-How are claims handled once they are within the subrogation department?

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1 Building a Successful Subrogation Department BY JAMES SALSBURY, UNITED FIRE GROUP Subrogation is a process. It has a beginning and an end. The best subrogation results are the product of planning and protocols. Subrogation, on a systemic level, is a commitment to the most effective and efficient process of identifying and resolving claims which have recovery potential. The focus of this article is on the establishment and management of a successful subrogation department and methods to coordinate subrogation with the claims process. Subrogation Effectiveness In defining our terms, subrogation effectiveness means achieving the best results given the facts of the loss. In some cases, the most effective method is to close out the file. This is true when the file has little to no chance of recovery due to factual or legal circumstances. It is not effective to spend more money on experts and legal costs than what is reasonably expected to be recovered (if anything). On the other hand, it may be effective to incur large expert and legal fees if the claim value, the prevailing law and the facts are favorable.. Another aspect of effectiveness is examining why some losses are set up for success and other are not. Being a day late to pursue subrogation, whether it is a day after the scene is altered or the day after the statute is limitations has run, is not effective. Identifying subrogation is as important as resolving subrogation. They are dependent upon one another, and that is why subrogation has to be an ongoing process. In considering how to develop the most effective process, the developer of a subrogation department must consider: -How can claims with potential recovery best be identified? -How are files referred to subrogation from the initial file adjuster? -How are claims handled once they are within the subrogation department? -How the referred subrogation files are resolved? Subrogation Efficiency Subrogation efficiency is achieving the best result given the resources available. If a subrogation adjuster only had one file to handle, they would be highly effective - yet hardly very efficient.

2 To be efficient, a subrogation manager, or the developer of a subrogation department, must consider whether increasing costs will lead to increased revenues. Doubling the subrogation department does not necessarily lead to doubling the efficiency of the department or the results. Areas of leakage must be identified and corrected. Some of these areas to consider include the following: -The costs of expert, counsel and outside vendors; -The length of time the subrogation files are open after referral; -Staffing and administration costs; and -Comparing the recovery results with external factors, such as benchmarking; claim count or volume; and overall claims payments. No subrogation department can hope to succeed without a commitment to the process. This commitment must come, first, from claims management and continue down the organization to the desk level. This commitment must also be from the initial development of the subrogation department throughout its growth and maturation. Unless there is commitment by both claims management and by the subrogation manager to establishing and maintaining an effective and efficient process, subrogation results will be frustrating. This commitment by management can take several forms: -In terms of capital (i.e. staffing, resources, automation upgrades): -Creating and fostering a claims culture that values the importance of subrogation; and -A willingness to integrate subrogation into the overall claims function. The biggest mistake companies make in managing subrogation is to consider it as a part-time, tangential, among other assigned duties operation. At some point in the process, a dedicated subrogation professional has to be devoting their full attention to subrogation. Turning the Claims Pyramid Upside Down As companies have become more focused on increasing revenues, particularly in prolonged soft markets, there has been an increased pressure on claims managers to improve subrogation results. In some claims departments, typically those without dedicated full-time subrogation adjusters, there is often the perception of an inverted pyramid. Ask these companies about their claims priorities, and it is likely subrogation would not make the top ten list. Instead, the broad claims functions are emphasized and subrogation is at the bottom of the pyramid-a task to accomplish after more important claims duties are competed. Subrogation is seen as a byproduct, or afterthought of the claims operation.

3 The most difficult task the subrogation department developer may face in establishing a dedicated subrogation department is convincing management to turn their pyramids around! The subrogation manager must emphasize identifying subrogation as a priority, or at least an equal part, of claims handling. Early identification and investigation is crucial to systematic subrogation success. When taking statements and undertaking investigations, claims handlers need to embrace subrogation as a goal; and not just focus on gathering a basis for paying or denying a claim. It is essential that everyone in the claims department be aware of the written strategies and guidelines for subrogation success. Of course, this is predicated upon establishing clear written strategies and protocols for subrogation before the process ever begins. As Steven Covey pointed out, Time is better spent sharpening the saw than struggling with a dull blade. Everyone in the claims department must have a very clear understanding of what is expected for subrogation to be successful. This will go far in eliminating turf battles and resistance to subrogation referrals. Developing and implementing these subrogation strategies is typically a dynamic process as each company has its own culture and definitions of success. In the early stages of developing a dedicated subrogation department, the goals may be somewhat low. Even then, the subrogation manager may find resistance and a reluctance to leave the good old days of handling subrogation. It is the task of the subrogation manager to continue to raise expectations and demand greater results. As this process goes on, the subrogation manager must be clear in defining their greater goals, and the basis for upgrading the subrogation process. These changes in the subrogation process should be made clear to everyone and have strong management support. The secret to developing a successful subrogation department is to convince the claims management that subrogation should be a constant focus for the claims handlers; and a full-time focus by dedicated subrogation personnel. Some companies require claims adjusters to handle subrogation as part of their overall filehandling duties. Despite the presence of certain superstars, most claims departments who rely on the file handler to also do subrogation cannot match claims departments with dedicated subrogation professionals. Subrogation laws and judicial decisions are diverse and constantly changing, as are emerging theories of subrogation, thus requiring expertise by dedicated subrogation professionals. Subrogation professionals should be actively managed by managers who have high expectations for process and results. Tracking such results is critical for gaining buy-in by upper management. The following discussion will highlight some practical ideas for establishing results which will lead to a successful subrogation department. In addition, there are some clear methods for effectively tracking, and demonstrating, that success to management.

4 You Cannot Collect What You Cannot Count Many times, it is difficult to get a good grasp on tracking subrogation results. Merely looking at the quarterly or annual recovery results or comparing ratios of claims paid to recoveries does not tell the entire story. It is the equivalent to measuring the effectiveness of the barn door by the distance that the horse had moved down the road. One of the biggest hurdles to overcome in developing a subrogation department is to develop reports and systems to properly track subrogation results. It will be almost impossible to develop or improve subrogation results without being able to prove what is actually happening through subrogation metrics. It is crucial to be able to drill down to the desk, unit or line of business to establish subrogation needs or gaps. A commitment to subrogation may require working with the IT department to develop reports or other data to properly measure and track subrogation. Measuring the Identification of Subrogation Potential There are three key areas to focus on when considering what metrics are important to subrogation success. The first area of focus is: How are files being referred or identified to the subrogation department? It is crucial that there be some way to track or measure the time between reviewing a first notice of loss and the eventual referral or involvement of the subrogation department. In developing a subrogation process, there should be some type of potential such as theft, electrocution, fire, collapse, multiple vehicle accident, etc. Once that is established, the next step would be to measure and evaluate the time between the file being opened; subrogation being identified; and the eventual referral of the file by the claims professional. Measuring the Success of the Subrogation Department The second area of focus is: How are files which are referred or identified for subrogation being processed? Once again, management must have a metric to be able to determine the time between subrogation referral and resolution. The manager of subrogation has to be able to track extended subrogation diaries, delays in referrals to subrogation counsel or collection, and overly long investigations. Other components which should be measured include: -Are the referred files being timely processed? -What happens to files involving counsel vs. files that are handled by the subrogation adjuster? -How effective is the use of outside collections companies vs. in-house pursuit? -What is the relationship between the costs of experts and recovery results?

5 Measuring Expenses and Excluding Outside Factors The third and final area of metric focus is: How are subrogation results being managed in comparison to expenses; and how can subrogation results properly exclude outside factors? One of the easiest and most common ways that subrogation is measured is to compare subrogation recoveries, either net of expenses or in gross dollars recovered, with claims paid. In order to do this accurately, subrogation costs and expenses must be separated from the expenses incurred in initially adjusting the file or salvage. Unless they can be separated and distinguished, it will be very difficult to measure subrogation success. In the same way, the only way to truly measure gross subrogation recoveries, or to accurately compare them to claims paid, is to exclude files, or lines of business, in which there is no likelihood of subrogation recovery, such as cat codes, bonds/surety, no fault, etc. Otherwise, subrogation results are skewed and will not reflect subrogation success. Missed Opportunities Ghost files are those unreported subrogation files which are either not identified or insufficiently investigated or pursued, and end up in the closed file scrap heap. As noted above, one method for tracking missed subrogation is comparing the initial subrogation identification with subrogation referrals. Of course, not all files with initial subrogation potential turn out to have subrogation after a proper investigation. Nevertheless, there should be a process in place to examine those files to insure the investigation was sufficient; that there was no spoliation; that the subrogation is not time barred; or that the file handler neglected to follow up on the subrogation potential. Another method for identifying ghost files is a regular audit, both of files with subrogation, and files without subrogation. This can be either internal or external and ideally should be a combination of both methods. Low-Hanging Fruit...Easy to Pick, Easy to Rot Once subrogation is identified as a focus by management, there is usually initial subrogation success. As subrogation becomes more systematic and focused, recoveries of routine subrogation losses will increase. Eventually, as these more obvious losses are processed, subrogation results and revenues will plateau. Additional resources are needed to continue to experience rising subrogation results. Subrogation Success Can Only Come From Ongoing Training and Education In developing a subrogation department, continued training and education must be utilized in order to increase subrogation results. Subrogation in today s ever-changing world requires dedicated subrogation professionals who collaborate with their peers. They must continue to be

6 aware of new theories of liability and methods of increasing subrogation effectiveness. In turn, the subrogation department should then be passing along that education to the claims handlers. A new subrogation department should resist the temptation to outsource or refer all files to counsel, collections firms or other outside vendors. These vendors are certainly valuable partners for appropriate files and losses, but investing time and money on internal programs, education, certification, and networking with other subrogation professionals will reap greater long-term results. To conclude, subrogation success is a function of an overall claims management strategy and commitment to subrogation effectiveness and efficiency. The failure to incorporate subrogation into claims management can be a fundamental mistake. Establishing a dedicated subrogation department will never be successful if it is a separate operation or done on a piecemeal basis. Much like making a quilt, building a successful subrogation department can only succeed when it is integrated into the entire claims program.