It's appropriate to take a moment to assess the state of subrogation, especially in today's environment. Certainly, we cannot address every aspect of what is currently happening in the subrogation arena in this article alone, but let's briefly discuss a particular concern that warrants awareness. The stakes involved with subrogation have indeed changed.
Let's imagine for a moment that it is 1970. Your insured has just reported that his home has been completely destroyed by an early morning fire. You are relieved to hear that the entire family escaped unharmed as you begin the process of handling the claim. Based on what you've learned, you begin the investigation by visiting the scene. A complete fire investigation ensues, and the origin and cause report indicates the newly installed hot water heater was improperly wired and caused the fire. The scene is appropriately protected and all interested parties are placed on notice and provided an opportunity to inspect the property and the origin of the fire.
The claim process moves forward, and the first-party portion of the claim is settled with the insured, less his $250 deductible. The paid loss amounts to more than $100,000. The subrogation process is explained, and the insured is happy to hear that the insurer will attempt to recover the deductible amount in addition to the amounts paid by the company. The insured is so satisfied that he writes a letter to the CEO of the company expressing his gratitude for the level of service provided.
In this case, subrogation began early in the claim-handling process. The hot water heater was recognized as the cause of the fire. Later in the process, it is discovered that somehow the hot water heater has been misplaced and cannot be located. For some reason it cannot be determined what happened to the unit; it's simply gone. Because of the particulars of this case, the subrogation claim cannot move forward without this vital piece of evidence. A call is placed to the insured explaining this fact and that he will not be receiving his $250 deductible.
Then and Now
At one time or another, we've probably all heard a similar story. So what happened in 1970 after the insured learned he would not be reimbursed for the $250 deductible? The answer may have varied depending on the insurance company's internal policy. After all, the insured was so pleased with the way the claim was handled. Did that make it easier for him to accept the fact that the $250 was not going to be returned? Maybe the carrier refunded the deductible amount, as it was its error in misplacing the hot water heater? The fact remains, however, that the opportunity for subrogation in this case was lost.
Let's fast forward to 2010. The same scenario occurs with an exception or two. Today, the house is valued at $750,000. The insured carries a deductible that amounts to a certain percentage of the insured's dwelling limits as outlined in his homeowner's policy. For purposes of discussion, let's assume the deductible amount equals $10,000. What might happen in today's environment when the call is placed explaining that the insured will not be receiving his deductible?
While we cannot be certain of the outcome, it is likely that many insureds would not be receptive to this loss. Sure, there are many issues to consider, but the stakes have changed. As deductible amounts increase, the insured has a greater interest or stake in the subrogation portion of the claim.
Adjusting Attitudes
Claim professionals have always understood the importance of the subrogation aspect of the claim-handling process; however, at times the subrogation file may have been easy to put aside because of other claim-handling issues. The claim handler may have believed that subrogation was something that happened at "the end" of the handling process. The logic might have been something like "after all, we have to take care of the new claims coming in. Anyway, the important part of the claim has been handled. We've paid the insured's claim, right?" We all understand that once the claim is paid, it might be easier to set the subrogation file to the side as we simply have to make new claims the priority.
If this thought process exists, then we need to adjust our thinking. We have to understand that claim handling with subrogation in mind has the potential to positively impact the individual insured, the larger policyholder group, and the insurance buying public. We all understand that one of the most important societal benefits of subrogation, among many others, is that it helps to keep premiums affordable for all policyholders. Subrogation cannot be thought of as something that occurs after the rest of the claim is handled. Why?
Areas of Concern
Let's take a brief look at what I like to refer to as the areas of concern in the 2010 scenario outlined earlier. While we cannot be certain of what might happen, for the sake of discussion, let's assume the insured contacts his insurance carrier. The insured indicates he was counting on the deductible being refunded. He demands that the claim be reopened in order to gain an understanding of exactly what happened and when, with regard to the subrogation claim-handling aspects of the case. We all understand the potential implications of this type of discussion.
While we may have a right of subrogation under the insurance contract, generally there is no obligation in an insurance contract requiring a carrier to subrogate. We would argue that our previous efforts on other claims where subrogation was initiated is enough to show a pattern or practice in similar claim situations. Thus, the argument becomes "What went wrong with this claim?" The first-party claim (which was originally settled amicably with the insured) may now give rise to other allegations by the insured.
Are these areas of concern enough to at least temporarily revisit the definition of subrogation? Black's Law Dictionary defines subrogation as "the substitution of one person in the place of another with reference to a lawful claim, demand or right…." We are all familiar with this definition. I'd like to suggest for a moment that subrogation professionals focus on this definition: subrogation is the byproduct of an appropriate investigation. Before we go any further, we understand this definition may lack some clarity but you'll soon see why we have chosen to use this verbiage.
You are probably aware of the same information, articles, interviews, and opinions about the declining experience level of the claim professionals in the P&C insurance industry. While much of this information may be subject to interpretation, the fact is that in today's claim environment, the structure of the claim operations is changing.
Centralization and specialization in today's claim environment, including subrogation operations, has resulted in fewer field claim offices. Fewer adjusters are actually inspecting scenes, or meeting with insureds or other involved parties. While insurance carriers are doing their best to undertake appropriate investigations, it takes vigilance by the carriers to maintain appropriate standards. I would suggest, in today's claim world, the subrogation professional, more so than at any time in the past, has to depend more on the front line claim representative to forward an appropriately investigated claim file. If proper attention is not provided, then the subrogation portion of the claim may be compromised as the frontline claim adjuster processes the first-party portion of the insured's claim.
Unless the subrogation professional handles the claim from beginning to end, the subrogation claim representative must depend on the frontline claim representative to conduct an appropriate investigation that considers the subrogation aspect of the claim. It is when the subrogation claim representative receives the file that the level of tension increases.
At times the necessary information to subrogate may not be in the claim file. If this occurs, then it is necessary to determine whether the frontline adjuster understands what the subrogation claim representative needs to successfully subrogate against the responsible party? Does he or she understand that unless the subrogation aspect of the claim is considered "upfront" in the claim handling process, then the opportunity for subrogation may be lost? If not, then what responsibility does the subrogation operation have to educate the person making the referral?
In today's environment, the subrogation and line claim operations often communicate about the importance of the partnership enabling effective subrogation to occur. We would suggest that the subrogation claim professional clearly has a responsibility to raise the awareness of the exposure that may arise when subrogation aspects are overlooked in the "front end" handling of a claim file. How might this responsibility be carried out? Or, put another way, what does this really mean?
Today's subrogation professional should recognize the opportunity to assist and to be available more so than in the past. We should be able to tell the "subrogation story" so that our line claim units understand the importance of having enough information to both pay and prove the claim. We must also recognize that the line claim units may be seeking more advice and will need the expertise of the subrogation handler. It means we need an understanding of applicable statutory and case law affecting subrogation in the jurisdictions where we handle claims. Yes, this may also mean more phone calls, more requests, and more consumption of our time. However, if committed to increasing not only the collection of subrogation dollars but also the awareness and importance of the subrogation aspects of claim handling, then we really have no choice.
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