cost structure of most claim departments.

This does not make subrogation claims less attractive, however. A properly trained SRS can compensate for many of the usual pitfalls that trap the inexperienced and mitigate many of the delays. This produces a tangible benefit for the principal in better, and often time larger, recoveries (a "better recovery" being defined as either higher dollar amounts per recovery or a greater ratio between expenses and recovery dollars).

So, organically, an SRS's focus, processes, and objectives are complete outliers to the traditional first-party claim process. For the sake of purely operational integrity, subrogation should be distinct from the claim process. This seems especially true in light of the fact that, at least technically, a subrogation claim does not even exist until the first-party claim is fully paid and closed, until the FPA is finished and ready to move on to his next assignment. In contrast, the SRS is necessarily thinking beyond the FPA's point of closure to the actual recovery. Therefore, having the subrogation process controlled by a claim paradigm, one that has already reached its natural terminus just as the subrogation claim is accelerating, is counter-productive.

In sum, it is now apparent that the nature of a subrogation claim is fundamentally different than that of a first party claim for a variety of reasons. Further, recognition of this fundamental distinction requires accepting that substantive differences therefore exist in how the respective adjusters must perform their responsibilities.

Therefore, efficiency requires any organization serious about pursuing subrogation have a separate unit dedicated exclusively to its recovery.

Myth: Subrogation Recovery Requires No Special Skill or Training

This is a dangerous misconception. A hypothetical description of a typical FPA's claim process would help to demonstrate the need for an experienced subrogation specialist to work alongside him. The process begins with the notice of loss. Next, the policy is reviewed for the initial coverage determination. Assuming there is adequate coverage for the loss, the FPA then moves to determine the cause of loss. The determination can be made in any way that satisfies either the policy language or the custom and practice of the adjuster.

It often involves site examination and the retention of experts who will help determine the cause of the loss. Next, the FPA usually begins to focus on the loss support documentation from the insureds or their representatives, analyzing it to determine what is payable and what, if anything, is excluded as an uninsured loss. Evidence in hand, the FPA now attempts to negotiate with the insured or his representative to conclude the claim. This may involve the use of an entirely new set of experts or consultants just regarding damages. All of this is done with the intent of completing all of the steps necessary from the first notice to cutting the final check and sending it to the insured, hopefully in exchange for a release or subrogation receipt, and thereby allowing the FPA to close the file and move it off of her desk permanently.

From this highly abbreviated sketch, we can extrapolate, for comparison purposes, some typical core competencies for an FPA: policy language familiarity and coverage determination ability; expert retention and oversight skills for cause and damages determination, client trust and relationship building skills, damages documentation evaluation and claim resolution negotiating skills. Overall, the aim of the FPA is to adjust and settle the claim quickly and efficiently.

Many organizations actually use a metric designed to track the number of days it takes an FPA to close this circle and resolve the claim as a way of judging the FPA's performance and the company's success. As a result, deviation from the steps in the claim cycle are at least tacitly discouraged and considered to be counterproductive.

The primary motivating factors for the FPA and the entire claim organization therefore become time, as in the number of days the claim is open and on the FPA's desk, as well as expense, meaning the cost to determine the nature and extent of the claim as well as the amount of the final negotiated settlement.

Unfortunately, effective subrogation pursuit is almost exclusively outside of this claim circle and must, by necessity, consider more complex factors. It is this friction that creates most of the tension between claim organizations and subrogation programs. The typical subrogation recovery program simply can not fit neatly or economically into the customary claim super-structure.

Since the subrogation recovery process is so much longer lived then the typical first-party process, includes all of the distinctions enumerated above, and contains additional variables that directly affect its outcome, to attempt to synopsize the SRS process would be unwieldy. Therefore, for comparison purposes, we can look at one element of the process the two specialists have in common to illustrate how the different perspectives play out.

Specifically, let us examine the initial scene investigation. As noted above, the FPA will customarily engage an expert to attend the scene and prepare a report with his opinion regarding the cause of the loss. Considering the way so many policies are written today, this could be more perfunctory than necessary. Regardless, once the opinion is prepared and the adjuster is satisfied as to the determination of cause, he can now move on to evaluate damages. There is no technical requirement that the expert's opinion adhere to any particular standard other than those imposed on the FSA by custom and practice in the industry or by her employer.

However, the SRS has a more nuanced criteria. The SRS knows that on average somewhere between 60 to 70 percent of his claims will require some sort of litigation or ADR to resolve, and the more complex or the higher the amount of indemnity dollars paid, the more inevitable litigation becomes. First and foremost, just a few claims like this would completely skew the "time and expense" model of a typical FPA. More importantly, this has a significant impact as to how the SRS must proceed from the outset. He must first determine where his cause of action will likely lie and what is required of him in that particular venue.

For many subrogation departments or subrogation vendors, this point in the process is a "cut-out." They go out and hire local counsel, or refer the investigation to panel counsel and let them handle the matter exclusively. However, this provides no economic advantage to the carrier, as it:

? Transfers control of the development of the claim away from the SRS while it is still in a preliminary stage of development.

? In effect, has a highly paid professional perform what the SRS is trained to do.

? Starts the attorney's compensation clock ticking from a very preliminary stage in the overall process, arguably long before a professional with this particular type of expertise is necessary.

? Encourages all parties to engage their own lawyers, which exponentially increases the number of people involved and opportunities for delay.

? Neuters the SRS's ability to continue active negotiations with the adverse carrier's representative.

Instead, an experienced, well-trained SRS can handle the development of the claim and continue active negotiations with the adverse carrier's representative until the time there is no alternative but to file suit. This also enables the SRS to provide a highly focused and fully documented referral to local counsel when he determines the time is right, thereby preserving every opportunity to settle pre-suit and limiting the overall legal cost per file.

The SRS must also obtain and maintain his scene evidence in accord with the legal standards of the applicable judicial forum in which he is likely to litigate, regardless of wherever in the world that might be. He must therefore be cognizant of the requirements of a proper "chain of custody," the proper standard for the admissibility of expert opinion and evidence, the standard for spoliation and how best to maintain the availability of his witnesses all the physical evidence until they are needed for resolution. Moreover, and as part of any spoliation concerns, he must orchestrate providing adequate and timely notice to all the potentially responsible parties, their representative and agents. Finally, if the evidence is of value to his claim, he will have to arrange for its long-term storage and preservation.

While there is some overlap and even some redundancy between the two specializations, the set of parameters within which an FPA operates differs from that of the SRS. The FPA's activities exist within the closed circuit of the policy requirements, his employer's requirements, his agent's, and the insured and his agents and consultants. By contrast, the SRS is really the root of an expanding tree of potentially liable parties, their agents and consultants, and the variable jurisdictional and practical norms superimposed over the claim.

The FPA and his insured are united in interest and striving toward a similar goal; the SRS, however, deals with opposing and competing interests in a zero-sum game, especially if the policy limits are insufficient. These are not compatable outlooks, and neither is served by the half-measures or blurring of focus that arise from an incomplete division of labor.

Ideally, an SRS will work cooperatively with the FPA in the earliest stages to ensure the cause is determined properly and that all necessary experts -- even those ancillary to the initial cause determination but necessary to satisfy the legal burden -- are engaged and provided what they need to make their contributions; that all interested parties are involved in the fact-finding process to avoid prejudice or spoliation; that evidence and witness will be preserved for litigation and attorneys can be brought in when necessary to pursue or protect the subrogation claim.

All the while, the SRS must continue to communicate with the experts to ensure the best possible claim is presented to the adverse adjusters and prepared for litigation; oversee the continued development of the facts; and progress the negotiations with the adverse carrier's representative until resolved or exhausted. Continued pursuit is the key, throughout development, through litigation, and until the claim is settled. This would obviously be exponentially more difficult if the subrogation recovery process was constantly intercut with a steady flow of new first-party claims, requiring the above described significant shift in focus.

Therefore, the idea that subrogation recovery does not require specialized skills or training, or that it can be assigned to first-party claim adjusters as part of their regular case load, is easily overcome by just a cursory examination of each adjuster's unique, mission-critical procedures. It is inherently unfair to an FPA who, by trying to prioritize the pursuit of a subrogation claim on top of his pre-existing case load, is really being asked to traverse largely unfamiliar and unfriendly waters. However, experience teaches us that the difference between the successful recovery of a large paid loss and its less attractive alternative often results from a command of the subtle nuances of the subrogation recovery process. It seems equally clear that such command is really the province of the separate subrogation specialist.

Myth: All Subrogation Recovery Pursuit Is the Same

There is at least one more important, substantive distinction about subrogation claims that must be recognized. There are significant differences between how a small-dollar claim is typically pursued and how a large-dollar recovery should be pursued.

It is not reasonable for all subrogation claims to be treated the same way. Subrogation recovery "enjoys" the reputation it has because the bar of expectation has been set so low. Until now, there has been the widely held belief that recovery meant, at best, 50 cents on every dollar of the paid loss. However, this expectation has arisen primarily because non-specialists have been pursing subrogation recoveries as part of a larger, more diversified job description without the proper tools to maximize recovery.

As a general rule, the larger the paid loss, the more complex the issues; the more time it will take to resolve; the greater likelihood multiple parties will encumber the claim; and that litigation will be required to resolve the claim. Additionally, the possibility of early or amicable settlement usually diminishes in direct, inverse proportion to the paid loss and the number of potentially liable parties. Moreover, investigation and discovery are both generally far and away more fact specific, issue laden and expert intense.

If the above distinctions are true, then it is as unreasonable to assume that large, complex losses can be recovered using the same processes used for lower dollar losses as it is to assume that subrogation can be effectively pursued as just another part of the claim-handling process. For example, could the investigation of a multi-million dollar fire at a commercial industrial facility be handled in the same way and with the same methods as the investigation of the fire at a single family dwelling, or even more extreme, any auto accident? Is is realistic then to believe that anyone but a thoroughly trained and experienced, large value SRS should be entrusted with what will likely be a lengthy, complex and expensive recovery process?

Lower dollar losses require very little substantive investigation, issue examination, or evaluation. These can often be handled by volume processing, very much like a collections agency in many respects, so long as it is done by trained subrogation specialists. Even so, it is not reasonable to automatically assume that systems able to process a high volume of lower value claims can accommodate the multitude of unique issues that can arise when the paid loss exceeds approximately $100,000.

However, because large loss subrogation claims are relatively rare and occur infrequently in comparison to the high-volume, smaller value, no-fault or auto subrogation claims, it does not make economic sense for most organizations, even those that specialize in subrogation, to have highly trained and experienced large loss specialists on hand all the time. Thus, despite their special needs, large losses often do not get the development or support they require because there is no alternative but to treat them the same as lower dollar claims. As a result, there is a higher risk that money is being left on the table when it comes time to negotiate and settle these higher value claims. In a time when the bottom line commands so much attention, it is folly to miss an opportunity so wholly within grasp. Yet this is the paradox many organizations face today.

How then is this paradox resolved? Each organization would have to examine its own circumstances and decide how best to proceed. One option is to ensure that any in-house subrogation department has a sufficient number of properly trained or experienced large loss subrogation adjusters on staff to handle the number of large losses incurred.

Some organizations choose to farm-out their subrogation recovery efforts, engaging one of the many vendors in the marketplace for a fee. The organization still has a duty to make sure the vendor has a sufficiently strong roster of large-loss subrogation specialists who can (and will) handle the losses. Lastly, consultants can review the organization's circumstances and recommend how best to proceed.

The essential nature of a first-party claim is quite distinct from a subrogation claim. This produces sometimes subtle but nonetheless significant differences in each type of adjuster's primary focus and core competencies. Moreover, subrogation claims can also be distinguished by the different types and larger number of parties that are needed to resolve those types of claims and the unique relationships that give rise to their involvement, the different costs and time lines of action and for resolution of each type of claim, and the expectations and definitions of success with respect to each type of claim. There must be a sufficient number of well-trained and experienced subrogation recovery specialists who can handle a variety of losses, especially the large, complex subrogation claims.

Special Reports /

The Case for Subrogation Specialization

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