Subrogation entitles an insurance claims entity to transfer risk by successfully recovering a paid loss from a negligent third party, the tortfeasor who caused the loss. Most everyone would agree getting money back is a good thing, but for many years the subrogation process was the stepchild of the claims department and often seen simply as an accommodation to retrieve an insured’s deductible. The position of a subrogation recovery representative was often perceived as either an entry position or stepping stone in to a more prestigious position in claims, or one to ease out a claims employee into retirement.
A few decades ago, insurance carriers began recognizing the significant role the subrogation recovery process had to the profitability of their organization. They began designing subrogation programs with the sole focus of increasing recoveries and measuring recovery to paid loss. Some companies developed centralized or dedicated departments staffed with highly-trained recovery specialists who typically worked in conjunction with the claims department to handle the subrogation function. Others engaged outside resources to fully or partially support their internal subrogation initiatives. Shortly thereafter, large brokerage firms and risk managers began educating commercial self-insured policyholders and those carrying significant deductibles about the correlation between subrogation recoveries and improved experience ratings, which could lead to increased savings by way of lower premiums.
As technology has advanced, new and more sophisticated processes and claims platforms have evolved to expedite and enhance claims handling. Some of the new claims platforms address the subrogation function by forcing the claims person to consider a recovery opportunity before the file can be electronically closed. Most recently predictive analytics have been designed to forecast which losses have the greatest potential for a successful recovery, allowing the person responsible for companywide subrogation results to properly allocate resources.
Still, many companies and self-insureds frequently leave large quantities of revenue unrecovered each year by failing to properly pursue subrogation interests. Recent studies estimate that up to 15% of carrier claims are closed with a missed subrogation opportunity. As businesses face constantly increasing insurance premiums many have chosen to insure their own risk by implementing a self-insurance program, handling claims internally or engaging the services of a third party administrator. But few self-insured companies have implemented recovery programs that would include a forensic look-back of their paid losses. This is unfortunate since it would be a win-win at no cost to perform and the probability of finding some degree of missed recoveries is high, especially for companies who represent multiple states. Recovery statutes vary widely, which makes it increasingly difficult for a risk manager to have detailed recovery knowledge in all 50 states.
The lines of coverage most typically recognized as having potential recovery are first-party auto and property claims. A claims person well trained in auto claims, theories of liability and rules of negligence can draw a conclusion as to which party is responsible for causing an auto accident once the investigation has been completed. Many property losses also offer opportunities for successful recoveries but more complex issues involving product failure or faulty installation may require a high degree of expertise and take longer to resolve.
Claims payments involving workers injured in the course of their employment can often represent high-dollar payments for medical and indemnity and much higher for catastrophic injuries. Workers compensation liens, loss transfer recoveries and direct action subrogation can represent a significant source of revenue particularly when the injury was a result of an auto accident, faulty product or premises liability. Again, these claims typically require a higher level of expertise to properly investigate and develop a theory of negligence, as well as to articulate the complicated state statutes that exist nationwide.
The handling of subrogation claims should begin when the loss occurs. Generally, the faster a recovery opportunity is recognized, the greater the chance for a successful outcome. The preservation of evidence is crucial to success and it is imperative for policyholders and self-insureds to be informed after a loss about the importance of retaining any evidence that may need to be inspected in the future. Savvy risk managers and brokers should develop a rapport with the claims professionals to keep on top of the recovery possibility as the investigation unfolds.
Achieving subrogation success requires a team that understands the concept and the financial impact a good subrogation program can have on the organization. Regular subrogation awareness training can help reinforce the proper identification of claims with subrogation potential. Groups like the National Association of Subrogation Professionals conduct educational conferences and courses on subrogation, while subrogation counsel and recovery vendors in every state provide webinars and training on just about every aspect of recovery. Not all losses will warrant an extensive subrogation effort, but ultimately, the possibility of sizable recoveries means that the subrogation process can positively enhance the bottom line of every organization.