Understanding Subrogation: How it Works and How it is Measured
It is, essentially, free money. Recovering the cost of accident repairs and related expenses is money there for the taking; but unless your company understands the subrogation process, how to do it, and how it is measured, you may literally be leaving money on the table in the search for cost reductions. Fleet Financials asked Bob Martines, president and co-founder of Corporate Claims Management (CCM), a Richboro, Pennsylvania-based fleet management services company, for some tips on how to tap this often misunderstood and neglected area.
As with any subject, it is important to define what exactly subrogation recovery is and how it relates to fleet. "Subrogation by definition is the act of the collection of a debt by one party on behalf of another," Martines explains. "In terms of our industry, for fleet and risk management, it is the process by which one party pursues recovery of the financial losses suffered by another party due to the negligence or carelessness of a third party, as a result of a vehicle accident." The losses most applicable to fleet are physical damage to the vehicle. But, Martines says, other costs associated with accidents, such as replacement transportation (rentals), downtime expense, and more should not be overlooked. "Whether you do it yourself or contract with an outside agency to do it for you, subrogation efforts should include all costs, not just that of repairing physical damage," Martines says. Losses are deemed recoverable, he continues, when they are the fault of another party, and that party has the ability to pay for them, either personally or through their insurance company. "The vast majority of accidents will be with individuals," says Martines. "Though state laws vary, some of these parties have physical damage insurance; some do not. Some 'self-insure' for accident repairs." Whatever the other parties' circumstances, the specifics of how an incident, accident, or crash actually occurred may ultimately determine if, and how much, money can be collected. "Typically, recoverable losses include rear-end damage, vehicle damage caused while being hit while legally parked or stopped, some intersection damage, and intentional damage due to negligence," Martines explains. In some cases, he says, even damage due to various manufacturers' defects may be recovered.
The Subrogation Process
It sounds simple, like collecting accounts receivable. You just call the other guy, tell him it's his fault, and demand a check. But the process of subrogation is not as easy as some profess, Martines says. "The more in- depth the research and knowledge skilled subrogation specialists possess, the greater the opportunity there is to collect a higher percentage of all costs associated with an accident." However, some similarities can be found with collecting accounts receivable. "The longer a file remains open," Martines comments, "the less likely full recovery will be possible." Thus it is important to begin the process as soon as possible after the accident occurs. Too often, he says, a claim is settled for fewer dollars simply because of a lack of information, or the party making the demand did not know how much recovery was possible. "Also, multiple vehicle accidents, where the responsible party has policy limitations, may well reduce your opportunity to collect, if you're not prompt in submitting a demand," Martines warns. Typically, he also says, the third-party insurer will not pro-rate the disbursement without knowledge of all parties involved, a kind of "first come, first served" situation. Once the demand has been made, a variety of options and issues must be considered as settlement negotiations progress. In addition to the above mentioned multiple-vehicle accident, settlement negotiations can also hinge upon whether or not the third party is insured or the coverage is sufficient. "If you are dealing with an insurance company, the initial goal should be nothing less than full recovery of all costs," Martines explains. "In dealing directly with the third party lacking insurance, you may have to consider a reduced lump sum payment or an installment agreement." This issue clearly is an important aspect of negotiations, particularly if the third party has caused more damage to your vehicle than he or she is insured for, or if the third party lacks insurance altogether. (Keep in mind that "insurance" here refers to coverage for physical damage. All states require drivers to carry some minimal level of liability insurance for property damage, personal injury, etc.). When the third party is underinsured, Martines says consideration should be made to negotiate a settlement from the insurance company, then pursue the individual directly for the balance. "Usually, with the threat of loss of driving privileges or a judgment against them personally, a third party will cooperate out of concern for their personal credit standing."
Other Negotiating Factors
"Another difficult element in the subrogation process is dealing with regional high-risk insurers. They are well versed in using delaying tactics to minimize their own exposure to risk," explains Martines. These insurers are usually located on the outskirts of major cities, where they can reach a concentrated number of high-risk drivers, who are often poorly educated immigrants unfamiliar with state or federal laws, or who possess poor driving records and/or perhaps unstable finances.
"Traditionally, these insurers will offer state-minimum coverage to these drivers, knowing incidents will occur more frequently," Martines reveals. "One way they manage their exposure is to ignore your demand for 30, 45, or 60 days, until you either give up or offer a compromise, which, of course, means taking less money than you are entitled to." However, some options may be considered. Since most of these insurers do not participate in arbitration, Martines says that you can either take less money and walk away or pursue the third party directly. "Securing a promissory note from the individual is a legal, enforceable, and viable option." Accepting a promise to pay, in the form of a promissory note or installment agreement, he further explains, requires careful monitoring and will likely increase the time and cost of handling the file. "If the third party skips town or otherwise fails to pay, you are once again at a loss," Martines says. Delaying tactics are common in all negotiations for settlements, not just for such smaller, high-risk carriers, and effective subrogation specialists know to pursue settlements to the "courthouse steps," if necessary.
Martines says that one of the most misunderstood aspects of subrogation is how much is acceptable in comparison to overall collision expenses. "The more you understand about subrogation and the types of losses you suffer," he says, "the easier it is to place a value on what is a proper return and what is not." For insurance carriers, he says, a return of 15 to 20 percent of the overall expense is satisfactory. For the general public, this figure may be appropriate, since there is a much wider range of vehicle types to consider, as well as deductible costs that can affect overall results.
"In the fleet industry, however, the number of high-end vehicles is smaller in comparison to the general public," Martines says. "And there are seldom deductibles to consider; thus the rate of return should be higher." A return rate of 25 percent or more (of gross dollars spent) is not out of the question in the fleet industry. Understanding state laws governing insurance and fault is critical in successful subrogation negotiations. "For example, the Michigan 'mini-tort' law limits recovery for physical damage to $500, regardless of how much more you've incurred in collision costs," Martines says. "Comparative and contributory negligence laws also factor into settlements." Such laws mete out responsibility for accidents by percentage and allow settlement accordingly. "In some states, being 50 or 51 percent at fault can actually bar you from recovery, while in other states the same 50 percent permits you to collect up to that much of your costs," he concludes. "Also, each state has a statute of limitations. You can see how unfamiliarity with the law can extend the time needed to collect and jeopardize the claim."
How Long Should It Take?
Timing is an important aspect of effective subrogation. As Martines said, the longer a file remains uncollected, the smaller the odds of full, if any, recovery. But how long should a typical subrogation file take to settle? "The answer to this question is not as easy to pinpoint as one might think," Martines says. "On average, a claim should be settled within 45-60 days. However, since every company, including insurers, keep their own bottom line the priority, a few days delay can make a significant impact in cash flow." Years ago, he continues, insurers would pay repair shops prior to the completion of the work. The payment process then evolved to "let us know when the vehicle is finished, and we'll pay." Now, in many cases insurers expect to pay within a specific time period after the vehicle is released to the driver. The effect on subrogation? "With the additional time insurers are taking to pay the shops, they have almost assumed the position of delaying subrogation payments as the norm rather than the exception," Martines explains. "Dealing with higher profile insurers is less difficult than working with the higher-risk insurers, so there is a definite difference in the time frame."
The type of accident can also factor into the settlement process. An accident involving a party 100 percent at fault will be settled faster than one with shared liability, when working with a reputable insurer. "High-risk insurers, however, have no regard for the other party," Martines cautions, "for your loss, and often even for their own customer. Thus, their cycle is significantly longer." Quality insurers pay on average within 45 days of demand, with high-risk carriers, settlement can take as long as 75 days.
Measuring subrogation performance is not as complex as many would suggest, says Martines. "Companies use many ways to measure subrogation success," he says. "Intent to collect (demand), return of funds by percentage of loss dollars per claim, overall collection of dollars versus overall expense are just a few." Martines believes that the truest measurement of success is simply dollars spent versus net dollar received. For example, if total accident dollars spent is $250,000, and the total collected via subrogation on those accidents is $50,000, the net return is 20 percent. "Any other calculation is misleading and inaccurate," he says. Insurers, for example, often base their calculation on the original estimate, purposefully omitting any supplements to the repair, which are done to make the results look better than they really are. The only reasonable adjustments to establishing accident costs should be damage resulting from natural disasters - a severe hailstorm, flood, or hurricane - which occur infrequently. However, none of these are controllable events for which another party can be held at fault. Such costs, Martines says, may indeed be part of total expenses, but cannot be budgeted.
"Accidents, while unfortunate and not predictable, can be measured and controlled," explains Martines. Removing incidents and acts of God from the example might reduce the $250,000 expense to $165,000. Comparing the same $50,000 recovery figure results in a net success rate of 30 percent, a more accurate and representative number. Thus, he concludes, by providing more accurate loss information and understanding that information, subrogation success rates of 30 percent, 35 percent, or more of recoverable accident dollars spent may be achieved.
Thus, the sometimes-mysterious world of subrogation recovery can be understood, and a fertile ground for achieving fleet cost reductions can be addressed. "Subrogation is fully understood in the insurance world," says Martines. "But that is not always the case in the fleet industry. Taking simple steps, using determination and common sense, can ultimately improve your company's bottom line." Among these steps are: If you outsource subrogation, make certain that your vendor has the necessary background and experience.Make certain you keep up to date on state laws and regulations that impact recoveries. Know the major players involved (major insurers versus regional, high-risk carriers) and tailor your efforts accordingly. Use the simplest measure for success: the percentage of total accident expense, less acts of God, recovered. Don't delay in beginning the subrogation process. In this case, time, literally, is money.