How to Subrogate Claims in Your Self-Insured Retention

Dan D'Imperio


October 27, 2021

how to subrogate claims

Subrogation is the assumption by a third party (such as a second creditor or an insurance company) of another’s legal right to collect a debt or damages. However, that definition neglects the businesses that use either self-insured retention (SIR) or a large deductible to reduce the cost of property insurance premiums. When a company uses either of these financial tools, it can pursue at-fault parties to recover the amount of money it incurred for a particular loss. 

With the continuing hardening of the insurance market, many companies are increasing the level of the SIR or deductible. As a result, claims falling within these higher SIR levels can be significant. The following is a road map for maximizing recovery for property losses that are not paid by insurers. 

Investigating the Facts

All losses are caused by something. A timely investigation is necessary to figure out what caused the loss and to identify any potential at-fault parties. Start with a simple question: Does a recovery opportunity potentially exist? Until proven otherwise, the answer should be yes. The key is to identify a viable theory of recovery and a target party. If the responsible party has liability insurance or sufficient assets, you are on your way.

For both uninsured and subrogated claims, a timely and thorough investigation of the facts is critical. As the party pursuing a potential wrongdoer (tortfeasor), the burden of proving your theory is on you. Your claim is unlikely to succeed without a clear picture of what took place and the supporting evidence. For many claims, recovery is determined by the physical evidence.

Having a post-loss investigation procedure in place—preferably in writing—will create a consistent approach and improve identification of potential recovery opportunities. Providing field staff with a checklist or questions that get at the “who, what, when, where, why and how” of each loss will identify claims to pursue, and help to eliminate cases with no recovery potential. Those 15 minutes of focus on recovery or subrogation rights after damages occur will be very valuable.

For example, assume one of your locations suffers water damage and the only detail about the loss indicates “water line to refrigerator leaked.” On the surface, this may not look like a claim with recovery potential. However, asking a few additional questions may reveal the refrigerator was recently serviced and the repair person crimped the water line. Securing a copy of the repair invoice will help support your claim and identify the target party. If such questions are not asked, the opportunity to subrogate may be lost.

Preserving Evidence

As the potential plaintiff in the case, you have a legal obligation to preserve relevant evidence. Failure to preserve evidence allows the target party to assert a spoliation argument. You are required to preserve the evidence and allow the target party the opportunity to conduct a joint inspection or an inspection of their own.

If possible, try to preserve the entire scene until the subrogation investigation is complete. This may not always be possible or practical, especially on smaller losses or in situations where repairs are needed to continue to operate your business. If a full scene preservation is not possible, preserve the area of origin and secure the evidence (the part or item you believe caused the loss), as well as key evidence that was ruled out but others might claim caused the loss.

Other forms of evidence include, but are not limited to:

  • Photos of the scene, failed part or item believed to have caused the loss
  • Documents outlining ownership, maintenance and control
  • Contracts, leases, security system data, warehouse receipts and bills of lading
  • Police and fire reports
  • Weather reports
  • Inventory records
  • Warranty documents
  • Product recall data

Note that losses caused by faulty products often require examination by an expert, depending on the extent of the damages, but the utility of using an expert will depend on the extent of damage. It does not make sense to incur a $1,000 expense for an expert on a $2,500 claim, but it does for a potentially viable $25,000 claim. 

Notifying the Adverse Party

With your initial investigation complete, a theory of liability developed, and a potential target party identified, it is time to notify that party of the loss. The notice letter outlines the facts of the loss (date, time, location) and informs the recipient of why you believe they or their product contributed to the loss. You should also notify the target to preserve relevant evidence. If you know the full extent of the damages, include that information in the letter. However, if total damage remains unknown, simply state that the full repair or replacement costs are not final.

If the scene was preserved, clearly provide that detail in the notice letter. Provide a specific but reasonable time frame for the other side to complete an on-site inspection. If evidence was removed or secured, you should offer to allow the other side’s expert to inspect the item (with non-destructive testing). 

Getting to the Finish Line

Once you have completed the investigation, identified the facts and the at-fault party, and notified them of your intent to pursue recovery, one of three outcomes is likely: 1) the other party will ignore your notification letter; 2) the other party (or their representative) will deny any responsibility; or 3) the other party’s in-house claims department, third-party administrator or insurer will contact you to discuss the matter further.

The first outcome requires a bit of reflection on your part. Weigh the overall strength of your case and the damages sustained against the expenses you are likely to incur. As mentioned previously, spending $1,000 to pursue  $2,500 with no guarantee of success is not economically sound. 

Outcome two, a direct denial from the other party, should not be too surprising. These cases should also prompt you to consider the strength of your claim and the costs you may incur continuing to pursue the recovery. If you believe that you have a legitimate theory of liability and the economics warrant continuing your efforts, reach out to the other party for specifics on the denial. You may get information that supports the other side. While this may be bad news, ending your pursuit on this non-viable claim allows you to focus on other more promising claims. Having numerous open files with no chance of recovery does not help you.

Outcome three is a favorable sign. While not a guarantee of future recovery, it opens the door to discussions and potential future negotiations. With a timely and complete investigation, you will be in a position of strength when it comes time to discuss settlement.

There is also a fourth possible outcome in which you receive a check in the amount requested from the responsible party. While rare, it does happen. Following the steps outlined above can help you achieve this ideal result.

Dan D’Imperio is co-director of National Subrogation Services.