In 1980, a front-line claim person at a property and casualty company handled most subrogation cases. Predictably, these files were usually located at the very bottom of the tallest stack on their desks.
There were many reasons for this. Claim professionals were judged by how fast they handled their claims. There was pressure to resolve them in a prompt and efficient manner. Third-party claims were expected to be processed effectively. The subrogation file was the lowest priority, and most adjusters were not evaluated on how they handled these claims. The concept of benchmarking subrogation results for individual adjusters, or company-wide, was almost nonexistent.
Subrogation also was an afterthought on a management level. Executives rarely discussed the topic, let alone made strategic plans to improve results. Subrogation education was missing, which likely contributed to lackluster results in terms of subrogation dollars recovered.
A Necessary Change
Today, subrogation at most companies — and in most lines of business — is completely different. Things began to change in the mid-90s, during one of the cyclical downturns in the insurance business. Many executives began taking a closer look at revenue areas for the business, which consists of three main sources: premiums, investment, and subrogation.
The premium dollar is a very expensive proposition. A company must support an underwriting staff, sales force, marketing expenses, agent expenses, and other costs to compete with all of the other carriers in order to bring in the premium dollar.
Investment dollars are, on average, a prisoner of the market. When the market is doing well, most companies' portfolios are growing. When the market is bad, everyone suffers. Investment departments at one company may do better than another, but on the whole, results typically trend the same direction industry-wide.
Subrogation, however, does not have the same costs as the premium dollar. A trained staff is required. Some infrastructure is necessary, along with technology. The subrogation dollar is out there, owned by the company. The question is, can the company put together an effective structure that results in the efficient collection of these dollars? Subrogation is not subject to the fluctuations in the market like investments. In addition, subrogation does not have all of the expenses that the premium dollar requires. The cost per dollar makes the subrogation dollar a relatively low-cost way to improve a company's financial performance.
This analysis hit home during a time frame when the industry was struggling with performance. Executives around the country began to see subrogation as a profit center where a real difference could be made on a company's bottom line. Major trends across the industry began to take shape.
Dedicated Subrogation Units
The single most significant difference in organizational structure occurred when companies began creating regional and national subrogation units. These units solved many structural problems. No longer could a front-line claim person bury a subrogation file at the bottom of their stack.
The new subrogation unit personnel would have one responsibility: recover money. Results could be measured by the amount they were collecting, how many subrogation files they were opening, and how many demands were being made. Recovery dollars may track like a roller coaster ride, especially on the larger files, but activities should remain more predictable. Management had an ability to evaluate their internal subrogation performance, beyond the dollars.
In addition to the structural benefit of removing subrogation files from the responsibility of front-line claim professionals, other benefits became possible. Over time, the subrogation unit will build expertise in the art of recovery. Subrogation is plaintiff's work. There is a plaintiff's mindset necessary to be effective, and one must creatively look for all potential opportunities to recover. There are personality traits that are more effective in subrogation personnel. Strategic hires can be made, and people with complimentary skill sets can staff subrogation departments.
In addition to the right people being in the department, the designated subrogation staff will develop and become more effective as their level of experience builds. The unit can take advantage of training that is dedicated towards plaintiff's issues. Eventually, the subrogation unit will be a source of expertise that can be used for more than their own internal purposes, including a resource for the entire company on recovery issues.
Subrogation units allow companies to track similar events. An example of this is the litigation against Firestone and Ford, related to exploding tires on certain vehicles. When a company has a dedicated subrogation unit in place, it is easier to track the same or similar claims against tortfeasors. This allows for a sharing of knowledge to make the claim professionals involved on these claims "experts." They will know how to handle them in the most efficient way possible without having to recreate the wheel every time another similar claim arrives.
Finally, subrogation units will begin to serve as subrogation advocates throughout the company. This is extremely important in light of the unintended outcome of subrogation reorganization.
Formula for Success
Virtually every company that has reorganized into a more centralized subrogation operation has found one element of their structure that cannot be changed. Subrogation units are still dependent on front-line staff for three things: identification, investigation, and transfer.
Identification is the most important of the three. Front-line staff must identify subrogation potential immediately, something that is especially true in property and workers' compensation scenarios. With the advent of the doctrine of spoliation, the courts will prohibit subrogation if the proper notification isn't made to potential tortfeasors. It is, therefore, more important than ever to identify subrogation claims early on.
Twenty years ago, the concept of spoliation was not widespread. In those days, a loss would be investigated, the site cleaned up, a few artifacts saved, and then other parties would be put on notice. The courts around the country ultimately decided that this was unfair and created the doctrine of spoliation. This doctrine holds that a tortfeasor is harmed when they do not have an opportunity to examine a loss site before it is disturbed. The sanctions for spoliation are severe and often result in cases being dismissed.
Spoliation has a huge effect on subrogation. Insurers faced with a loss with subrogation potential must place all potential tortfeasors on notice and coordinate the examination of a loss site. This usually requires the input and direction of attorneys and experts. If subrogation is not recognized immediately, in many cases the right of recovery may be lost. Therefore, many subrogation units spend a great deal of time developing and implementing strategies to continually train front-line staff to recognize subrogation potential when a loss is reported. If subrogation is not recognized early, it may be lost forever.
The second key component still remaining on the shoulders of most front-line claim professionals is the duty to investigate. A lack of an early investigation usually results in all subrogation rights disappearing. Once again, this requires training on how a subrogation investigation should proceed. Subrogation units are often involved in training claim staff on investigative issues. Many companies have put in place technological methods of informing subrogation units early on about large losses. This allows the subrogation unit to give input into the investigation much sooner in the process.
The third key is the transfer of files with subrogation potential to the subrogation units. Before recent improvements in technology, this was a bigger problem. When companies had one paper file, it was difficult to open a subrogation file until the adjustment was finished. Today, most companies can open a subrogation file while the adjustment is ongoing because of the advent of electronic files. However, some companies still struggle with ways to make sure files with subrogation potential actually make it to the subrogation department.
Many companies today have put in place audit procedures in order to ascertain where the subrogation referral system breaks down. The single biggest culprit is the failure to identify subrogation potential. Companies use many different approaches to shore up this hole in the process. What is clear is that there is no one-time solution to the issue. Subrogation identification requires constant training and prodding to be effective.
This is where the subrogation advocate concept comes into play. Subrogation units should be promoting subrogation awareness throughout the company. This group will provide the continual reminder of what needs to be done to facilitate quality subrogation results.
Joining Forces
One of the most significant changes in the subrogation field occurred in the fall of 1998. A small group of people came together to create the National Association of Subrogation Professionals (NASP). This non-profit trade association was formed with the following mission statement: To enhance the stature and effectiveness of subrogation and recovery professionals through education, training, and the exchange of information.
Over the years, NASP has grown to more than 2,300 members. It has an annual conference with more than 75 subrogation educational programs divided into tracks such as auto, property, subrogation management, workers' compensation, health, and specialty. In addition, NASP has created a certification program for people within the field to demonstrate their professionalism. The program — Certified Subrogation and Recovery Professional — includes a 428-page training manual covering 14 chapters of material. It is the most comprehensive training manual on subrogation in existence.
NASP also has sponsored industry-wide benchmarking studies so that companies can understand how effective they are compared to industry averages. These studies were the first time companies could gain access to data that had this type of apples-to-apples comparison. The benchmarking studies also include best-practice examples from the industry.
NASP has just hired an education director to launch a new Subro College training program. Initially, this program will be taken on the road to train people new to subrogation. Eventually, the program will expand with an advanced curriculum for experienced personnel. Since very few companies have dedicated subrogation training programs, and many states require continuing education credits for claim professionals, Subro College will fill a void for the industry.
None of this would have been possible 25 years ago. NASP exists because insurance companies today realize the positive effects of a well-run subrogation unit. The difference between high performers and average performers, as demonstrated in the NASP benchmarking studies, results in millions of dollars left on the table.
Today is truly an exciting time to be involved in subrogation. There is a real opportunity for a group of people to make a significant difference within a company. This was not the case 25 years ago. Back then, subrogation departments, where they existed, were often dumping grounds for low-performing staff. Many companies are now putting their best and brightest into subrogation because the results can have a dramatic effect on a company's bottom line.
Jeffrey M. Baill is an attorney at Yost & Baill in Minneapolis, Minn. He is the founder and past president of the National Association of Subrogation Professionals.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.