the concept of subrogation to the general
public becomes problematic when an insured first hears the word. Because many
subrogation claims require involvement
and cooperation of the insureds, it is imperative that they understand how the
right is derived.
To the insured, it is easiest to refer to
the language of the insurance policy and
the clause that requires the insured to co-operate with the carrier in its subrogation
efforts. Despite the clear language of the
contractual insurance language, subrogating carriers are often accused of trying
to take money out of their insureds’ pockets when a settlement is reached.
I really believe subrogation is a good
thing and am proud of what I do. There
are three entities that benefit from a subrogation recovery: the carrier, the insured
and society as a whole.
The Insurance Carrier
The benefit to the insurance carrier
should be obvious. Any dollar the carrier brings into the company is a positive.
Whether the company is a publicly-held
company or a mutual company owned by
the policyholders, the benefit is the same.
More revenue enhances the company’s
bottom line. There are three main ways
an insurance company brings in revenue:
premiums, investments, and subrogation
recoveries. With more than 3,000 insurance companies competing with each
other for the premium dollar, the advertising, marketing, and other promotion
costs make this an extremely expensive
dollar to bring in. Every insurance company is a prisoner to the general investment market environment.
When the market is rising, most carriers make money on their investments.
When the market crashes, as happened in
2008 and 2009, carriers will probably lose
money on this side of the business. Carriers can do better than their peers at the
margins, but are generally limited by the
general market performance.
Subrogation is an area where an insurer
has a right to recover dollars. The ques-
tion becomes whether carriers are set
up to properly identify and execute on
opportunities. The subrogation dollar is
almost always cheaper to obtain than the
premium dollar. When the stock market
is down, subrogation may be the second
largest source of income for a carrier.
Subrogation recoveries can easily make
the difference between a company being
in the red or the black in any given year.
In the auto subrogation world, companies can recover between 12 and 22 percent of their paid losses in a given year. 4
This is a huge opportunity for an insurance company to improve their financial
performance. Over the last thirty years,
as carriers have come to recognize the
financial impact of a successful subrogation program, they have begun to dedicate increased attention and resources to
their subrogation departments. They are
now actively managed, benchmarked,
and analyzed to maximize revenues.
The practice of subrogation exists in
many lines of insurance, including auto,
health, property and workers’ compensation. In each arena, the insured benefits
from a recovery in different ways. In an
auto subrogation claim, the insured usually suffers a loss of his or her deductible
when a motor vehicle accident occurs.
The carrier’s subrogation efforts are the
most effective method of recovering
that loss. When both parties to an automobile accident have insurance (which
is required under Minnesota law), the
carriers each pay for their own insured’s
damages, less the deductible. They then
negotiate the claim. If they cannot agree
to a resolution, most carriers belong to
an arbitration agreement. The claim is
submitted and a decision on liability and
damages is rendered.
The insured deductible is recovered
from the liable carrier through this pro-
cess. Unfortunately, many individuals in
Minnesota drive without insurance. In
the circumstance where the uninsured
person is at fault, the carrier’s subrogation
efforts are the best chance the insured has
of ever getting back any part of his or her
deductible. As deductibles continue to in-
crease, insureds become more interested
in this process. I rarely meet an insured
who understands why she or he has in-
curred a deductible when the other party
is at fault. Recovery of the deductible be-
comes an important customer service is-
sue where insureds do not expect to have
any financial loss because the accident
was not their fault.
In property loss cases, deductibles are
also increasing rapidly. Some insureds
have deductibles that are a percentage
of their coverage. It is not unusual to see
a deductible on a homeowner’s claim in
excess of $10,000. On a commercial loss,
there may be very large deductibles or
self-insured retentions. In all of these
cases, the insureds are usually very concerned about the carrier’s attempts to
recover these losses. In the workers’ compensation area, a business’s premiums are
based on an experience rating.
This means any loss can cause premiums to rise. A recovery will lower rates.
Companies have a vested interest in the
recovery efforts. In addition to deductible recoveries, insureds benefit when an
insurance carrier’s investigation into the
cause of a loss creates the evidence necessary for the insured to make his or her
own claims for uninsured losses.
A homeowner who loses her or his
house to fire may be paid for his insured
loss, but what about the portion of the
loss that exceeded available coverage?
Without the subrogation investigation,
such an insured might reluctantly accept the policy limits and absorb the uninsured loss that should be paid by the
party that caused the fire. Subrogation investigations yield evidence, theories of liability and viable third parties to pursue.
Whenever there is an airplane crash in
this country, the Federal Aviation Administration (FAA) conducts an investigation.
One purpose is to find out the cause of the
accident so that other accidents can be
avoided. When a fire occurs in a home in
Minnesota, fire officials usually make one
determination: Was the cause of the fire
intentional or accidental? If intentional
fire is ruled out, most officials leave the actual determination of cause to the insurance investigators. If there was no right of
subrogation, then there would be no need
for any further investigation. Let us assume there is a defective brand of furnace
that is causing fires around the country.
It is often the subrogation investiga-