Valueing Subrogating

Because subrogation has historically been given a low priority, many insurance carriers have discovered missed opportunities regarding causation, spread of loss, delayed “extinguishments”, etc. Now, many carriers are starting to beef up their subrogation investigation and recovery programs.

As part of its subrogation initiative, Employers Reinsurance Corp. (ERC) has been gathering best practices from many reinsurance clients. Although different programs exist from company to company, one commonality in all successful programs is prompt and thorough investigation – either by the insurers or by a consulting expert or attorney.

The first 72 hours after a loss is critical to the investigation. This is when an investigator must discover the cause of loss and identify/notify potentially liable third-parties. Many sound subrogation opportunities are lost due to spoliation of evidence or an inadequate fact-finding search.

Thorough investigation does not necessarily include hiring the most expensive experts in the industry. An investigation may be as simple as asking your insured several follow-up questions that may reveal a subrogation opportunity. In fact, some carriers have chosen not to hire outside experts until litigation is imminent. The following three scenarios have been developed to provide an explanation of the recommendations in this article.

FIRST SCENARIO

A fire starts in the family room of a house and destroys the entire dwelling. The fire department investigates the loss and finds no evidence of an intentionally set fire. In the area of origin, the fire department finds several electrical appliances. With an unknown level of “expertise” in electrically caused fires and/or no true desire to “call” the exact cause, the fire department concludes the fire was accidental and the exact cause is “undetermined”.

At first glance, based on the fire department’s investigation, there appears to be no subrogation opportunity. However, assume the scene is preserved and the insurer hires an experienced investigator shortly after the fire, preferably one with a background in electrical fires. This investigator has reviewed hundreds of fires and is familiar with most if not all the appliances in the room of origin. The investigator finds convincing evidence the fire was caused by a defect in one of the appliances and learns the appliance was purchased from a local retailer by the insured less than two months prior to the fire. Due to the fire, the manufacturer cannot be identified by mere examination of the appliance, so the retailer is placed on notice of their potential liability for the loss. Through internal records, the retailer is able to identify and notify the manufacturer of the claim.

The above investigation could be completed within days or even hours of the loss. A claim that originally appeared to have no subrogation potential was transformed into a viable candidate for a recovery through a minimal amount of time and expenditure. As a result, do not rely solely on fire department investigators to discern causation. Many will readily admit that once it is determined that a fire was not intentionally set, their investigation slows or halts as to the exact cause of the fire. We do not fault fire department investigators, but rather illustrate that it is not their job to determine the exact cause of an accidental fire.

SECOND SCENARIO

Scenario two is a more complex example. A fire starts in a section of a warehouse and eventually destroys the entire structure and contents. The fire not only destroys the owner’s property, but also the property of several commercial tenants. Almost immediately, the cause of the fire is attributed to the negligence of the owner’s employee.

At first glance, the owner appears to have no subrogation opportunity. The tenants appear to have a valid subrogation claim against the owner. However, the tenants shortly learn that the owner carries only enough liability insurance to cover one-eighth of the total tenant loss. The various parties hire investigators who learn that a sprinkler system was installed to protect the entire warehouse from the spread of fire. The sprinkler system was to be tested and maintained regularly by a fire suppression contractor. It also is learned that the sprinkler system did not activate properly to extinguish the fire. If the sprinkler system had functioned as designed, the fire would have been contained within the area where the fire originated, instead of spreading throughout the warehouse.

Through a thorough investigation, what appeared to be a minimal subrogation opportunity now turns into a likely recovery under a fire spread theory. The conclusion: never stop digging for additional facts and opportunities. This does not imply that a target for subrogation should be frivolously pursued. Rather, it is important to look past the initial causation layer to determine if any party is ultimately responsible for the loss or any portion of it

THIRD SCENARIO

Assume that an insured owned a retail establishment that was intentionally burned by a disgruntled employee. Through the investigation, it is learned that a security company was supposed to protect the premises from exactly such an occurrence, thus identifying a possible subrogation opportunity.

In such a circumstance, think “outside the box” for subrogation opportunities beyond the typical causation theory of recovery. Too many insurers are not taking this next step in identifying subrogation opportunities.

PROFIT CENTER

ERC’s subrogation department has identified many “best practices” being used in the industry to build and maintain a profitable subrogation department. The following is a list of best practices that may help establish a successful profit center:

Develop a process map of the current “as is” subrogation process and identify areas for improvement;

Conduct audits of open and closed claim files under the “as is” process to catch unidentified opportunities;

If it is not already in place, create a subrogation process that places investigation and analysis early in the claim process;

Create a dedicated subrogation unit with experienced subrogation professionals. Keep a list of attorneys and vendors that specialize in subrogation;

Ensure qualified experts are involved immediately in the loss investigation;

Consider the referral of claims that are reserved above a certain dollar threshold to an attorney who specializes in subrogation recovery. Include creative fee agreements with subrogation attorneys depending on the size of the loss, complexity and date of recovery;

Conduct regular training sessions for claims and subrogation departments;

Implement execution metrics to make sure the intended process is being followed and works. Periodic and random audits can prove helpful;

Create financial metrics that measure subrogation department performance and processes. Recovery ratios are a good way to compare historic performance; and

Create “flags” in the electronic claim system that force claims professionals to consider subrogation upon the opening and closing of all new claims. Also, establish financial tracking mechanisms for subrogation recoveries and expenses that will assist in financial metrics.