Steps to Understanding and Managing Subrogation

Author, Daniel Frazee, Executive Vice President, Rancho Mesa Insurance Services, Inc.
Author, Jim Malone, Workers’ Compensation Claims Advocate, Rancho Mesa Insurance Services, Inc.

Definition

Subrogation is defined as the substitution of one person or group by another in respect of a debt or insurance claim, accompanied by a transfer of any associated rights and duties. It occurs in property/casualty insurance when a company pays one of its insured’s for damages, then makes its own claim against others who may have caused the loss or contributed to it. Subrogation crosses into many areas of the insurance world including workers compensation, general liability, property, and auto. As an employer, developing an effective Incident Investigation Plan is a key first step to managing the potential impacts of subrogation on your organization. 

Employer Level Investigation

Identifying the potential for subrogation should occur immediately after an injury or accident occurs with an employer-level investigation. This includes visiting and securing the scene of the accident. If there are hazards or dangerous conditions still present, address them by taping off the area or removing the hazardous element. All potential witnesses need to be identified with securing their name, employer, telephone number, address, copy of their driver’s license, etc. These witnesses should be provided a witness statement for their completion. 

It is also imperative that the employer preserve the evidence by taking possession of the tool or equipment that caused the injury. If a ladder broke causing a fall and injuries, take possession of the ladder and keep it secure until needed later. If a tool malfunction is the cause of injury, take possession of that tool until it is needed for the next step of the investigation. Removing the injury-causing item prevents the chance of additional injuries or accidents. 

Additionally, take photographs or measurements of the entire area, building as much visual evidence as possible. Be aware too that changes can and will occur to the scene of the accident within minutes or hours of the incident. Entire crews are known to be removed from the area to avoid being identified as potential witnesses of an at-fault third party incident. 

Referring a Claim and Protecting the 2 year Statute

As you continue with your internal investigation, ensure that the claim’s assigned adjuster sends your third party information to the insurance company’s subrogation department. Most claim professionals do not have experience nor handle the details of subrogation cases. As a subrogation adjuster and attorney build their respective files, they will benefit significantly from the information obtained in a thorough post-injury investigation. They can then focus on obtaining additional discovery that can solidify their subrogation efforts. Reach out promptly to your subrogation adjuster and attorney as they will value your contribution to the investigation. We also recommend requesting regular updates, which would include participating in regular interval claim reviews. 

Be aware that the California Statute of Limitations for personal injury cases is 2 years from the date of the injury and/or accident. “Protecting” this statute means ensuring your insurance company formally files a civil lawsuit against the identified third party in a timely fashion.

Pursuing Subrogation

While injured employees are barred from suing their employer for their workers compensation injury due to the Exclusive Remedy Rule, that same employee may still bring a personal injury claim against a third party who shares responsibility for the injury. The employer also has the right to bring a civil claim against a third party to be reimbursed for the workers compensation benefits it is providing. If the employee pursues the third party, the workers compensation carrier can join as a party to this litigation. In this scenario, the workers compensation carrier simply provides a summary of their costs, or their workers compensation lien. The carrier then has first lien rights once a judgment is reached against the at-fault party. 

As subrogation cases move toward settlement, there are many factors impacting the net recovery for the injured worker and insurance company (employer). Many incidents have shared negligence alleged by the employer and even by the employee. The civil arena does not have the same thresholds or tolerances for extent of injury, need for medical care, resulting temporary disability, permanent disability and / or future medical care as does the workers compensation system. Many times the workers compensation liens are considered liberal and excessive by the civil arena. Therefore, it is difficult for the workers compensation carriers to be fully reimbursed for the total costs of their claims.      

Waiver of Subrogation

In the Construction space, many trade contractors are asked via contract to provide waivers of subrogation in conjunction with other insurance requirements. Waivers do not prevent a subcontractor’s injured worker from filing suit against the general contractor. The waiver bars the subcontractor's workers compensation carrier from pursuing subrogation in the event the employee does not pursue relief from the aggrieved party. If the employee files suit, the subcontractor’s work comp carrier can then join the action. If the employee does not file suit, then the subcontractor’s carrier cannot pursue subrogation on its own against the General. Consider this example: A general contractor responsible for erecting scaffolding on a jobsite subcontracts drywall work to a subcontractor who will use the scaffolding in the scope of their work. An employee of the drywall contractor falls from the scaffolding and it is later determined that the General did not secure the base of scaffolding properly. Typically, the employer’s workers compensation carrier could look to subrogate the costs of the work comp injury claim incurred by the injured worker from the general contractor. However, the drywaller provided a waiver of subrogation to the general as a condition of securing the contract. Therefore, their right to subrogate against a general contractor has been waived. Subrogation between subcontractors; however, remains a viable avenue of subrogation if the involved parties are subcontractors.    

Closing

Becoming comfortable with the many facets of subrogation is crucial as your team builds an overall plan to manage risk. This process includes incorporating third party questions into your Incident Investigation Plan, overseeing the claim and recovery process, creating reasonable expectations as settlement draws near and paying closer attention to waiver requirements. While these are only initial steps, they represent a solid base to building a greater awareness and deeper understanding of subrogation. 

To learn more, email Daniel Frazee at dfrazee@ranchomesa.com or Jim Malone at jmalone@ranchomesa.com.

Understanding Waivers of Subrogation for Contractors

Author, Casey Craig, Account Executive, Rancho Mesa Insurance Services, Inc.

In an era where general contractors commonly require a Waiver of Subrogation from its sub-contractors before they are allowed to step foot on the jobsite, it is important to understand how a Waiver of Subrogation functions. Most companies simply tell their agent they need the waiver added to their policy, but what does this mean? How does it affect the policy?

Subrogration is "the legal process by which an insurance company, after paying for a loss, seeks to recover all or a portion of the loss from another party who is legally wholly or partially liable for that loss," according to the Workers' Compensation Insurance Rating Bureau of California (WCIRB). So, a Waiver of Subrogration prevents your insurance carrier from recovering funds paid on a claim from the named party requesting the waiver.

When subrogating, three things must be established:

1) The defendant was negligent (or that a product was defective),

2) Negligence proximately caused the damages for which the carrier paid, and

3) The amount and nature of the damages.

 If you cannot establish any one of these three, there will be no subrogation.

Subrogation is used throughout various lines of insurance. It is very common in dealing with auto insurance claims. If you are in an accident and the other driver is deemed to be at fault, your insurance company will respond first by paying to have your vehicle fixed. Then, the carrier will collect from the at fault driver’s insurance company to recover the amount they had to pay to fix your car. The insured’s carrier jumps on the claim immediately so that the insured will not have to wait for the claim to be disputed and resolved before their car is repaired. Claims are handled the same for every line of insurance, unless there is a Waiver of Subrogation in place.

When a sub-contractor is hired and has signed a Waiver of Subrogation for the project owner or general contractor, they are essentially waiving their carrier's ability to recover the money that was paid out on a claim that was caused by a third party's negligence. Waivers of subrogation often come in two formats. Either, the waiver specifically names an entity that the carrier waives its’ right to subrogate against, or a Blanket Waiver of Subrogation. If a Blanket Waiver of Subrogation is provided, the carrier must obtain permission from the named insured to subrogate against a third party.

When adding a Blanket Waiver of Subrogation to a policy, there is an additional fee to offset the carrier’s ability to reclaim money from any losses that were caused by a third party's negligence. These fees can change from carrier to carrier and it is a good move to review each policy to know exactly what you are paying for waivers. Adding a blanket waiver of insurance does not increase coverage or limits, it simply absolves an owner/general contractor of their liability.

With Waivers of Subrogation becoming more prevalent, it is easy to see how important it is as a business owner to know exactly what is covered and what you are waiving.

If you have any questions or would like to understand subrogation further, please contact Rancho Mesa at (619) 937-0164.