A variety of factors can preclude successful subrogation outcomes and recovery results can vary greatly when any of these factors become a barrier. Some of these issues can be addressed through education, while others create challenges for all involved.
The recovery specialist is responsible for making a convincing argument as to how and why the claim facts warrant recovery from an adverse party. Sometimes the factual evidence needed is difficult to obtain. Occasionally, investigation crucial to the recovery effort is not readily available and further digging is necessary. Here are 16 factors that can impede a successful investigation or recovery.
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1. Lack of cooperation by the policyholder.
Typically, the recovery specialist expects the policyholder to cooperate in the process by providing facts and supporting documentation crucial to successful subrogation. Unfortunately, many insureds fail to cooperate. They may be suspicious or unwilling to help because they are dissatisfied with the claims process.
By combining empathy with some gentle prodding to gain their trust and cooperation, the recovery specialist can often obtain the much-needed information. Once trust is established, the recovery representative can discuss the claim with the insureds or their representative, and create a logical sequence of events for the loss. Further substantiation to support the claim against a negligent third party can also be obtained. Not taking the time to have these conversations with the insureds will lead to subrogation failure, since the names of potentially responsible parties and evidence are not acquired without their cooperation. And unlike fine wine, the subrogation process does not improve with age!
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2. Recovery preclusion & executing a release with an adverse carrier.
Maintaining an open rapport with the claims department and policyholder promotes better recoveries. It may also alert the subro rep when the insured is contemplating a third-party settlement, so creating a demand package to the adverse carrier would be a waste of time.
There are instances where the policyholder executes a release for damages other than those their carrier is paying under the insuring agreement; in most instances, this bars subrogation recovery from the adverse party. The best scenario involves speaking with the policyholders before they execute a release, and explaining that while their deductible will be reimbursed, they are precluding their insurance carrier from recovering the gross paid loss.
In these instances, it is important to check the date the adverse party or carrier was placed on notice of the subrogation claim as compared to the date they negotiated a release with the policyholder. If the adverse carrier was placed on notice before they settled and sent the release to the insured, they may still be responsible for the subrogation claim.
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3. Lack of communication between policyholder, claims and subro teams.
Occasionally, the subrogation department learns of a large loss with recovery potential after it is too late to present a claim. Open and frequent communication between the adjuster and the recovery specialist improves the subrogation efforts.
The adjuster should be cognizant of evidence retention, as well as gathering information that will later be valuable to the recovery specialist. Information regarding witnesses, contractors, landlords, tenants, neighbors and virtually any facts regarding how or why a loss occurred is always valuable. File documentation by the adjuster should always contain a section on subrogation potential or the reason that none exits.
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4. Desk reviews and lack of support documentation.
Desk review loss adjustments are widely used for property claims during peak periods associated with storm activity to allow insurers to provide rapid customer service to their policyholders. Unfortunately, expeditious claim handling and subrogation don’t always complement each other and a recovery opportunity may be overlooked.
Desk reviews usually preclude obtaining the support documents, photographs and proofs on low-dollar claims because ultimately it is more cost-effective to move onto larger catastrophic losses. However, small amounts can become large ones, and claims without documentation can add up to significant lost recoveries.
5. Independent adjuster reports that do not address subrogation.
In most instances involving loss adjustments, an adjuster is at the scene of the loss and can be a tremendous help in addressing potential subrogation, obtaining witness statements or encouraging the insured to retain and protect the evidence until contacted by the carrier or recovery personnel.
6. Lack of support documentation.
A lack of supporting documents to establish liability against a third party can also deter recovery. Police/fire marshal reports, insured and witness statements, diagram scenes, photos, expert reports, product information and appraisals are all necessary elements to uphold a recovery claim and prevail in arbitration or litigation. Obtaining this material early in a claims investigation ensures it will be available for the recovery process. When there is no support documentation and the policyholder does not have any information to assist, the case is frequently closed without recovery.
7. Spoliation of evidence.
One of the ultimate frustrations for a recovery professional is spoliated evidence. A recent case involved a property claim where the insured’s pool exploded, releasing 10,000 gallons of water into the policyholder’s finished basement. Contact with the insured revealed that the pool had probably been improperly installed the previous year. While these facts would indicate probable subrogation recovery against the manufacturer or installer, unfortunate intervening causes prevented subrogation.
Upon realizing that the liner had ripped and water was flowing into the finished basement, the insured and several family members jumped into the pool and started ripping holes into the liner in a failed attempt to redirect the water flow. Then they took hammers and tried to bang a hole in the opposite end of the pool in yet another failed attempt to divert the water flow away from the house. The evidence was so mutilated that it became impossible to determine if the failure was due to a manufacturer’s defect or an installation error. These unfortunate actions by the insureds destroyed any possibility of recovering the $31,000 paid.
Quickly preserving evidence and properly identifying and protecting it for inspection is critical to successful outcomes. Evidence without any identifying manufacturer, serial numbers or codes will also impede successful recovery.
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8. Statute expiration after or just prior to subrogation referral.
Every recovery specialist should be aware of the statutes of limitation (SOL) for claims. Some jurisdictions are not as subro friendly as others, and have laws that limit recovery opportunities. In many jurisdictions there are limiting time frames to file a Notice of Claim against municipalities, often within 90 days of the date of occurrence, followed by one year to file litigation to protect the statute if the matter cannot be resolved within that time frame.
Adjusters and recovery professionals should be cognizant of third-party tortfeasors. If it is a municipality, immediately place them on notice to preserve the statute. The civil statutes of limitation vary by state, ranging from a one-year SOL to a very generous 10-year SOL for property damages.
9. Subrogation waiver by contract.
Waiver of subrogation provisions found in contracts are generally upheld by the courts, however it is always best to have the contract reviewed by subro counsel to confirm the legitimacy. Incurring the additional legal expense to do so is well worth the investment.
10. Settlement by claimant counsel and workers’ comp liens.
A particularly unfortunate impediment to successful subrogation involves the failure to recover for workers’ compensation liens when a tort claim is settled and the workers’ comp lien is unprotected. This can happen if the injured party has a change in legal representation and the workers’ comp representative is unaware of the change, or when frequent contact is not maintained with claimant counsel. The adjuster may believe that since the workers’ comp lien is protected by statute, claimant counsel will notify him or her throughout the third-party settlement process, and make contact to obtain a consent to settle. However, this is not always the case and without follow-up, it is conceivable that the case could settle around them.
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11. Lien waivers.
Even the most perfect workers’ compensation lien recovery can be thwarted by a claims decision to waive the lien, which is often best for the company and closes both the indemnity and medical portions of the claim. However, it can be frustrating for the recovery representative who has been working on the recovery plan only to have to close the case on day 750 without recovery.
12. Failure to pursue direct action.
Occasionally, an injured worker does not retain counsel or initiate a lawsuit. In these instances, while the recovery representative understands a direct action is warranted, a workers’ compensation adjuster may not come to the same conclusion within the statutory period, and the opportunity is lost.
13. Underwriting “business” decisions.
Equally exasperating are those instances when a recovery specialist realizes this is a winnable case and must cease recovery efforts due to an “underwriting directive,” or a directive to waive a lien to amicably close out the comp file.
14. Low tortfeasor policy limits.
While limited adverse party policy limits are disappointing, it is important to recognize that there are other viable parties to pursue and investigate prior to accepting limits. Make sure to obtain a copy of the declarations page to ensure the limits asserted are applicable to the claim.
15. Poor rapport between claims and subrogation.
Whoever is responsible for recovery needs to work closely with the insured party, claims team, claimant attorneys, insurance agent and all other parties of interest to identify the recovery opportunity early and direct the investigation with recovery in mind, to substantiate the claim.
16. Allegations of negligence not substantiated by facts.
Sometimes a new case appears to show negligence against the tortfeasor, but further investigation determines that the policyholder was actually at fault.
There are challenges to successful subrogation, but the rewards for the insurance carrier include improved financial stability, proper allocation of insurance premiums, better underwriting processes and increased customer satisfaction — all of which are worthy endeavors.
Kathleen Smith, CSRP, (dsmith@localhost) is managing director of Spartan Recoveries LLC. Donna Geraghty (dgeraghty@localhost) is the vice president of sales and client services for Spartan Recoveries LLC.