Wickert: 10 Subrogation Mistakes Insurance Companies Keep Making, Part 1
Monday, July 3, 2017 | 1753 | 0 | min read
This year is the 21st anniversary of the romantic comedy "Jerry Maguire." Its director, Cameron Crowe, just published the entire 5,000-word mission statement he wrote for his crisis-hit sports agent played by Tom Cruise.
The memo, entitled "The Things We Think and Do Not Say," laments some of the dysfunctions within the world of sports agents and endeavored to improve the profession. In many ways, this article is also a mission statement revealing critical mistakes we see with some frequency within the industry, and providing suggestions as to how to avoid repeating them.
Subrogation is the necessary evil of recovering as much of our insureds’ claim dollars as possible in order to help hold down insurance premiums and soften the blow a claim event might otherwise have. No industry is perfect, and insurance is no exception.
Thirty-three years of subrogation litigation experience has distilled 10 of the most common mistakes we see clients continuing to make when it comes to recognizing and acting on subrogation potential. I divulge and discuss them here, much like Jerry Maguire did — not as a criticism of the clients to whom we owe the living we make, but as a healthy reminder to those who do not wish to repeat them.
The following are the the first five of the 10 most common mistakes we see repeated within our industry, in order of the frequency with which we see them made, and are edited for length.
Check back here at WorkCompCentral on Wednesday to read the second five.
1. Waiting too long to involve subrogation counsel
The dollars lost because claims with subrogation potential are referred to subrogation counsel mere weeks, days or even hours before a statute of limitations or other deadline is about to expire, is almost incalculable. I refer not to cases in which subrogation potential is discovered late, or notice of a pending third-party action filed by the insured or claimant is received late in the game. Rather, I refer to files in which subrogation potential is obvious, but a conscious decision is made to avoid incurring subrogation attorneys’ fees or costs resulting in the wholesale avoidance of referring the file.
Claims deteriorate with age and we see far too many files entrusted to us at the very last moment that contain literally dozens of identical demand letters — with little or no substance or subrogation “proof” to support them — sent to the third-party carrier every six weeks like clockwork for years, each a carbon copy of the one that preceded it.
When the file is submitted to subrogation counsel with very little time left on the clock, there is frequently no opportunity to conduct a thorough investigation. Evidence has disappeared or been destroyed. Deadlines have passed. Lawsuits have been settled. Releases have been signed. Witnesses have vanished or been “reached” by the other side. Money has been lost. It is the number one subrogation-killer we have seen over the years, in terms of the volume of dollars lost, and the number of claim files.
The most surprising aspect of this particular insurance practice is that it appears to transcend file size. It is one thing to sit on a $3,500 med pay claim; quite another on a $350,000 workers’ compensation claim. Trial lawyers have developed a well-known body of law in almost every state, which allows them to take tremendous advantage of carriers who protect their interests either passively or not at all.
Subrogation is a serious investment that deserves both respect and a dedication of time and resources. A successful subrogation program is never an accident and it cannot be developed as an afterthought or a last resort. It is always the result of a commitment to excellence, informed decision-making and planning, subrogation knowledge, an investment of time and money, and an intensely-focused effort and perseverance.
2. Failure to recognize third-party liability
We are the biggest obstacle to larger and quicker subrogation recoveries. We are our own worst enemy. Our industry is, by design, steeped in the mindset of limiting liability. Even the most experienced claims adjusters see the comparative fault of their insured before they see the liability exposure of the tortfeasor.
Your defense lawyers see myriad ways to defend a claim, but very few ways to aggressively prosecute one. It is what makes them good at what they do. Our industry shares a defense myopia that has served us well in the defense of claims of all types and sizes. Human nature dictates that we sing for life the song we learn in our youth.
Claims professionals are often blind to liability. Your greatest strength is also your greatest weakness. As subrogation counsel, we are plaintiffs’ trial lawyers for the insured industry, hired guns who push your subrogation claims to the maximum — the only way to achieve maximum recovery in each file. It is what makes us good at what we do.
Claims professionals reminisce at the water cooler about the ridiculous verdict in the McDonald’s hot coffee case, which has become the poster child for tort reform across America. Yet the true facts of the case reveal a well-litigated claim, an aggressive trial lawyer and a brash, cavalier defense in which the defense witnesses gave off an air of indifference to the 700 serious burn cases which preceded those of the 79-year-old grandmother named Stella Liebeck, whose full thickness third-degree burns over 6% of her body, including her inner thighs, perineum buttocks, genital and groin areas put her in the hospital for eight days while she underwent skin grafting and burn debridement treatment.
They looked past the fact that Stella lost 20 pounds (nearly 20% of her body weight), reducing her down to 83 pounds. They ignored the fact that her grandson was driving and had pulled over in a McDonald’s parking spot while attempting to pull the far side of the lid toward her to add sweetener, when the cup exploded in her hands.
Two years of medical treatment and extensive medical bills followed. The creativity and aggressive pursuit of that infamous case should be the poster child for aggressive subrogation programs rather than a case to be ridiculed as emblematic of an out-of-control civil justice system.
Subrogation opportunities are most frequently disguised as hard work, so it is no wonder they are often not recognized. Our industry is no stranger to hard work. But human nature is such that the over-worked claims professional with a full plate simply adjusting claims will rationalize away subrogation opportunities because it means willingly accepting more work and more responsibility.
Compound this with the fact that recognizing third-party liability often requires thinking like a plaintiff’s attorney and having a working knowledge of tort law from premises liability to product liability. It requires in-depth knowledge of statute of limitations and repose, and an ability to make quick and accurate decisions regarding engaging experts, putting the right people on notice and taking steps to preserve rights that could easily be lost.
Wearing two hats is never easy, but subrogation requires exactly that.
3. Lack of timely/thorough subrogation investigation
Whether a claim is large or small, the burden is the same. The subrogated carrier has the burden of proving: 1) that the defendant was negligent (or that a product was defective); 2) that this negligence proximately caused the damages the carrier paid for; and 3) the amount and nature of those damages. If it fails with regard to any one of these elements, there will be no subrogation recovery.
Liability carriers are quick to latch on to weaknesses in subrogation files and often deny claims simply because the demand letter doesn’t address these three elements satisfactorily. Like a chain, a subrogation claim is only as strong as its weakest link, and that weakest link is almost always created early in the claim, when memories are fresh and evidence is available.
The first few days after a loss are critical — the first and often only chance anyone may have to identify, retain, document, investigate and record valuable information on which a future subrogation lawsuit will depend. Things that may seem to have little or no meaning or importance may turn out to be the lynchpin of an entire subrogation action.
It is important to lock witnesses into positions and testimony favorable to your subrogation case, before the other side gets ahold of them. It is sometimes urgent and legally necessary to place government entities on notice of your claim. Early and thorough investigation often uncovers additional third parties and sources of recovery, including the occasional existence of other insurance that may be available to contribute to the loss.
Some cases are virtually worthless — even with the best of liability facts — unless some investigation and preservation of evidence is undertaken almost immediately. Premises liability cases involving slips and falls, ice and snow or dangerous conditions on property require some sort of preservation or recording of the conditions existing at the time of the fall. Such cases depend entirely on whether the condition was “unreasonably dangerous” and “open and obvious.”
In most cases, relying on the claimant’s or insured’s memory in order to meet our burden of proof guts such files of virtually all value. Cases involving livestock that escape a fenced-in area and wander onto a busy highway almost always require the subrogated carrier to prove that the livestock owner was negligent. This means proving in court that a broken fence or gate that wasn’t repaired, or other negligence on the part of the owner, caused the accident. This type of evidence can be preserved only at or near the time of the loss and before repairs or spoliation take place.
If a product is involved in a subrogation claim, it is our burden to prove a defect or that there was negligence by a third party in maintaining the product. We also have to prove that the condition of the product was unchanged at the time of the injury or damage from the date it was manufactured.
These are impossible burdens to meet if the product is not preserved and the chain of custody is not carefully documented and protected. When an appliance that causes a fire is still under warranty and the repair technician (often an “authorized service company”) takes the appliance or the faulty part, this evidence is often misplaced in the shuffle. Sometimes we are able to argue spoliation by the manufacturer, but it's much easier and cheaper to simply preserve the part.
When the cause of a loss seems apparent, don’t stop with simply securing only the product or evidence bearing most directly on the case. Bear in mind that the targets of your investigation will almost always find alternate causes and persons to blame, and will quickly cry spoliation if evidence, which they claim may exonerate them, is gone or damaged.
Think like the defendant. Take efforts to disprove and eliminate the alternate theories your subrogation counsel will ultimately face. If the claim is significant, engage subrogation counsel or an investigator to conduct the investigation and take thorough statements of all witnesses and, if called for, timely engage experts who are qualified and experienced.
Even in inspecting the loss, the client (and sometimes even the expert) doesn’t keep any of the evidence. This is especially true when insurance clients try to cut corners by not having an expert out to the loss scene, but instead rely on plumbers or technicians to tell them what failed. The plumbers or technicians may uncover what failed, but they are not qualified to testify to that in court. Unless they preserve the product and other possible suspects the defendant is sure to blame the loss on, an expert retained at a later date will not be able to offer an opinion and the case will be rendered worthless.
4. Using cut-rate vendors and low bidders
Many corporate decisions made with the best of intentions can be some of the most detrimental to subrogation performance. This is irony at its purest.
When making decisions on ways to “save” money when it comes to subrogation, the real, total cost often looks very different. This “mistake” must be assessed when taking into consideration total costs of outsourcing subrogation.
John Glenn was often asked what he was thinking as he was about to be launched into orbit in the nose of a giant rocket. His reply is instructive: “Well, the answer to that one is easy. I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts — all built by the lowest bidder.”
The trend today is seemingly to fall victim to slick marketing promotions by third-party adjusting companies and subrogation vendors, often owned by larger law firms with control over the employees.
Litigation is rarely cheap, but it is often necessary. Nowhere is this truer than in the area of insurance subrogation, where those who resist paying subrogation claims assume that insurance companies are loath to pull the trigger and file suit. As a result, liability insurers almost never pay full value on subrogation claims with even the clearest liability facts.
For decades, the insurance industry has paid special attention to the attorneys’ fee line item in their claim department budgets and have gone to great lengths to find the perfect balance between keeping litigation fees and costs in check, and maintaining high-quality representation. Insurers have turned to litigation budgets, in-house counsel, litigation management guidelines, litigation vendor databases and law firms with lower hourly rates.
An entire litigation cost-management cottage industry has sprung up and some insurers have even turned over the distasteful task of disallowing certain lawyer time entries and expenses to cost management vendors whose very existence is justified by cutting as much as possible from fee bills.
The problem of runaway fees began and remains primarily within insurance defense litigation, but the mindset of cutting costs has quickly spread to other areas of litigation, including subrogation, where cost effectiveness is a built-in requirement.
It is difficult to assess whether a large hourly attorney’s fee in a defense case resulting in a defense verdict is justified, because it is an open-ended evaluation. Defense lawyers must react to and defend against the case asserted by the plaintiff, whether it has merit or not. A fee of $100,000 that saves $1 million on a defense file is worth it in hindsight. In subrogation cases, however, cost efficiency must be built into the handling of every file because subrogation is as successful only as it is profitable. If you spend $5,000 to recover a $5,000 subrogation claim, the only winner is your lawyer.
Subrogation files are most frequently handled on a contingency fee basis, which makes the cost containment goal less elusive, but limits the litigation management options available to the insurer. As a result, one illusion that the insurance industry seems to be operating under is the specious notion that lower contingent fee percentages translate into higher net recoveries and, therefore, a more successful subrogation program.
If 33 years of subrogation litigation experience has taught us anything, it is the fallacy behind that premise. The only path to true subrogation success is a genuine partnership between an insurer and a law firm it trusts.
A new generation of opportunistic subrogation and claims vendors, often owned by lawyers who have experienced firsthand the cost-conscious insurance industry’s attraction to low rates, have had great success by offering contingent fee rates too good to be true. Idioms that have weathered the test of time usually have a basis in fact, and the pejorative phrase “built by the lowest bidder” is no exception.
The lowest contingent fees guarantee that many files will be settled for less than their true value and that larger files that should see the inside of a courtroom in order to get top dollar never will. Like insurance catnip, however, the low contingent fees serve up the mirage of fee containment while simultaneously devaluing an entire book of business. The only winner here is the short-lived vendor, who profits by selling short the wheat and leaving the client with the devalued chaff.
A $75,000 recovery in a $90,000 subrogation claim litigated on a one-third contingency fee is preferable to a $30,000 recovery on a 15% contingency fee. The subjective nature of subrogation success allows a good file to be easily misrepresented as a bad file in order to justify a quick settlement. Unfortunately, it is often easier for subrogation claims managers to sell an 18% contingent fee than to assess the true recovery potential of a large case that is settling for little or nothing at all.
Far too many in our industry go for the quick buck, skimming the cream while leaving behind a treasure trove of subrogation potential to slowly decay until statutes of limitations are mere weeks from running. Taking the road less travelled means that the bulk of files referred by such vendors have less than 30 days left before being time-barred.
Lawyers know the number of hours necessary in order to ready a file for trial and, if that number exceeds the potential profitability of success based on a reduced contingency, they won’t stay in business long. The subrogation vendor working on cut-rate contingency fees is faced with that stark truth when it tries to assign to counsel the majority of files that do not settle quickly at discounted value. When even lower-rate vendors undercut the cut-rate vendors, the result is disaster.
For these entrepreneurial opportunists it is not about getting good results across a wide spectrum of files for their client — it’s about making any promise necessary to get the business in the door and milking the files for settlements the client could have achieved with just a phone call.
Unlike law firms, subrogation vendors don’t have to follow attorney ethics rules and obligations, and owe no fiduciary duty to ensure that the client’s best interests are being served. Time and time again we see independent audits revealing millions of dollars unrecovered and left on the table, and by then, it’s often too late.
Litigation is not a “commodity.” It is a professional service like brain surgery and engineering. When you need it, you have to get it right. If your adversaries win by paying significantly less than what they owe, the entire industry suffers.
Successful subrogation requires that the pointy end of the subrogation sword — a genuine threat of litigation — must always be hanging over your adversary’s head. Value, experience, legal knowledge, availability, prompt and thorough reporting, and the willingness to strong-arm top dollar recoveries in every matter entrusted to it are the trademarks of a good litigation law firm and a good subrogation department. Everything else is smoke and mirrors.
Successful subrogation requires the best, not the cheapest.
5. Relying on plaintiff’s counsel to protect you
“From a place you will not see comes a sound you will not hear” is the famous line dealing with special forces snipers. It describes the inevitable when insurers think they have “teamed up” with plaintiff’s counsel for protection of their lien. The illusion that many insurers operate under is the perceived “savings” that result from not engaging counsel and relying instead on the plaintiff’s or insured’s attorney to protect and safeguard their subrogation interests.
Trial lawyers are shrewd and suggest such arrangements because they know their victims. The idea of a plaintiff’s attorney protecting your valuable subrogation interests runs contrary to the ethical duty these lawyers have. They are ethics-bound to zealously and aggressively represent their client’s interests, not yours. Their number one mission is to make sure you take as little of your subrogation interest home with you as possible, and then bill you for the privilege of succeeding.
When relying on plaintiff’s counsel for their “take” on litigation, it is almost always dismal, and trial lawyers know that when the hen comes to the fox for advice, the result is never pretty.
One of the most common types of file we see is one in which our client thought it had an “understanding” with the plaintiff’s attorney that he or she would protect their interests. Everything goes well right up to the point where it doesn’t. Frequently, motions to eliminate the lien or subrogation interests are filed just a few days before a hearing date. Scrambling to protect interests this late in the game almost always result in lost recoveries.
If your claim is small enough that entrusting plaintiff’s counsel with your interests, despite the above, is still the more cost-effective course of action, make sure you have, in writing, an agreement that spells out that you are a “client” of the attorney just like the claimant or your insured. This will go a long way toward deterring the attorney from not keeping your best interests protected.
Gary Wickert is a partner with the Matthiesen, Wickert & Lehrer law firm in Hartford, Wisconsin. This blog post is reprinted with permission.