The Cost of Subrogation Procrastination

In July 2017, we published a somewhat controversial article in the Claims Journal,Ten Subrogation Mistakes Insurance Companies Keep Making. Thirty-four years of subrogation litigation experience had distilled ten of the most common mistakes that we see client and non-client insurance carriers continue to make when it comes to aggressively pursuing their rights of subrogation and reimbursement of losses and claim payments. We listed the ten most common mistakes we see repeated within our industry, 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. They were listed in the in order of the frequency with which we see them made and the severity of their consequences. Mistake number one was waiting too long to involve subrogation counsel. Mistake number two wasn’t even a close second.

It is difficult to be critical of decisions made to save the insurance company attorneys’ fees and costs by delaying the involvement of a lawyer in a dispute. It is especially difficult when the recommended remedy of the mistake involves the referral of work to our firm or firms like ours. It gives the impression that the criticism is self-serving. As subrogation counsel, our responsibility — our ethical duty — to our clients is to provide them with a net recovery that is higher than had they otherwise not engaged us in a dispute. The “Delay of Game Penalty” mistake referenced in the article above is number one because it is the most prevalent mistake and it costs the company the most money—even considering attorneys’ fees that accompany utilizing subrogation counsel.

It should not be news that trial lawyers and their powerful judicial and legislative lobbying machine have been at war with the subrogation industry for decades – and they are winning. Inroads to avoiding subrogation responsibilities, legal obstacles to reimbursement rights meant to hold down insurance premiums, and the outright destruction of subrogation rights in a growing number of states, is the result of years of foolishly believing that less is more – that a company saves money by not spending money. As with anything else, including freedom itself, by not treating subrogation as a right worthy of protection and investment, we will gradually lose it. Actively pursuing subrogation rights and aggressively securing rights of reimbursement increases a company’s “net” subrogation recoveries (even after taking into consideration any attorneys’ fees incurred) and protecting the right of subrogation from the legal erosion and/or destruction which occurs when judges and legislators face tragic stories about passive carriers insisting on full recoveries to the detriment of seriously-injured victims. It is not coincidental that one letter we use to introduce ourselves to potential clients contains this paragraph:

We promise to increase annual contingency attorneys’ fees your company will pay in the coming fiscal year. Please allow me to explain why that is a good thing and an opportunity you should not let slip by. An increase in contingency fees translates into an exponential increase in net subrogation recoveries – something Matthiesen, Wickert & Lehrer, S.C. lawyers have been delivering for their clients since 1983. For clients who formerly experimented with utilizing in-house counsel, the increase in recoveries have far made up for the allocated expenses and overhead associated with that business decision. For clients who formerly were attracted to the illusion of lower contingent fee rates advertised by cut-rate third-party subrogation vendors and TPAs, they are amazed at how much money was literally being left on the table.

It should be noted that not all subrogation vendors are equal. We work with some excellent vendors, but as cut-rate vendors continue to flood the marketplace, the good ones are becoming the minority.

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 literally incalculable, which is what makes the decision to avoid involvement of lawyers so speciously attractive. There is no accountant who can point to a ledger and document how much money you left on the table. Grading the success of your subrogation program — or assessing the subrogation result in a single claim — is one of the most difficult functions an insurance company can undertake. When told by the claimant’s counsel that the liability in a third-party case is bad, chances of winning are slim, or that law allows you to recover only a small percentage (or none) of the total claim payment, it is easy to see how accepting $25,000 on a $250,000 lien might look like an A+ on your subrogation report card. However, this assumes true the information and legal assessments of an attorney whose ethical duty it is to minimize or destroy your rights of recovery. If you could have instead recovered $150,000 to $225,000 by employing subrogation counsel early in the game, that “A+” begins to look more like a “D.” In a growing number of states, the law provides a solid arsenal of traps, pitfalls, and tools for claimants’ counsel to throw in your way. The prevalent claims practice of sending multiple, identical lien notice letters to all involved can be counter-productive. It reminds counsel, whose job it is to avoid repaying you, that you aren’t going away, but you haven’t bothered to adequately protect yourself from efforts to minimize your rights.

The moment you know that a lawsuit has been filed by an insured or an injured employee, the fuse is lit. Many states have short statutes that eliminate or significantly reduce your right of recovery if timely action is not taken. In Colorado, failure to simply intervene means automatic reduction of your lien by more than one-third. In Connecticut, the fuse is thirty days, after which you lose your entire subrogation interest. Similar land mines exist in Iowa and many other states. The most common reasons for rejecting a subrogation file is an impending statute, blown notice deadlines, products which disappear, spoliation, lost witnesses, and the like. Billions are lost annually because we don’t give subrogation the respect or attention it requires.

We are in a new era of workers’ compensation insurance and our industry is undergoing significant change in our legal relationship with our insureds. Legislators are recognizing the relationship and duty we have to aggressively pursue subrogation to keep low the experience modifiers of our insured’s employers. A few years ago, the National Council on Compensation Insurance (NCCI) introduced a new rating formula which produced lower modifiers for employers without large individual claims, but increased modifiers for employers with larger individual claims. Businesses have gotten smarter about the world of insurance and are demanding aggressive recovery efforts to protect them from large premium increases in future years. That is where we come in.

The problem isn’t 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. The costly problem, rather, is 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 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 little time left on the clock, there is frequently no opportunity to thoroughly investigate. Evidence has disappeared or been destroyed. Deadlines have passed. Lawsuits have been settled. Releases have been signed. Witnesses have vanished or have been “reached” by the other side. Money has been lost. It is the number one subrogation-killer over the years, in the volume of dollars lost and the number of claim files.

Some clients consider subrogation to be “automatic”, especially in workers’ compensation subrogation, where some states grant an automatic lien. However, securing that lien is where the unrecognized hazard lies. There are a plethora of ways in which trial lawyers can gerrymander settlements by allocating non-economic damages or giving huge slices of a recovery to spouses or non-beneficiaries, placing those funds out of reach of the unsuspecting carrier. And, if we are not a party to the litigation, these actions take place under cover of darkness.

The most surprising aspect of subrogation procrastination is 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 that 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 after-thought 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.

Allow subrogation counsel to increase the attorneys’ fees you will pay in a given year. As outrageous as that sounds, it should be your company’s main objective. Any increase in contingent attorney’s fees translates into a disproportionate increase in the amount recovered. The corresponding, exponential increase in subrogation recoveries will allow you to give yourself a much more “informed” and accurate subrogation grade. Knowing that you’ve maximized your “net” recovery is what 21st Century insureds are demanding as they scratch and claw for every penny to help keep their premiums low. Subrogation need not be difficult or increase the burden on an already-heavy case load for claims professionals, but we should strive for the best result possible. Invest in your recovery efforts. The dividend is usually outstanding. Not all claims require counsel and our job is to help you separate the wheat from the chaff.

Procrastination makes easy things hard, and hard things harder. There are no short cuts in life, and that includes subrogation. Fast food is popular because it’s convenient, it’s cheap, and it tastes good. But, the real cost of eating fast food never appears on the menu and is rarely discovered until it is too late.