Why Are Insurance Subrogation Recoveries So Hard Fought? A View from the Inside.
“Don’t worry, we will get it back in subrogation.” These words are often heard in the insurance claims world to soften the blow of a significant settlement or judgment. They might be said to support an account`s deteriorating loss ratio, to support an insured`s renewal terms or even demonstrate good performance by a claims handler or manager in a review. Internal audit may require subrogation to be considered leading to the prospect of second guessing if a manager disagrees with a decision not to pursue a subrogation claim.
For senior management subrogation is seen as a revenue stream and an opportunity for the claims team to add to the profitability of the company, for underwriters the possibility of a subrogation recovery supports their rational for writing an account that now has a significant loss and for actuaries the possibility of subrogation recoveries are used to support IBNR calculations and projections. C Level managers` rationale may center around managements` obligations to shareholders.
Whatever the reason, and there are many more, insurers see subrogation as positive revenue that goes to the top line and insurance recoveries, through subrogation, are now built into financial models. The expectations of all of these differing interests creates increasing pressure on the claims handlers to recover the maximum possible to avoid “leakage” especially when the other party is a rival insurer. In order to maximize recoveries, insurers have turned to specialist insurance centric law firms who often act on a contingency fee basis.
With the prospect of millions of dollars flowing back into the insurance company through subrogation one might expect dedicated teams to be set up within the insurance company to handle the specialist field of recoveries, and for recoveries to be benchmarked and swift resolution to be the order of the day, and for the straight forward low value claims this can certainly be true. However, the large losses, particularly in the Specialty lines, seem to be handled very differently.
So why is it so difficult to resolve the larger losses? Surely insurers will treat the claims in a rational and dispassionate way, balancing risk and reward and enabling both sides to swiftly reach an agreement on the merits and move rapidly to an appropriate valuation? Large losses seem to lead disproportionately to acrimony, excessive litigation and entrenched positions.
In order to understand why subrogation claims are often the hardest fought it necessary to look at how they are handled within the insurance carriers. While insurers are now retaining different counsel to pursue subrogation, the claims handler who manages the underlying loss is often the same claims handler who is responsible for the subrogation recovery. In the defense of an underlying liability claim the claims handler and defense attorney are in sync, they are unlikely to be emotionally invested in the outcome as their job is to assess liability and quantum and, if possible, resolve the case at, or within, those parameters.
The applicable law that governs this process is typically straightforward, the facts required to defend a claim are well known and the process well established. However, the same cannot be said for subrogation. The applicable law and jurisdiction may be completely different, the evidence required, and the burden of proof, will be different and the whole process will be dependent on the original defense team taking steps and preserving the requisite evidence, possibly many years beforehand. The adversary (claims handler on the other side) is a competitor, reputations are at stake and professional pride becomes a significant factor to both parties.
To further complicate matters, damages paid out in the original settlement may not be recoverable as a matter of law, damage calculations will likely be challenged and matters long since considered settled in the underlying litigation will be fought over. As for the amount of the dispute, the word “volunteer” is almost always deployed, leading to the suggestion that the underlying suit was settled with too much money, thus attacking the competency of the very claim handler who is often tasked with pursuing the subrogation recovery. Matters get further complicated with internal reserving and the allocation of recoveries, as vested interests either seek early recovery or hold out; whether to justify a position or hold money back “ for a rainy day”. A carrier may refuse to be “reasonable” in order to trying to establish a reputation for being difficult to deal with, in an effort to dissuade contingency fee litigation. The claims handler may be fearful that an early resolution will make them look weak to their peers.
With all of these separate business interests, and a myriad of other factors, it is not surprising that insurance to insurance subrogation matters, particularly in the large loss arena, are among the hardest disputes to resolve. The reluctance of carriers to change handlers following the initial settlement, and before the subrogation proceedings are commenced, places additional strain on subrogation counsel as well as the defense counsel retained to address the recovery action.
Early mediation can help. While early mediation may not necessarily lead to immediate resolution, provided the mediator is skilled, it should enable the adverse parties to better understand the legal and procedural issues that will need to be addressed at a much earlier stage in the dispute. As set out above, often these legal and factual issues are different from those involved in the underlying matter that led to the subrogation proceedings.
The earlier the parties address the need for any additional facts (as well as the evidential nature of such newly developed facts which may well involve experts) and agree upon the legal framework of the dispute, the easier the matter will be to resolve. While there is no guarantee that the matter will settle at that time, with clarity of the applicable law and facts required, both parties` lawyers will be better placed to represent their clients, assess the risks of continuing the proceedings and, of course, find it easier to advise when and how to resolve the claim. In addition, a mediation will provide a neutral venue, and provide the parties most directly involved a forum where compromise and resolution take precedence over being right, and where both sides can resolve a case without extraneous factors interfering.
ABOUT THE AUTHOR
As a mediator and arbitrator at Miles, Nigel Wright handles extensive personal injury claims in disputes in over 50 countries and complex claims (including class actions) for A&H, Aviation, Casualty, Commercial Property, Construction defect, Crisis Management, Cybersecurity, D&O, E&O, Energy and Marine, Environmental, Financial Lines, Insurance coverage, IP, Pharma, Product defect, Professional Liability, Political Risk, and Surety.