Subrogation is the transferal of the right of legal restitution from one party to another. In most first-party property coverages, insurance contracts give insurers the right to pursue recovery on insureds' behalf against any wrongdoers or tortfeasors. In a sense, the insurer stands in the shoes of the policyholder. Subrogation reflects the equitable principle that the person causing the loss should bear the cost of such loss.
Risk managers may not think a whole lot about subrogation, but they should. Why? There are plenty of reasons.
First, the risk manager may stand to get money back from the insurer. Most property policies have deductibles. Many liability policies have self-insured retentions. Either way, these mean that the burning layer of loss is funded by the risk manager's company. If an insurer successfully pursues subrogation (on first-party claims) or recoveries (on third-party claims), it may recoup funds it paid within its own deductible or SIR. That financial payback is enough to make sure that insurers aggressively pursue subrogation.
Second, an insurer's successful recovery may reduce the risk manager's ultimate loss ratio. Money coming in can offset claim payments flowing out, proving a net number that is lower than the original claim payment. The better the loss ratio, the better chance of getting a good deal, such as lower prices or broader coverage terms, on future insurance coverage. Entities with low loss ratios have stronger leverage in the insurance marketplace. Thus, successful subrogation in the short term may reduce cost of risk in the long term.
Third, risk managers must be aware of subrogation to make sure that they do nothing to jeopardize an insurance company's recovery rights. This is a stipulated requirement in most insurance contracts.
TPA Selection
If companies outsource self-insured claims to third-party claim administrators, for example, successful subrogation routes dollars back to the entities absorbing the losses. Many larger companies may self-insure for workers' compensation losses and outsource these to independent adjusting firms. Others may do likewise with fleet auto or general liability claims. Successful subrogation helps organizations' cash flow, which is always a virtue to the financial types (CFOs, VPs of finance, controllers, and treasurers) who, typically, are risk managers' bosses.
Provided that the risk manager cares about subrogation, what can he do about it? One step: pick an insurance partner or TPA that takes subrogation seriously. Many pay lip service, but are lame on the follow-through.
Reasons for this may include the fact that there is no incentive for claim people to pursue subrogation. Adjusters are eager to close files or encouraged to do so. Subrogation may prolong a claim's life span. It had never dawned on me that people saw me by the work that I did. I judged myself by what I was capable of, but others were judging me by what I did.
Adjusters also may lack the persistence to pursue subrogation or be easily put off by disclaimers of liability on the part of prospective tort feasors or their insurance carriers. Adjusters have a mindset to defend claims rather than pursue them. Many adjusters are more comfortable playing defense than playing offense.
Assuming that subrogation is an entry on our shopping lists when we buy insurance, how do we discover how high subro is on an insurer's radar screen? Questions that could help to gauge an appetite and success for subrogation include: On what percentage of open files are you pursuing subrogation? How do you spot subrogation opportunities? What are the most common subrogation opportunities that you see on claim files? How much did you collect in subrogation recoveries in the past year? Are adjusters evaluated in any way on their success in pursuing subrogation? Do you have a separate subro unit? A separate legal panel of attorneys who specialize in pursuing subrogation?
An old management maxim is, "That which gets measured gets done." Chances are that, if an organization measures subrogation, it will get better at it. Moreover, the more it does a certain thing, the better it will get at it.
Don't Negate Subro Rights
Another risk manager duty regarding subrogation is to make sure that the organization does nothing to nullify its subrogation rights or those of any insurer. Doing so risks loss of insurance coverage or recovery rights. Recently, the author was an expert witness for a car company that defended itself from a product liability claim. Allegedly, a defect in the car's radio system triggered a fire, causing a total loss to the car and to the hotel at which the car was parked.
Problems arose when the subrogating insurer discarded the vehicle in question and let the salvage be squashed into a washing machine-sized cube. Ouch. A defense asserted by the car company was that the subrogating insurance carrier breached its duty of reasonable care by discarding or altering key cause-and-origin evidence. The case went to trial with the result of a defense verdict for the car company.
This was a personal line claim; no risk manager was involved. Nevertheless, it illustrates the importance of preserving an insurance company's subrogation rights, lest those rights become unsatisfied due to somebody's carelessness. Commercial entities can suffer fire or incur workers' compensation losses for which there may be promising subrogation opportunities. One role of the risk manager is to institute procedures to make sure that all within the organization know of the ramifications of preserving evidence and doing nothing to prejudice the subrogation rights of either the insurance company or the risk manager's organization.
Risk managers can encounter subrogation opportunities in many loss situations. Initial focus should be on loss recovery. Within each loss situation, however, risk managers should be attuned to subrogation opportunities, as these will bypass many lay observers and others involved in the loss recovery process. Spotting potential subrogation situations and following through on recovering from potential tort feasors is an acquired skill.
No one suggests that subrogation savvy should be the determining factor when deciding among competing insurance bids. Nevertheless, it may be one factor among many. Make it part of your renewal or shopping checklist. Explain to your insurance broker the importance of subrogation. Make sure that your broker impresses on any candidate insurers the need for vigorous subrogation. Press for specifics in asking each candidate insurer to demonstrate its commitment and track record in subrogation pursuit. Do they go through the motions or are they pit bulls?
Kevin Quinley, CPCU, is senior vice president for Medmarc Insurance Group in Chantilly, Va. He can be reached at kquinley@medmarc.com.
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