March 2013 5 Recovery without subrogation Recovery with subrogation Gross written premium dollar Subrogation dollar $ $$$ An insurer with a subrogation best practices program recovers more than twice that of carriers without a program. The value of a subrogation dollar is possibly 3 to 5 times greater than a gross written premium dollar. reports and, consistent with the insured’s root cause analysis, suggest that the insured failed to properly supervise, conduct maintenance, and otherwise run the facility appropriately. While a few contractors were mentioned, the regulatory agencies consider the loss to be the fault of the insured and have fined them a small amount, citing minor safety and health regulations. The insured’s operations vice president sought to share blame with the contractors involved in the project initially. In response, the contractors’ counsel threatened to walk off the repair job. Hearing that, the insured’s general counsel negotiated with the contractors (discretion being the better part of valor); the same contractors agreed to expand a different facility of the insured at a reduced amount in recognition of their potential, partial culpability. Neither the adjuster nor counsel ever learns of this. Subrogation counsel’s report concludes there is no subrogation and references the insured’s introspective root cause analysis as conclusive evidence that continuing the subrogation effort would simply throw the proverbial ‘good money after bad.’ With report in hand, you walk to your supervisor’s desk and explain now, about a year or so after the loss, you can finally answer his question. You tell him: “We’ve had counsel look at it. There is no subrogation.” While standing there, you both get notice of another large loss. What now? The old file is put away and closed, never to be looked at again (right after you pay subrogation counsel for their most recent invoice). The fundamental reason an insurer engages in subrogation best practices; or, ‘Show me the money’ While the numerous subrogation metrics and recovery studies do not usually apply to larger losses, it is commonly accepted that upwards of $15 billion in subrogation opportunities are missed each year. Tidball, C., ‘Benchmarking and Metrics: The Devil is in the Details’, 31/1/2011 www.findingmillions.com. An insurer with a subrogation best practices program recovers more than twice that of carriers without such a formal subrogation program in place. See, Tidball, C., ‘Benchmarking and Metrics: The Devil is in the Details’, 31/1/2011 www.findingmillions.com. The return on investment (namely, the cost of subrogation versus the net subrogation recoveries over any significant measurement period) is up to 800%, meaning the expense of a thorough subrogation program is paid back up to eight times. ‘Focus on Subrogation Missing From Many Firms, Survey Finds’ [citing to a Ward benchmarking study], 9/12/2009, www.propertycasualty360.com. Perhaps most persuasively, while varying by insurer, some of our clients have informed us that they find the value of a subrogation dollar is significantly greater – possibly 3 to 5 times greater – than a gross written premium dollar since the subrogation recovery comes directly back to the insurer in full. In the example above, the insurers will probably never know if a recovery opportunity was missed and, perhaps more importantly, will have failed to actually make a recovery to offset its payments on the loss. Over the course of a year, a carrier that fails to follow a structured approach may not recognize how much money was lost due to overlooked subrogation claims. A late investigation, misplaced reliance on the insured or government investigators (who have different objectives, frequently imposed by regulation or statute, than a subrogation investigation) and perhaps over-reliance on non-specialists to evaluate recovery potential are not uncommon even in the modern insurance market. While certainly each loss will not provide a subrogation recovery, the emerging trend is to instead institute a best practices approach that more quickly and more thoroughly evaluates losses for subrogation opportunities. © 2013 Xchanging