Subrogation: Put Your Knowledge to Work for the Client!

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Editor’s Note: As claims adjusting becomes a more This issue of Adjusting Today very different) approaches to subro- sophisticated process, agents and examines subrogation, and how your gation, as well as trends. brokers around the world are being knowledge of this procedure can be We think you’ll find this issue challenged to respond to new com- critical to your clients’ welfare. interesting and helpful. plexities. It also outlines three common (but

Subrogation: Put Your Knowledge to Work for the Client!

Drew D. Lucurell, Esq., SPPA fundamental understanding of the which a broker can put his or her process, and would agree that such an knowledge to work for an insured — Adjusters International – Seattle understanding is essential to their own to not only provide for the client’s professional practice. But many of security, but to enhance the broker- Sub-ro-ga-tion. them are less cognizant of the tremen- client relationship as well. The very sound of the word, let dous benefit their knowledge can have alone the principle behind it, can be for a client who suffers a loss — A Definition frightening to those unfamiliar with especially if that loss is partially Because the insured can be signifi- legal and insurance jargon. insured. In the comments that follow, cantly affected by the subrogation Most agents and brokers have a allow me to suggest some ways in process, they, too, must have a basic

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tant their understanding of subrogation insured has been fully compensated by can be to a client following a loss. the insurer and is only seeking the Insureds should be aware of the return of their deductible. In the latter fact that it is a general tenant of tort case, most insurance companies will Subrogation... continued law that an injured party can, if willing, agree up front to reimburse the insured understanding of it. So let’s start there. bring an action for damages against a for the deductible from the net pro- Taken from the dictionary, subro- third party. Therefore, as an injured ceeds recovered in subrogation. In all gation is defined as “the substitution of party, the insured who has suffered a remaining cases where an insured and one person (or party) for another.” loss is entitled to bring such an action. insurer pursue a claim against a third Going a step further, in an insurance This recourse can be critical to full party, the distribution of costs and sense, three parties will be involved: restoration when a loss is partially attorney’s fees, and the division of the insured, who has suffered a loss; insured. Obviously, a client in any of proceeds must be addressed at the the insurer, who has compensated the these situations has a strong interest in outset of the subrogation process. insured for all or part of their loss; and examining the opportunity for a tort the tortfeasor, or party who is allegedly claim against the responsible party! A Different Principle responsible for the damages, through Along the same line, one of the The underlying principle behind negligence. The definition comes alive most crucial aspects of an insurer’s insurance is to indemnify the insured in the following scenario: investigation immediately after a loss is against a loss. The principle behind the Let’s say a manufacturing com- determining cause and origin. Without law of torts — under which subroga- pany hires a contracting firm to such an investigation it might be tion falls — is to allocate responsibil- renovate its production plant. The impossible to determine whether a ity for the loss among the parties repairs require extensive welding, third party tortfeasor is responsible for involved. In an insurance context it during which sparks fly, igniting nearby the loss. If the insurer does not under- means that the insurance company materials and setting off a fire that take such an investigation, it can be becomes subrogated to the rights of destroys a major portion of the plant. critical for the insured to do so! This the insured, to the extent of the monies As the insured, the manufacturing firm includes hiring the necessary experts, it paid to the insured as indemnification is compensated for their losses by their like cause and origin investigators, for a loss. insurance company. Under subroga- forensic investigators, etc. Without the This distribution of a loss settle- tion, the insurance company assumes agent/broker’s guidance the insured ment by the legal system is known as the right of the manufacturer to sue would probably not recognize the need the doctrine of equitable subroga- the contractor — the tortfeasor — to to take such action. tion. The law recognizes this doctrine the extent of the damages for which it as a means of guarding against undue has reimbursed the insured. The Distributing Costs and enrichment. A settlement would not be manufacturer also has the right to sue Proceeds properly allocated if, upon suffering a the contractor for any damages not Once the awareness of a claim loss, the insured was able to collect covered by their insurance, which possibility exists, the attention shifts to from their insurance company and then might be substantial if the firm was how the costs associated with pursuing through litigation, also collect from a partially insured. the claim will be distributed — and the third party. This would amount to a proceeds from the settlement or double recovery — or undue enrich- Agent/Broker’s Knowledge judgement, divided. ment. Most insurance policies contain is Critical! I should point out that this is not a a subrogation provision that contractu- As I indicated earlier, despite their concern if the client is on their own, ally grants the insurer subrogation knowledge of the subject, agents and without the involvement of an insurer rights. brokers often lose sight of how impor- having a right to subrogation; or if the A D J U S T I N G TODAY 3

Three Approaches any remaining balance. Costs and fees party, for any loss that was not cov- Each state has its own rules of law are borne by the insurance company, ered by insurance. The insurer is then on subrogation, so it’s important to since often the recovery will not entitled to be fully reimbursed for its understand how the courts in each will exceed the insurer’s share. payment to the insured. Anything apply the doctrine in practice. Gener- 2. The recovery is prorated remaining goes to the insured. Costs ally speaking, they will address alloca- between the insurer and the insured and fees are prorated, based on the tion in one of three ways: according to the percentage of recov- recovery, unless otherwise agreed to ery sought by each party in relation to before the litigation begins. The 1. The insurer is reimbursed first, the total loss. Costs and fees are following scenario helps explain the from the net proceeds, for the full prorated on the same basis. three approaches. amount of the benefits paid to the 3. The insured is reimbursed first, insured; the insured is then entitled to out of the recovery from the third

ssume that an insured has a loss for $150,000. The insurance company paid the limits of the policy, which were A$100,000. The tortfeasor has no assets other than a liability policy for $75,000, and its carrier is willing to tender the policy limits. Attorneys’ fees are $20,000 and costs are $5,000.

Under the first approach, the Under the second approach, the Under the third approach, the insurance company would receive insured and insurer would share the insured would receive the entire $75,000 minus the attorneys’ fees recovery and expenses of litigation as $50,000 of net proceeds. The and costs — or $50,000. The follows: the insurer would pay two- insurer would have recovered all insured would recover none of thirds of the expenses, and the insured other proceeds if the tortfeasor their $50,000 uninsured loss. would pay one-third. (Note: This is had additional assets or a larger important only if the recovery does policy. not exceed the expenses, because these costs will always be paid from the gross recovery before either party shares in recovery.) The insurance company would receive $33,333 (two-thirds of $50,000 [$75,000 minus $25,000]), and the insured would receive $16,667.

allowing the insurer to be paid back The Trend insurance policy provided, and that in before the damaged party is made Obviously, insurers prefer the first collecting the premium, the insurance whole does not properly align the risk approach, but such is clearly not the company agreed to bear the risk of of loss and is inconsistent with the trend in the courts or in state statutes loss to the extent stipulated in the principles of equity. throughout the United States. Oppo- policy. Theoretically, the premium — The trend is toward approach nents stress that the insured paid a property invested — covered this risk. number three. The basis for this was premium to have the benefits of the The prevailing feeling today is that set forth in Couch on Insurance 2d

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making sure that actual damages are carefully noted in the final settlement agreement.

An Essential Element Subrogation... continued In the final analysis, it is ironic that S. 61:20, which said, “Subrogation is a subject about which most insureds an established branch of equitable need to know more is something they jurisprudence, and equity requires that would not have to be concerned with the insured be made whole before the at all if insurance programs could be insurer’s right to subrogation.” ideally constructed and implemented; Approach number two actually that is, so that all aspects of all risks represents a compromise between were always fully covered. Then, the numbers one and three. The insured insurance settlement alone would bring gives up some benefits by sharing the full restoration. costs pro rata with the insurer. It is It goes without saying that the often the easiest place to start if the agent/broker deals with the practical insured, who is virtually certain to have rather than the ideal. That means Drew D. Lucurell their lawyer involved in a subrogation sometimes helping clients cope with matter, is attempting to negotiate a risks that are uninsurable — and losses survival. This makes the introduction custom subrogation agreement with that are intentionally or unintentionally of subrogation an essential element in the insurer. underinsured or uninsured. As empha- the broker-client relationship. It’s sized earlier, in these instances, the another important way you can put Negotiate Ahead of Time! subrogation process can be critical to your knowledge to work for your Of course, since it is impossible to the client’s recovery — and possible client! know the circumstance of a loss before it happens, a subrogation agreement cannot be negotiated before A D J U S T I N G the loss takes place. But it should be negotiated before the final settlement of the claim; once the insured’s losses TODAY have been established and the insurer has paid its obligations under the insurance contract. At this stage the ADJUSTERS INTERNATIONAL WEB SITE ADDRESSES insured still has leverage in arranging a Corporate Office http://www.adjustersinternational.com 126 Business Park Drive http://www.adjustingtoday.com pro rata agreement. Utica, New York 13502 Whenever it appears that a third 1-800-382-2468 ADJUSTING TODAY is published as a public ser- party might be responsible for a loss, Outside U.S. (315) 797-3035 vice by Adjusters International, Inc. professional FAX: (315) 797-1090 loss consultants. It is provided for general infor- the claim should be prepared and [email protected] mation and is not intended to replace profes- adjusted with subrogation in mind! PUBLISHER sional insurance, legal and/or financial advice for Ronald A. Cuccaro, SPPA specific cases. This means carefully following all of EDITOR the steps associated with a thorough Stephen J. Van Pelt PRINTED ON RECYCLED PAPER proof of loss review, giving particular AT92-2 3007 attention to the cause and origin © 1992, 2001 ADJUSTERS INTERNATIONAL. ALL RIGHTS RESERVED. investigation, how the physical and economic losses are documented, and