Wickert: 10 Subrogation Mistakes Insurance Companies Keep Making, Part 2
Wednesday, July 5, 2017 | 1371 | 0 | min read
On Monday, I discussed five of 10 subrogation mistakes we routinely see among insurance carriers. Today, we round out the list with the remaining five.
6. Failure to discover indemnity/waiver of subrogation
A frequently seen obstacle to successful subrogation is the waiver of subrogation. Waivers of subrogation are a necessary evil of underwriting, but their application and effect on subrogation are rarely understood.
One of the ways to avoid subrogation is through the implementation and enforcement of waivers of subrogation. Just as the insurer has a legal right to pursue subrogation, so too does a party to a commercial transaction have a right to structure the transaction so that the party’s legal rights of recovery against another party are abrogated or somewhat limited.
Such clauses, known as exculpatory clauses, have as their intent and effect to limit a party or that party’s insurer from subrogating against another party to a transaction. Obviously, the existence of contractual limitations to subrogation must be discovered during the due diligence investigation of subrogation potential and should be revealed to subrogation counsel as soon as possible. Spending significant time and money on recovering large subrogation dollars only to discover that a waiver of subrogation endorsement to an insurance policy cuts us off at the knees is worse than if subrogation had not been pursued at all.
A waiver of subrogation actually involves two separate provisions:
- A waiver of subrogation clause contained in the contract between the parties.
- A provision in the insurance policy, or an endorsement to that policy, granting permission to the insured to waive, in writing, recovery rights against the others prior to loss.
Waivers can be found in commercial general liability policies, commercial auto policies, workers’ compensation policies, and commercial property, builders’ risk and inland marine policies, to name a few.
In the workers’ compensation context, however, even if a waiver of subrogation exists, a sin worse than not discovering the waiver in the first place is giving up on subrogation because of a waiver that technically would not bar you from seeking a subrogation recovery or a future credit.
The first mistake might be issuing a waiver of subrogation endorsement without adequate consideration or premiums charged. However, once issued, it is important to understand what a waiver does and doesn’t do. We see far too many companies giving up on subrogation because of a waiver that will not prevent them from subrogating, seeking reimbursement and/or, at least in the area of workers’ compensation, obtaining a significant future credit.
Typical waiver of subrogation endorsement language reads as follows:
We have the right to recover our payments from anyone liable for an injury covered by this policy. We will not enforce our right against a person or organization named in the schedule, but this waiver applies only with respect to bodily injury arising out of the operations described in the schedule where you are required by a written contract to obtain this waiver from us.
As you can see, there are lots of conditions that must be in place for the waiver to be applicable. Even if it is applicable, clients routinely think their right to reimbursement and their right to a future credit are also waived. This is not always the case, and failure to act on subrogation due to a misunderstanding of when rights are waived and when they aren’t continues to be a problem we see costing the industry a lot of money.
7. Failure to give notice
Refraining from doing some of the simplest acts can result in some of the largest subrogation potential being lost.
Notice requirements necessary to preserve and protect subrogation claims are very common, and vary from state to state. They present a procedural trap and a pitfall for the unwary subrogation claims handler. We frequently see significant claims lost because notice requirements with short fuses receive a back seat to the busy activity of adjusting a new loss, especially early in the claim.
Notice is required in many states in as short a time as 30 days. A notice of claim against the city of Austin, Texas, must be filed within 45 days or be lost forever. An intervention for workers’ compensation subrogation must be filed within 30 days of the carrier having notice of a third-party complaint being filed, or it can recover nothing.
If our insured settles a personal injury claim with a tortfeasor prior to us giving notice of our subrogation interest to the liability carrier, no matter how quickly the settlement occurs, our subrogation rights as against the tortfeasor are lost forever. In almost every state, if the claimant settles a third-party bodily injury action before we have placed the claimant’s attorney on notice, our right of reimbursement may be jeopardized and the ability to pursue the only entity with money left in the bank — the attorney — might be barred.
Notice to governmental entities must strictly conform to statutory guidelines and contain specific items of information in order to be valid. Frequently, we see “form” notice letters being sent to such entities, and only months or years later do we receive the file, and by then it is too late.
Notice to a plaintiff’s attorney that we will not need his services and do not want to contribute toward common fund attorneys’ fees is necessary in order to avoid significant portions of our subrogation interest going into the bank account of the insured’s attorney.
Yet, we often see notice — or notice in the incorrect form and with insufficient information — not given in a timely manner. These become expensive letters that we didn’t bother to write, and quite often there is nothing subrogation counsel can do to turn back the hands of time and fix the problem.
In the workers’ compensation arena, notice is frequently required in order for the carrier to file suit, intervene or settle a subrogation claim. Notice against the federal government must be filed on a government-prescribed form or, in the alternative, it must contain precisely the same information as requested on the form.
The failure of clients to give adequate notice to the property party in a timely manner remains a common mistake leading to the elimination of subrogation potential across all lines of insurance. Unless our client knows that notice required, how to file it, what must be included and who to serve it on, the notice is often simply overlooked.
8. Failure to recognize multi-jurisdictional opportunities and pitfalls
Under the U.S. Constitution, each state is still considered sovereign, and each state controls the laws within its boundaries. Things get complicated, however, when a vehicle insured and garaged in one state is involved in an accident in another state.
The legal issues involving conflicts of law, at least with respect to subrogation rights, concern themselves with one question: Which state’s subrogation law should be applied to a particular lawsuit? The actual process by which a court determines which state’s law to apply is sometimes referred to as “characterization” or “classification.” The actual determination of which state’s law is to apply must be made in accordance with the law of the state in which the court is sitting, which is most often the state in which the accident occurred.
Courts have used a variety of approaches to determine which state’s law applies to an auto insurance carrier’s subrogation interest in a lawsuit filed in a state other than the one in which a vehicle is insured and garaged. This area of law is known as Conflict of Laws. The three main approaches used to determine which state’s law applies in situations such as these are the following:
- Lex loci delecti — applying the law of the forum state in which the tort or accident occurs.
- Larson Rule (workers’ compensation) — applying the law of the state where the benefits are paid (enabling state) to a recovery made in a different state in which the third-party action was filed (forum state). This is the same as the Restatement (Second) of Conflicts of Law § 185.
- Most significant contacts — applying the law of the state with the most significant contacts to the incident.
Some states have not declared what their rule is and handle extra-territorial situations on a case-by-case basis. In fact, some states that apply rule number 3 above must look at the facts and circumstances of each case to determine which law applies.
Opportunities to game the subrogation system frequently present themselves in the area of workers’ compensation insurance.
In today’s national and global economy, employees are routinely traveling in the course and scope of their employment throughout the country, and are getting injured in states other than the state where the employer is based. Employers with multi-state operations are regularly encountering workers who are being injured and claiming benefits in states other than the state where their home office is located.
When attempting to subrogate for workers’ compensation benefits, this can lead to a wide array of confusing results. Most state workers’ compensation laws are extra-territorial. This means that an employee in the enabling state (the state in which he was hired and under whose laws he recovers benefits) who suffers an occupational injury or disease while outside of its boundaries in a forum state (the state in which the worker is injured and files a third-party action) is still eligible for workers’ compensation benefits under the laws of the enabling state.
In some circumstances, the employee who is injured in another state may choose to collect benefits either in the enabling state or in the forum state.
We frequently see clients who have the ability to select the payment of benefits under one jurisdiction picking a different jurisdiction even though the selection forecloses any possibility of future subrogation. For example, one state may give an employer and its workers’ compensation carrier first money rights of recovery (such as Texas) while another state may disallow your subrogation interest unless and until the worker is “made whole” (such as Georgia).
Knowing which state’s subrogation law to apply is critical in evaluating your subrogation potential and recovering your subrogation interest. If Texas benefits are selected relative to a Georgia accident and a Georgia third-party lawsuit, however, subrogation is destroyed because Georgia allows subrogation only when benefits are paid under Georgia law.
Therefore, the littlest decision — often the very first decision made — can have devastating consequences and cost literally millions of dollars in subrogation, all because the necessary homework with an eye toward subrogating was not performed ahead of time.
9. Waiver of lien to settle comp claims or EL claims
Whether it’s a case of the tail wagging the dog or the simple fact that insurance companies see their primary responsibility as that of adjusting and concluding “claims,” we all too often see a client with significant subrogation potential waive a $500,000 workers’ compensation lien in order to take down $75,000 in reserves on a pending claim. It is simple and quick, and because they do not yet have the $500,000 in hand, it becomes Monopoly money.
The importance placed on closing a file often clouds the more economically sensible decision to wait until the subrogation claim settles and take a large future credit that will have the effect of closing the workers’ compensation claim without having to waive half a million dollars in potential recovery.
Sadly, decisions such as these are often made at levels far above those of the front line subrogation professional, who learns after the fact, that despite significant efforts spent to effect a large recovery, the lien is waived and subrogation is gutted. Left holding the bag, of course, is the employer, who has a vested interest in seeing a large subrogation recovery and a reserve takedown so that its risk modifier is favorably affected and future workers’ compensation premiums do not go through the roof.
States that allow employer liability claims, including contribution claims (e.g., Illinois and Minnesota), also present “opportunities” for a carrier to waive a significant lien in order to settle an employers liability claim worth considerably less.
While there are other considerations at play, such as attorneys’ fees for the defense of the EL claim, large liens are often abandoned for the settlement of much smaller contribution claims without much financial analysis.
Defense counsel’s job is to resolve the EL claim or the compensation claim, so their recommendation to the client usually consists of waiving subrogation — without regard to the net effective gain or loss.
10. Hiring the wrong expert
In modern litigation, especially subrogation litigation involving defective products, premises liability, negligent maintenance or medical negligence, expert testimony may be necessary to prevail.
The first rule of subrogation is “do no harm.” This rule is violated when experts who are not qualified to support a subrogation claim area are engaged. Experts represent an expense of litigation — a necessary evil for subrogating carriers. However, in an effort to minimize costs, many carriers rush into broad agreements with “expert” vendors who offer “cut rate” fees and a sliding menu of services.
All too often, we see “expert” reports authored by investigators and technicians who are not qualified to offer testimony in court. It is human nature to tend toward the path of least resistance, and engaging the same company over and over, regardless of their areas of expertise and credential, to author a report that does nothing more than state “the fire started somewhere under the hood,” has become quite common.
Unfortunately, the failure to hire the right expert is often worse than hiring no expert at all. At the same time, subrogation professionals cannot afford to hire the best available expert in smaller cases.
Compromises must be made. All too often we see our clients settling for experts who are not experts and who author reports that say little or nothing at all. Such an effort is a complete waste of time and money. More importantly, it damages recovery potential.
Manufacturers of defective products know their products much better than you do, and they have a routine of responding to a defective product allegation down to an art. They are familiar with their electrical schematics and engineering diagrams, while our expert may have to learn from scratch.
It is said that an expert is one who knows more and more about less and less. Every state has specific requirements about what is necessary in order to allow an expert to testify.
Subrogation counsel should be prepared to provide you with a number of potential experts immediately after a loss occurs. They should be able to walk you through the process of setting up an inspection and destructive testing of a potentially defective product.
In the right case, choosing the best available expert means the difference between a large recovery and no recovery at all.
- Signing releases with indemnity.
- Ignoring the subrogation duty we owe to our insured.
- Ignoring the small files.
- Get appraisal in residential/dwelling/building total losses.
- Grading on a curve — giving yourself an A for D work.
The above 10 areas are those in which we most commonly see costly mistakes being made. Over the years, we have learned that good decisions come from experience, and experience comes from bad decisions.
That may sound like making bad decisions is a good thing, which isn’t true. However, bad decisions permeate every industry and every profession. Making the most of those bad decisions — learning from them and taking steps to avoid remaking them — is the hallmark of a progressive company. They can be expensive lessons to learn.
“Experience is simply the name we give our mistakes,” Oscar Wilde famously said.
Quite frequently, the subrogation mistakes we see from even the most experienced claims professionals are actually disguised as corporate efforts to save money, streamline or consolidate. We understand that they are not made in a vacuum and they often begin with the best of intentions.
The mistakes we see repeated are sometimes benign. Quite often, however, they turn into very expensive lessons. Whether we learn from these lessons is the true test of both our desire to optimize the recoveries we make and the lengths we will go to in order to fulfill the service — and in some states the duty — we owe to our insureds and our clients, for it is often our insured that pays the price for missed subrogation opportunities.
As the industry becomes wiser to the significant savings that aggressive, cost-effective subrogation can provide, we can no longer ignore the best subrogation practices and techniques available to us. We can take advantage of our mistakes only if we recognize them and strive to avoid repeating them.
Gary Wickert is a partner with the Matthiesen, Wickert & Lehrer law firm in Hartford, Wisconsin. This blog post is reprinted with permission.