The Societal Benefits of Subrogation

Subrogation is one of the oldest legal concepts in jurisprudence with roots that trace back to Roman law under the reign of Emperor Hadrian (A.D. 177–A.D. 138). First established in English common law with the Magna Carta in 1215 A.D., subrogation is now part of the fabric of both our insurance industry and the American economy. Subrogation today works hand-in-hand with the concept of insurance and indemnity to ensure both economic justice and individual responsibility, and is favored under the laws of every state.

Workers’ compensation subrogation remains one of our last lines of defense to keep premiums in check and ensure the affordability of insurance for employers, large and small, across the country.

Workers’ compensation subrogation is much different than other forms of subrogation, and should be treated as such. Workers’ compensation legislation first came into being in 1911 when Wisconsin became the first state to adopt workers’ compensation legislation. By 1948, every state had some form of “workmen’s compensation.” Such legislation had its roots in socialism and is a social contract in which employers are mandated by law to pay unlimited medical expenses and lost wages when employees are injured while working – even if the employer is absolutely without fault. In exchange for this social safety net, workers’ compensation becomes a worker’s exclusive remedy as against their employer, and the employer is given immunity from liability. As part of the contract, the employer (or its insurance carrier) is also entitled to be reimbursed for any benefits paid whenever a third-party tortfeasor (somebody other than the employer or employee) is responsible for the injury or death. Unfortunately, courts and legislatures have begun eroding away the employers’ end of the bargain, rendering them liable both when they are at fault, and when they are not. At the same time, their rights of reimbursement have also been assailed.

The term “subrogation” might be a misnomer when it comes to workers’ compensation, because the carrier’s right is more appropriately one of “statutory reimbursement.” The Wisconsin Court of Appeals has correctly observed that “the rights granted by the statute are distinct from subrogation.” Campion v. Montgomery Elevator Co., 493 N.W.2d 244 (Wis. App. 1992). Rather, they are a defined set of rules for honoring our social contract with employers by safeguarding reimbursement, placing the responsibility for the loss on the backs of the wrongdoers, and holding down employers’ insurance premiums. Unlike traditional subrogation, the carrier here is not subrogated to the rights of its insured – but rather, is statutorily given the right to press the claim of or receive reimbursement from the injured worker, a stranger to the insurance contract.

Judges and legal scholars agree that subrogation recoveries are an important component in calculating premiums. An insurance company sets its rates based on historical net costs. One legal scholar at the University of Chicago explained how subrogation impacts insurance premiums. See Jeffrey A. Greenblatt, Insurance and Subrogation: Where the Pie Isn’t Big Enough, Who Eats Last?, 64 U. Chi. L. Rev. 1337 (1997), citing Harry L. Sutton, Jr. and Allen J. Sorbo, Actuarial Issues in the Fee-For-Service/Prepaid Medical Group, 46 Center for Research in Ambulatory Healthcare Admin., 2d ed., 1993. (“An adjustment to estimated total HMO expenses…should be included to project the impact of coordination of benefits, workers’ compensation, and subrogation”), and author’s phone interview and letter from Dean K. Lam, senior actuary for Allstate Insurance Company to Jeffrey A. Greenblatt, Jan. 30, 1997 (“Lamb letter”) (on file with U. Chi L. Rev.). “An insurance company sets its rates based on historical net costs. Thus, if the insurer had 100 policyholders in the experience period, and experienced a total of $20,000 in claim costs, it will set its actuarial premiums at $200 per policyholder. If, on the other hand, the insurance company experienced $20,000 in claim costs and received $5,000 in subrogation, it will set its actuarial premiums at $150 per policyholder.” Id. at 1355. Similarly, another writer explained how subrogation recoveries figure into an insurer’s premium calculations:

Revenue gained by the insurer, whether through subrogation collection or otherwise, is applied toward responding to the actual risk that is required to be paid by the insurer under the terms of the contract or policy…As a source of revenue, subrogation operates to reduce the actual past cost total used in the calculation of probable future insurable risk or loss on which future premiums will be based. F. Joseph Du Bray, A Response to the Anti-Subrogation Argument: What really emerged from Pandora’s Box, 41 S.D.L. Rev. 264 (1996).

Courts throughout the country agree that subrogation benefits society by lowering insurance costs and preventing double recoveries. See Brooks v. A.M.F., Inc., 278 N.W.2d 310, 313 (Minn. 1979). Subrogation along all lines of insurance serves the vital function of helping to keep premiums low for billions of insureds worldwide and should be protected at all costs. This is especially true with workers’ compensation insurance where the laws of some states require reimbursements to be considered in calculating premiums.

The complicated calculation of workers’ compensation premiums necessarily involves the concept known as the Experience Modification Factor. The Experience Modification Factor (also known as an Experience Modification Rating, EMR, Experience Modifier, or just the Mod) is an adjustment that is made to the Workers’ Compensation insurance premium of American employers. This means that the calculation of insurance premiums for an employer takes into consideration a number of factors, including prior years’ payroll, loss history, and subrogation recoveries.

In 2005, the Workers’ Compensation Subcommittee of the American Academy of Actuaries reported to the U.S. Senate Judiciary Committee on the dangers and economic harm associated with efforts to limit subrogation rights in the workers’ compensation arena, acknowledging that insurance premiums for employers are generally determined in the process of underwriting taking into consideration and counting on the fact that subrogation rights will apply. The role subrogation plays in holding down workers’ compensation premiums is even much more pronounced than in some lines of insurance because when the employee makes a successful third-party recovery, the workers’ compensation carrier not only has a right to recover past benefits it has paid, but in most states, it has the right to take a credit in the amount of the worker’s net recovery toward any future benefit payments it might owe. This combination of subrogation and future credit plays a large role in erasing negative loss histories, positively affecting risk modifiers, and helping to hold down insurance premiums for one of the key operating costs for American businesses large and small – workers’ compensation insurance.

Allowing insurers a right of subrogation will not increase the amount of lawsuits. In fact, it will have the opposite effect of reducing lawsuits. For example, without subrogation many plaintiffs are free to bring a lawsuit without concern for whether he or she must repay their subrogated carrier. If plaintiffs were forced to repay their health insurers after a third-party recovery, many doubtful or borderline cases would not be brought.