In the larger picture of society, insurance is spoken of from a consumer perspective. Something horrible happens, say, an auto accident. The insured submits a claim to their carrier. It gets paid out simply and quickly. All for an affordable premium. But where do those losses go? How does a carrier continue to provide that stellar service if all they’re doing is doling out checks?
Every insurer engages in subrogation. At its base, it’s an important mechanism to remain financially viable. But there’s a lot more to it than that, and not enough is said (to consumer or carrier) about why an insurer’s right to subrogation is so important to the very fabric of the insurance and creditor industry.
As a subrogation law firm that prioritizes industry education, Rathbone Group provides several modes of informational material on subrogation law and process. It’s all open-access discussions by experienced attorneys with diverse points of view (Note: It does not constitute legal advice or establish an attorney-client relationship). This article is one of those discussions. So, let’s look at the bigger picture of why it’s just as important to a carrier to recover from an incident as it is their insured.
The Subrogation Process: A Primer
To our earlier question – subrogation is how an insurance carrier or other creditor continues to provide stellar service while continuing to pay out all legitimate claims. In subrogation, the insurer “steps into the shoes” of the insured to get reimbursement from the responsible party.
Subrogation is based in equity and the rights of insurers to recover losses caused by someone else’s negligence or bad intentions. Consider a car accident where a drunk driver runs a red light and causes massive property damage and personal injury. The victim, who is the insured in this hypothetical, submits a claim to their insurer. The insurer quickly pays out that claim, as it’s fully covered under the policy.
But there’s the matter of the other driver who caused all this trouble. Where do they fit in the aftermath? The primary priority, the insured, has been reimbursed, but that only passes the loss onto the insurer. Pursuing the tortfeasor via subrogation provides a way for the insurer to recover that loss, and also serves as a deterrent, as it holds the other party responsible for their tortious actions.
Why Does an Insurer’s Right of Subrogation Matter?
Subrogation serves as a control mechanism on several planes. As discussed, it is a societal deterrent for hurting others, whether physically or financially, and it is also what keeps the insurance industry running. If a carrier had no way to recover money paid out to insureds, there’s no possibility of remaining viable. They’d have to gut their policies, triple their premiums, and get very picky about paying out claims.
This, results in an insurance marketplace that offers policies with very little protection for the consumer, at very high costs. Now, why be insured at all? The industry would be completely destabilized, and the repercussions would run through all sectors of the economy. The insurer’s right to subrogation protects the insured and the insurer while ensuring that bad actors are held accountable for their actions.
Obstacles to Pursuing Subrogation Recovery
As with many “rights”, it’s not a simple and straightforward path to recover everything you lost in every claim. Carriers face myriad obstacles when pursuing reimbursement from liable parties. Three of the most common obstacles subrogation lawyers face in managing insurance disputes are:
Inhospitable Jurisdictions
Our society tends to view creditors warily – even sometimes negatively. This is reflected in our judicial system. As we’ll discuss shortly, states handle subrogation laws differently, and how subrogation laws and statutes are designed will tell you everything you need to know about how that region view creditors.
However, just because a state isn’t kind to creditors doesn’t mean there aren’t avenues to recovery. Retaining subrogation counsel familiar with the relevant jurisdiction is the key to finding them.
Statutes of Limitations
Sometimes it almost seems like statutes of limitations are designed to keep insurers from pursuing subrogation recovery. If a case involves two jurisdictions, subrogating counsel must know which one applies. Even cases in a single jurisdiction must know whether the SOL clock starts at the time of the accident, the time a lawsuit is filed, or anywhere in between.
Luckily, all it takes to overcome SOL obstacles is a subrogation law firm that can deploy attorneys experienced in that specific jurisdiction. Staying ahead of deadlines and persistently reminding other parties to do so as well can ensure you don’t accidentally waive the right to subrogation by missing a filing date.
Lack of Subrogation Education Resources
There’s a big problem in the subrogation industry – no one talks about it. The average consumer, unless they’ve ever received a subrogation letter, lien or notice, has no reason to ever have heard of subrogation! Even within the insurance industry, subrogation isn’t a well-integrated facet of daily operations.
Like with all rights, widespread education is key to ensuring (a) they’re exercised to their fullest and (b) laws and statutes regarding those rights are written and executed fairly. This is a big part of Rathbone Group’s commitment to generating free educational material on insurance subrogation, whether it’s NASP presentations, industry publications, our subrogation podcast, videos, or articles like this one.
Further Complications: Subrogation Laws Vary by State
If subrogation weren’t complicated enough, almost every subrogation law and statute is handled differently in different states. That means a carrier’s choice of subrogation specialists and lawyers should be those who understand the relevant jurisdiction. Three important legal frameworks of the subrogation process that vary by state include:
Made Whole Doctrine
At its base, the Made Whole Doctrine means that a carrier may not be reimbursed for a loss until their insured has been reimbursed (“made whole”). It sounds straightforward, but it’s actually quite vague, and every aspect of this doctrine is handled differently across the US. Subrogating carriers may face complications such as:
- Many states have not passed any statutes establishing the doctrine into law and just use case law to handle this doctrine. Some don’t use it at all.
- Some states bar subrogation recovery in face of the doctrine; others limit it.
- Some states define “made whole” as recovering the damages as well as cost of pursuit while others only count damages.
- Some states weigh the importance of what party recovers which type of damages. Some say the injured party has to recover both economic and non-economic damages before the insurer can initiate a subrogation demand. Others place the insurer’s right to subrogation recovery as second to the insured’s economic damages.
There are myriad additional examples, just with this doctrine, of how jurisdiction and a subrogation professional’s knowledge of it are vital factors in achieving recovery.
For more on the Made Whole Doctrine, read our article discussing this doctrine in depth: Subrogation and the Made Whole Doctrine: Critical to Understand, Hard to Determine, Impossible to Ignore.
Comparative v. Contributory Negligence
Another way state subrogation laws vary is how they weigh responsibility for a loss. In simple terms, there is a legal spectrum of negligence. There are contributory, pure comparative and modified comparative fault.
In contributory fault states, if the court determines the injured party is even 1% at fault, pursuit of recovery is barred. For example, if there was an accident at a 4-way stop where the responsible party ran the stop sign and hit the insured, but the insured was texting at the time, a court could determine they were partially at-fault for using their phone while driving. This would fully bar pursuit of subrogation recovery.
In pure comparative fault states, the injured party can seek recovery, but the award will be diminished in proportion to whatever the court determines is their share of the fault. For instance, if in a tree fall case the court finds the injured party is 20% responsible for the damage because they noticed the tree was very unstable and hanging over their property line. Their recovery would be 20% less than they were seeking.
In modified comparative fault states, the same process as pure comparative fault applies, but only if the injured party is determined to be less than 50-51% at fault. If the court determines the insured had more than half a hand in causing the loss, there is no right to subrogation recovery.
For more on jurisdictional differences in handling liability, read our article for a detailed discussion: Subrogation Fault Lines Spread Across States.
Statutes of Limitations Again!
Statutes of limitations are hard deadlines, and this may include filing a lawsuit, responding to notice of one, finalizing a settlement, or any number of other things. Missing a statute of limitation can cause immediate dismissal of your subrogation claim, so understanding how they work is important. Consider:
- States are in charge of how they handle statutes of limitations, including tort, written contract and oral contract statutes.
- The SOL clock may begin at the time of the injury or at the time of the discovery of the injury.
- Government entities tend to have much shorter SOLs than any other type of subrogation case.
- A tort claim may have a different SOL than an automotive claim.
- There can be stays that pause the clock for an SOL, including bankruptcies, government health orders (akin to COVID measures), a plaintiff is in the military and currently deployed, and others.
Subrogating lawyers must be knowledgeable of the statutes of limitations in the relevant jurisdiction and type of subrogation case. Even more so if the case involves multiple jurisdictions with conflicting rules. Failure to have all your paperwork ducks in a row can result in sustained massive losses where you could have recovered.
For more on navigating subrogation statutes of limitations, read our in-depth article: Understanding the Basics of Statutes of Limitations.
Why Many Insurers Outsource Their Subrogation Efforts
Understanding subrogation and its complexities and confusions, it is easy to see why so many carriers and creditors outsource their subrogation efforts to a focused law firm. Aggressively analyzing and pursuing every viable subrogation claim takes a lot of time and labor. This takes away from a company’s ability to perform at their best in daily operations and customer service.
Besides allowing a carrier to continue their operations uninterrupted while also knowing their losses are being recovered to the fullest extent is just one (big) advantage of outsourcing subrogation efforts. Others include:
Access to Focused Attorneys & Subrogation Specialists
Subrogation is a unique and obscure area of law; it takes a lot of practice, trial and error to gain the skills necessary to become effective at recovering losses in a way that adds value to a company’s bottom line. Subrogation companies have lawyers, specialists and adjusters experienced in the nuances of the insurance industry.
Strategic Approaches to Insurance Dispute Resolution
This depth of experience and education in subrogation results in the ability to approach every case strategically. This is especially important in inhospitable jurisdictions. But in every case, having subrogation attorneys who understand which cases should be handled with subrogation lawsuits and which can be handled with alternative routes to resolution, such as mediation and arbitration, streamlines the process. That means less time and money spent on subrogation pursuit, coupled with better chance of maximizing recovery.
An Advocate for Your Right to Recover Losses via Subrogation
Importantly, having a partner on-hand to manage your subrogation cases provides you with a tireless advocate. And in a society where carriers are often looked upon harshly, and many jurisdictions that write those harsh feelings into statutes and case law, a subrogation law firm can ensure you are properly represented in every case, and that your right to pursue subrogation recovery is always exercised to its fullest extent.