Trends in Subrogation

It is easy to see how files with good potential for subrogation are missed: a loss has been adjusted and paid out. The file can be closed. Pursuing subrogation means keeping the file open and making a further investment in expert fees, legal expenses and general overhead costs. Why throw good money after bad, except in the most certain of cases?

In some cases, the decision to pursue recovery through subrogation is easy. For example, subrogation opportunities are relatively straightforward when there is enough money at stake, when the facts surrounding liability are clear and when there is a collectible target.

It is the less certain cases that tend to be ignored; smaller losses where the facts are unclear and the possibility of recovery uncertain. These cases are often systemically neglected as insurers consider that, on a cost-benefit analysis, it is a better business decision to close the file and move on. If subrogation is approached on a program basis, however, fewer opportunities will be missed.

Organizational Planning

The decision to pursue a subrogated claim is multifactorial. Can liability be established? What is the cost of obtaining and preserving evidence? Is there a target that has the means to pay a judgment? What internal resources must be allocated to these efforts?

Once a claim is pursued for subrogation, a financial investment must be made. Most claims require experts to provide opinions on liability and lawyers to prosecute litigation. From a claims perspective, the investment decision is made throughout the life of the claim, from the moment of first notice of loss through to closure.

Most insurers recognize there are opportunities for recovery through prosecuting subrogated claims. They have some kind of process for first party claims handlers to identify where there is a subrogation opportunity. However, the demands of managing a first party claim are many, leaving little time or opportunity to investigate targets, locate and preserve relevant and necessary evidence, obtain statements and prepare a file for subrogation. Each of these steps involves investment, be it the time and resources of the handling adjuster, the hiring of forensic professionals to investigate causation, or keeping up to date on developing, often complex, case law.

Some insurers recognize subrogation requires a front end investment in systems that allow subrogation professionals to coordinate their efforts with first party adjusters in the early stages of a claim. What follows is an approach that measures the success of a subrogation on a program basis – not on a file-by-file basis. In this paradigm, files are looked at not as individual cases, but rather as portfolios where some will be winners and some will be losers.

The objective: weed out the losers early on so resources are not wasted on cases where the chance of recovery is negligible. Then pursue the others aggressively, always maintaining flexibility to abandon subrogation if circumstances warrant.

Front Line Execution

In a world that is increasingly specialized, working in subrogation requires a broad, generalized knowledge of an array of different types of losses. An oil spill file might take up space on the shelf beside a commercial fire loss case or a flood claim resulting from water main break. Those three files alone necessitate a working knowledge of the Technical Standards and Safety Act and associated Regulations, sophisticated and often complex commercial leasing agreements, as well as technical construction-related issues and nuanced rules surrounding municipal liability. Add to that uninsured motorist claims, condominium losses and class actions stemming from mass tort and you are left with someone who, by necessity, is a jack of all trades and master of none.

Investigation

Early investigation is a key to a successful subrogation effort. The challenge is to put resources in place to conduct a full investigation at the outset of a loss, before witnesses disappear and evidence is lost. First party adjusters who are managing the loss may not have the luxury of time to complete the necessary investigation. Therefore we are seeing, in limited cases, greater and earlier coordination between claims and subrogation adjusters.

This proactive approach to subrogation requires specialized investigation skills and knowledge. Who are the likely targets? What information is necessary to obtain? Are there witnesses who need to be interviewed and statements obtained? What evidence must be preserved? Who can ensure the evidence is adequately preserved?

We often see a mistaken belief that information received at an early stage of the claim and documented in the file is equivalent to admissible evidence in litigation. For instance, consider the following (fictionalized) adjusting note on a fire loss: “insured spoke with neighbour who indicates he saw tenant’s guest smoking on balcony and putting cigarette out on wooden deck and not into an ashtray.” This might lead to a conclusion that there was evidence of negligence. That is not the case. This fictional note is not admissible evidence, but rather inadmissible hearsay. The identity of the guest is unknown. The tenant is not committed to a story by way of a signed statement. Once a statement is obtained from the tenant that identifies the culpable party, it becomes evidence so long as the person providing the statement is available to give evidence at trial. But the culpable party still must be identified.

In this same early timeframe for identifying subrogation opportunities, a decision must be made whether any identified target(s) should be put on notice. If this is a ‘checklist’ item for a first party adjuster, notice will often be given to ensure that box is checked. This can be a tactical mistake. Once a target is put on notice, if there is an insurer responding, that insurer will open up a liability claim file and begin its investigation. The insurer is not hindered by the demands of adjusting the first party loss and, in many cases, it will nail down liability evidence to start building a defence to the claim. Notice should be provided to other parties in circumstances where there is likelihood that evidence may be lost or compromised in a way that a target defendant would be able to argue spoliation.

Negotiating with Counter Parties

Once the preliminary investigations are complete, information should be analysed against the backdrop of relevant case law, regulatory and legislative standards to consider next steps – putting the targets on notice and entering into settlement discussions.

If a negotiation is managed properly, there is little downside to attempting to reach an early resolution prior to moving into the litigation phase. However, a poorly managed negotiation can significantly impair a case. Care should be taken to ensure that an offer to settle made at an early stage is not heavily discounted, given that it is unlikely that a negotiated resolution of a claim will ever exceed the lowest offer that has been made.

As lawyers with extensive subrogation experience, we often see first offers exchanged, with significant discounts offered on account of depreciation and liability contingencies. Similarly, we often find engineering reports being provided to the other side in the vain hope that this will persuade a counter party to make a reasonable offer to settle. The response is often no offer at all, but rather a bald denial of liability. Where does that leave the insurer that has made the offer? It has incurred the expense of retaining an engineer, disclosed evidence to the other side and made a discounted opening offer. The insurer is essentially left with nothing in its negotiating position.

While there is nothing wrong with making an opening offer to the other side with some implied discount for early settlement , it is important not to give too much away at an early stage. The counter party may be doing little more than ‘tire k
icking.’

The resources required to design and implement an effective subrogation program are manageable for most insurers and independent adjusters. Thoughtful design of workflows and training are essential. An investment is required to allow for, among other things, greater coordination between first party adjusters and dedicated subrogation professionals. Even smaller organizations can create these competencies and protocols, which should improve subrogation recoveries. 

Neil Colville-Reeves is a partner at Samis + Company Barristers & Solicitors. Neil’s practice is focused exclusively on insurance related litigation.