Some areas in the arena of claim adjusting or the practice of law cry out to the practitioner with interest and excitement. That could include a hotly contested intellectual property claim, a cutting-edge legal issue case, or the "bet the company" battle. Not necessarily so for lowly subrogation matters.
A closer look, however, can show that the subrogation matter is really a method to reverse a loss, boost a bottom line, and — when properly evaluated and handled — a way to make a smart business decision even smarter.
A Primer
First, the legal concept to be considered is this: If the carrier has paid on behalf of its insured a loss owed by another, then it is entitled to recover from third parties the amount paid. In brief, what's fair is fair. Stated in legal terms, it is the carrier's right to use principles of equity to step into the shoes of the insured and assert those rights the insured had in order to place responsibility on the party with whom liability truly rests.
The right obtained through subrogation is only as good, however, as the right held by the insured when the matter concludes. Whether subrogation is equitable in nature or a matter of contract, the rights obtained are no greater than those held by the subrogated party. This fact inevitably requires an honest assessment of the value of the right of subrogation because recovery requires an investment.
The equation for evaluation of the value of the subrogation matter is as follows: the strength of the legal right to be asserted and the monetary value of the potential for recovery versus the cost of winning. Like many claims, an incorrect assessment of the strength of the case in the first instance will doom the subrogation matter to become a losing proposition from the outset.
This reality dictates that the claim professional examine the legal position of the insured and accurately determine the strengths of the case. For instance, in the construction-defect arena, the carrier for a developer seeking to recover from subcontractors those sums spent to settle the case must know the true liability of the subcontractors, and be prepared to convincingly state the case.
If there is no true liability against the subcontractor, then the subrogated carrier will soon discover that the same weakness embodied in the plaintiff's case is transferred to the subrogation matter, severely reducing its value.
If the legal position of the subcontractor supports minimal liability because, in point of fact, the subcontractor met the operative standard of or the damage caused was limited, the carrier, which has paid to settle a case and take its insured out of harm's way, must be willing to make that assessment and walk away. If the choice is made to pursue the third party, then the carrier may, in many circumstances, be proving the case never proven by the plaintiff before settlement, and may have the expense of doing so squarely on its shoulders.
The equation for success is not favorable in such a situation because the target party will resist liability on a legal basis, and the cost of prevailing could far exceed the amount at stake.
In that circumstance, the carrier has to determine whether it got what it thought it did when it settled and began a subrogation proceeding, or if it received something of reduced value. In this regard, a subrogation matter is like any other matter — it is only as good as the facts and the law.
The legal issues are not the sole consideration, however, because the subrogation matter implicates other business and, yes, emotional considerations, as well.
As a business decision, the subrogation matter can be used to lessen the blow of concluded litigation and minimize loss without the risk of an adverse result against the insured. While premium revenue can create a profitable underwriting result, claim experience and losses can destroy it. An effective subrogation effort on the right case can demonstrate to others in the marketplace a corporate philosophy concerning the seriousness with which subrogation is regarded. That can yield results beyond the discounted contributions often offered in litigation. Third, successful subrogation litigation can buffer the carrier from downside risk, and allow the carrier to more accurately quantify the end result in litigation.
Fight Perceptions
That said, the subrogation matter all too often carries with it an emotional — or at least challenging — perception within and among insurance companies. Ask yourself these questions to see if some of these emotions or challenges strike you as familiar when evaluating subrogation: "I just closed this file. Do I really want to open it again for subrogation?" "Won't the other parties just figure I am looking to cut my losses and offer me pennies on the dollar?" "How much do I have to spend to get anything back? Shouldn't I just walk away?"
A closed file is a good file, so the saying goes. In truth, the better view is that a closed file is a good file only when all reasonable sources of contribution have been reached and that has been done cost-effectively. This view takes the good business decision of resolution of a case and makes it the superior business decision that incorporates the factor of minimizing loss.
The more a carrier uses subrogation to make informed choices about recovery, the better positioned it is to resist. Though the mindset of the third party might be that subrogation is an exercise in recovering pennies on the dollar, nothing speaks as loudly as history and results. Nothing is more convincing in the properly framed subrogation matter than a willingness to litigate to proper conclusion, not a discounted resolution. Evidence of a historical nature showing that kind of resolve can bring recovery more quickly and for greater sums.
The subrogation case will require an investment; money has to be spent in order to get money back. However, if the evaluation of the value of the subrogation right is properly done in the first instance, the money spent is well spent. Again, a closed file requires no further investment, no further outlay. If viable contributions can be identified and secured, then the closed file with untapped resources for recovery cannot be viewed as a truly successful result.
Philosophies change in cyclical nature regarding claim handling and resolution. In difficult economic climates, various views take hold for the bringing in of revenue and slowing expenses. Subrogation can achieve a loss-minimizing result with great return. It is not free, but it can be valuable. It requires analysis, informed pursuit, and appropriate investment. With those conditions, it can be more than it appears at first blush. Subrogation can be a sound and profitable business decision. K
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