Welcome to “Finding Fault,” a new column in which members of the National Association of Subrogation Professionals (NASP) discuss issues and share important information related to subrogation practices with the CLM claims community, with the goal of facilitating communication and education between everyone involved in the field.
When I started practicing 30 years ago, there were only a few subrogation departments. During an economic downturn in the 1980s, however, the insurance industry seemed to have an epiphany about the way insurance companies make money. It included three basic revenue streams: premiums, investments, and subrogation.
The premium dollar is an expensive dollar to capture. There are marketing costs, advertising, and other expenses that are required in order to bring in that dollar, not to mention competing with over 3,000 companies.
The investment dollar is a prisoner of the market. When the market is strong, most companies do well. When the market is weak, results are poor. Some carriers do better than others on investments, but each ultimately is constrained by market conditions.
Lastly is the subrogation dollar. In the 1980s, companies began to examine subrogation revenue streams more closely. As executives looked beyond the difficult premium and investment dollars, they shifted to subrogation, which may be the cheapest dollar to recover in terms of the positive impact to a company’s bottom line. Since insurance companies already had the right to certain recoveries, the question became “Is our company organized in a fashion to maximize results?” The logical outcome was that if results were going to improve, the organization of the process needed to be revamped. This gave birth to the dedicated subrogation unit.
NASP has conducted benchmarking studies over the years regarding subrogation results in various lines of business, and there are significant differences between high and low performers. These differences most often are linked to the management of the subrogation process. In the property realm, field professionals who were resolving first party claims typically were responsible for the subrogation aspect of the file, too. They were busy enough with the first party aspects of resolving the claim; investigating and prosecuting subrogation claims was too much. In addition, they had little—if any—subrogation training. The fix was somewhat obvious: Create and train a dedicated subrogation department to handle recoveries. Those who manned it would gradually gain experience, and their performance could be measured over time. This new level of expertise and focus resulted in better performance over time, and almost all carriers have moved to this model.
This did not, however, solve every problem with the process. Subrogation units were still dependent on frontline staff to identify and, in some cases, investigate subrogation opportunities. So the question that needed answering was “How do we make sure that our frontline staff recognize, preserve, and investigate subrogation potential?” Different companies have varying approaches to the issue. Some companies bring in subrogation counsel at the first report of a potential subrogation claim to handle the investigation. Others have subrogation-type liaisons to provide input and support. Some rely on training their frontline staff on what needs to be done. Everyone faces the same challenge: If an opportunity is not identified, then subrogation may be destroyed.
Some carriers have even faced extra-contractual lawsuits for failing to properly investigate a subrogation claim, even though there is no requirement in the policy to do so. Take the following scenario: Your insured suffers a fire loss. You tell him that you are investigating the claim, which includes a large uninsured loss. Your efforts fail to protect and investigate a potential subrogation theory, and evidence is destroyed that may have proven the case. Your insured sues, claiming that he had a large uninsured loss. You told him that you were going to investigate what caused the loss. He relied on your investigation and now his rights are impaired by your failure to do what you said you would do. There may be defenses to this type of claim, but wouldn’t it be better to avoid it in the first place?
This column will allow the subrogation community an opportunity to provide information to non-subrogation personnel to enhance their abilities to identify and investigate subrogation scenarios. We will present articles by leaders in the field, who will provide important tips, pitfalls to avoid, and how to protect subrogation rights, thereby enhancing your company’s bottom line. We look forward to providing information to get everyone on the same page for the benefit of all of our policyholders.