Courtesy of the National Association of Subrogation Professionals. / 2005 © NASP Subrogator® Winter 2005 Issue. NASP / 888.828.8186 / www.subrogation.org

The BalancingAct of SmallSubrogation

Claims

by Kimberly Rathbone and Joel Rathbone,

Javitch, Block & Rathbone, Cleveland, Ohio

Courtesy of the National Association of Subrogation Professionals. / 2005 © NASP Subrogator® Winter 2005 Issue. NASP / 888.828.8186 / www.subrogation.org

Handling

small subrogation

claims is all about

the “netback.”

If you are a subrogation supervisor or adjuster responsible fordeciding the best way to handle small balance subrogationclaims, you know your options are limited. The balancing actbetween collecting the full balance and controlling expenses canbe exhausting. However, if the decision is based upon theamount you “netback,” you will minimize your costs whilemaximizing your recovery.

“Netback” is the number that impacts your bottom line - it is thereal number you have in the bank after all recovery expenses arepaid. When our clients ask our advice on tackling these issues, wetell them if they are fully informed about their options, the bal-ancing act and decision-making can actually be quite simple.

Determining a proper file for subrogation is basically a combi-nation between company philosophy and balancing variouscompeting interests. An insurer should consider many factors.

First, consider the monetary value of the file. Contrary to whatyou might expect, attempting to subrogate the small files willactually dramatically increase your overall recovery. It is all amatter of what to outsource and where to focus your employ-ees’ time and attention internally.

A second factor to consider is the type of file and the strengthsand weaknesses of any liability issues. The collection of an auto-mobile file is vastly different than the collection of a non-automo-bile property file. For example, even within the automobile indus-try, a case of assured clear distance is vastly different than a casewith a citation against the insured. Another example is in healthclaims, where a file with ideal facts and plan language is vastly dif-ferent than a file with bad facts and bad plan language. Again, it isnot necessary to close the file when there is a less than ideal liabili-ty situation. Instead, you can outsource those cases and turn yourattention to those that resolve a little faster and more successfully.

The key here is to train the claims adjusters and subrogationstaff to identify a file that is more easily collected from one thatis not. Even if you determine the initial assessment was incor-rect, you can always choose to close or outsource it when thedifficulties in a file become apparent. That way, your time is notbeing consumed by more complicated files, and you can insteadspend your time on auditing procedures that allow you to iden-tify missed subrogation opportunities in closed or new files.

Once you have identified your files with subrogation potential,you have several options. Let’s review them.

1) DO NOTHING DESPITE THE SUBROGATION POTENTIAL

There are various factors to consider in determining whether to

close a file instead of pursuing subrogation. These are based ona) the value of the claim; b) percentage of liability; c) collectibil-ity of the wrongdoer; d) whether insurance is available; e) theability to locate the wrongdoer and any potential witnesses; and,f) any company policies or philosophies that exist, such as mak-ing every effort to return the deductible to the insured. We havefound that some companies will make a small effort to collectthe file, through a few collection phone calls and then will shutdown the file if they have made the decision not to outsource.Remember that the top performers in the 2004 NASPBenchmarking Survey regarding insurers’ practices were thosewho had a lower balance threshold when subrogating and maxi-mized recovery on even the small files. Many do this by a com-bined approach of working in-house and outsourcing the rest.

2) COLLECTION EFFORTS THROUGH AN IN-HOUSE SUBRO STAFF OR LEGAL DEPARTMENT

In-house subrogation is best utilized when maximizing theresources to obtain the best return. Most departments are notlarge enough to handle the volume of complex cases insurancecompanies will likely accrue. Therefore, most insurers find thein-house staff works best when they focus their efforts on thefiles that provide the best return. Some examples include aninsurer working the files where insurance is available asopposed to uninsured or a small number of large balance fileswith clear liability instead of numerous small balance files orthose with questionable liability.

Even attempting to manage large balances through promissorynotes or payment arrangements can be costly due to the largemaintenance costs of tracking and depositing the monthly pay-ments. These files are ideal for outsourcing to a vendor to mon-itor the payment schedule and pursue payment in full immedi-ately when a wrongdoer misses a payment.

The 2004 NASP Benchmarking Survey also states that the aver-age amount of time an insurer should work a file internally isapproximately 100 days. If no collection has been obtained inthat time, good results can be obtained from outsourcingbecause it provides a new “voice” and “name” to the wrongdoer,even if there is no intent to file suit. This conveys that youmean business.

3) OUTSOURCING

When deciding whether or not to outsource, there are some gen-eral rules that you can follow. Do not be afraid to outsource filesthat have the lowest recovery potential. Again, those insurers hav-ing the best success are handing off the more complicated files,including those with low balances, and focusing their efforts onthe ones that are easier to collect. Some insurers are even out-sourcing their arbitration filings when the volume is substantialor when staffing is temporarily low due to issues such as medicalleave. The 2004 NASP Benchmarking Survey indicates that a filethat is valued under $10,000 should be outsourced.

One of the major considerations when determining whether tooutsource a file is the amount of time it takes to prepare thefiles to be sent to the vendor. Depending on the technology youhave available, some vendors will make this preparation easierby communicating electronically in a paperless fashion.

If a vendor is confident that they are doing the best work avail-able, they will encourage you to audit their performance

Courtesy of the National Association of Subrogation Professionals. / 2005 © NASP Subrogator® Winter 2005 Issue. NASP / 888.828.8186 / www.subrogation.org

through secured technology that allowsyou to easily monitor what is happeningon each file. Additionally, a good vendorwill make their numbers and liquidationrates available for you to evaluate regu-larly or even provide the results to poten-tial clients so you can compare them toother competitors. You not only want toconsider the fee for each of the vendors,but, more importantly, you should con-sider the success rate that each vendorhas in the different areas of the countryand different types of law.

But even if you decide you want to out-source, you have the option to out-source to either an agency or a law firm.Some hints on how to make this deci-sion are below.

A) Outsourcing to an Agency with No Suit

Company philosophy often plays a majorrole in whether to use an agency or a lawfirm. Sometimes the insurer makes thedecision that it does not want to extendresources towards the expenses of litiga-tion like court costs or expert fees.

When choosing an agency, measure theliquidation rates for the files within a 12-month period, which vary from state tostate. In addition, when choosing anagency, consider the automation of thevendor, such as use of a predictive dialer,and the ability to monitor the file, likeviewing your files in process online.

B) Outsourcing Through aLaw Firm with Suit

Many insurers use externalcounsel to work their smallsubrogation files. Often, themore successful insurersaverage a lower number ofattorneys on their pre-approved list in order tocontrol costs. Some lawfirms are capable of doingthe job of an agency as wellas suing the file, so someinsurers have decided to uselaw firms to handle theirfiles from start to finish.This can save time, whichcan be crucial when wrong-doers are on the run.However, we do not recom-mend that you send thefiles to a law firm unlessyou have a general intent tosue the files in order toobtain judgment.

We have often found that a lawsuit is thebest way to force an insured wrongdoeror a carrier to step up to the plate whenit comes to paying a subrogation claim.The legal process tends to uncover insur-ance and assets where none were previ-ously thought to exist. In addition, thewrongdoer may name a third party tocollect against and increase your chancesof recovery because they realize thatthere is no more time to play games.

When deciding whether to sue, we rec-ommend using the 10% rule - if courtcosts exceed 10% of the balance of thefile, it is not usually worth suing unlessyou have ideal facts concerning liabilityand knowledge of assets to increase col-lectibility. If the court costs are lowerthan 10% of the balance, filing suit is anexcellent tool in discovering many waysto get the wrongdoer to pay.

Another cost to consider when decidingto sue is the cost of experts to assist inproving your case. If you have alreadyretained an expert to write a report, theexpert expenses are not always over. Theexpert will probably charge an additionalfee to testify hourly on video or at trial.Additionally, a separate expert may berequired to prove medical expenses arerelated to the incident, to prove an acci-dent occurred the way the partiesremember or to testify as to a standardin an industry.

The cost of any potential counterclaims isalso something to keep in mind whendetermining whether to sue a file. Whilesome companies have no fear of counter-claims, others are very reticent to file suitwhen a counterclaim is threatened. Thisis usually based on the insurer’s philoso-phy and whether they control their costsby having in-house counsel defend thoseclaims.

However, the benefits of obtaining ajudgment can often outweigh the costs.Obtaining a judgment allows you toaccrue and collect interest from the dateof judgment. This can often be a signifi-cant amount of money that is not other-wise obtainable. Thus, this interest is like“gift money” which far exceeds the courtcosts used to obtain the judgment. Thisprovides for a greater “netback.”

Another benefit of obtaining judgment isthat a credit bureau report can now berequested on the wrongdoer in order toobtain further information regarding col-lectibility. The obtaining of the creditreport provides a better opportunity toexecute on the judgment including wagegarnishments and bank attachments.

Having a good relationship with attor-neys that you regularly use can also bebeneficial, because you can use thoseattorneys as a resource. For example,attorneys can provide training on subro-gation issues, obtain updates on the law,recommend experts with strong trialexperience and provide guidance whendifficult issues such as spoliation orbankruptcy arise.

An insurer may also have a general inter-est in suing a type of file in order todevelop favorable law in an area that isnot insurance-friendly. For example,since the 6th and 9th Circuits are notori-ously difficult to subrogate in the healtharena, an insurer may prefer to use a lawfirm that can take the case to trial whenthey have a good set of facts.

Obviously, the world of small subroga-tion is a balancing act, with many areasof competing interests, and insurers needto be mindful of that. While keepingyour company’s philosophies in mind,keep analyzing your numbers to deter-mine the procedure that provides themost “netback,” and you will continue tosee the subrogation department be ahuge success.

Obviously, the world

of small subrogation

is a balancing act,

with many areas of

competing interests,

and insurers need to

be mindful of that.