This article is a companion piece to the video below:

In this special episode of our On Subrogation YouTube series, Subro LIVE! – Subrogation When Your Insured has Out of PocketsKim Rathbone discusses OOP expenses with attorney Susan Benson live during a National Association of Subrogation Professionals (NASP) conference.

State Subrogation Laws & Out of Pocket Expenses

Oops… I did it again! We all make mistakes, but for subrogating insurance companies, OOPs (out of pockets, or out of pocket expenses) has a special meaning.  Out of pockets are expenses not covered by the carrier, and they represent a growing issue in subrogation claims now that policy limits have become so small. 

In fact, California, New Jersey, Pennsylvania, and Massachusetts have laws mandating $5,000 policy limits. However, damages often exceed that amount.  So, how should the reimbursement for out of pockets proceed between an insurance company and their carrier?

Auto Subrogation Loss: What Counts as OOPs?

Here is a very common example of coverage vs out of pockets: 

An insurance policy covers repair of a damaged vehicle, but also an initial deductible, for which the insured is responsible. That deductible is an out of pocket expense for the insured. If a car rental is not included under the terms of the policy, this may be another out of pocket if the insured doesn’t have access to another vehicle to drive during the repair time. 

Another, more complex, issue is diminution of value. Once a vehicle has been in a significant accident, even after repairs, it does not return to its pre-accident valuation. Most insurance companies do not provide diminution value coverage.  

Efficiently Ascertaining Out of Pockets when Initiating a Subrogation Recovery Claim

The easiest way to figure out if there is an OOP involved is at the claims adjustment level. Insurance claims adjusters perform the claim intake, often helping the insured find a repair company. If there is no rental insurance, the adjuster is in a great position to ask the insured if she will need a rental car. 

For subrogating insurance companies, having insurance adjusters who are well-versed in relevant fact-gathering can save tremendous leg work further along in a claim. Early on, communication with the insured is frequent; in fact, most state statutes place insurance companies under time constraints to process claims.  

If that factual groundwork has not been laid, gathering information from the insured can be much more time-intensive and expensive for the insurance company once the claim reaches a subrogation attorney. Carriers anticipating a subrogation claim should have subrogation specialists perform a robust investigation at the outset of the claims process.

What Happens once a Subrogation Claim is Filed?

Once a subrogation claim lands on an attorney’s desk, they should immediately send out a letter to the insured, explaining that their firm has been retained by the insurance company and is pursuing reimbursement of what the insured has paid, including the deductible.  

Here is where confusion arises: the firm may be pursuing the deductible, but not the other OOP expenses. Why? Because most state statutes require the insurance company to include the deductible in any subrogation demand letter, classifying it as one of the duties of an insurer. Then, when a subrogation settlement is ultimately negotiated, that deductible is reimbursed to the insured in accordance with the insurance policy.  

Other OOPs are a different story. They aren’t fully ascertainable in most situations, particularly diminution of value. Most jurisdictions require an expert report showing the valuation before and after the accident, and there is no obligation on the insurer’s part to provide that courtesy to the insured. Usually, the insured has an affirmative duty to pursue those damages on their own.  

What if a Release is Involved in the Subrogation Suit Judgment and Resolution?

Let’s walk through a hypothetical situation from the standpoint of a subrogating lawyer representing an insurance company:

Suppose an insurance company has a $5,000 policy limit on a claim worth about $12,000. The insured rented a $300 car, so the insurance company owes the insured another $4,700.  The insurance company has negotiated contribution payments from the other individual and is ready to settle. But the opposing carrier says that the insured won’t return the release. Perhaps the insured has more OOPs and isn’t satisfied with the negotiation. 

In those situations, the subrogating attorney will reach out to their client, the insurance company. The insurance company is often in the best position to contact the insured and let them know that they have a duty to cooperate under the terms of the policy in order for the carrier to obtain reimbursement or recovery. That does not necessarily mean they have to sign the release, but they do have to cooperate. Failing this, reaching out to the agent for assistance can be very effective.

If the agent won’t help, can’t locate the insured, or the insured is now represented by another carrier, that’s a problem. Sometimes, the only thing to do is to let the statute of limitations run out so that the insurance company can sign a subrogation release without affecting their insured’s rights.  

Suggested Release Language for Subrogation Cases Involving OOPs

Letting the statute of limitations run out is only necessary if the other carrier refuses to accept a revised release. When the other carrier is receptive to it, the insurance carrier’s subrogated matter can be settled using language stating that both companies agree to accept this as full and final settlement of all subrogation claims.

This does not affect any rights of the insured to pursue any OOP claims or uninsured losses arising out of this incident. However, a carrier will still reimburse the deductible in accordance with the state statute or the policy.  

It’s surprising that this is sometimes an issue, because it’s reasonable to address the rights of the insured party in a subrogation release, as the subrogating lawyer cannot represent the interests of the insured and the carrier at the same time.  

This problem arises when there’s a policy limit involved.  But, in most instances, if the insured can’t be located, we can reach out to other carrier asking: 

(1) Has our insured made a claim? Usually they haven’t.

(2) Have you been able to talk to them? Usually, the answer is no.

(3) What are the chances of the insured actually filing suit for those out of pockets?  There is some risk on their part, but they’ve also minimized the exposure to their insured on our claim in many respects, and the insurance claim itself.

Out of pocket expenses can make a simple auto subrogation case not-so-simple after all. Subrogation lawyers experienced in the nuances of OOPs and versed in the differences in state insurance and subrogation laws can ensure maximum recovery for the affected carrier.

Interested in more educational material on important topics in subrogation? Visit our YouTube channel and podcast library. If you have a question about insurance subrogation we haven’t yet covered, email us at [email protected] for us to feature the topic on a future episode of On Subrogation.