The Importance of Subrogation
Subrogation along all lines of insurance serves the vital function of helping to keep premiums low for billions of insureds worldwide, and should be protected at all costs. As an example, subrogation keeps workers’ compensation premiums low for American employers. The complicated calculation of workers’ compensation premiums necessarily involves the concept known as the Experience Modification Factor. The Experience Modification Factor (also known as an Experience Modification Rating, EMR, Experience Modifier, or just the Mod) is an adjustment that is made to the Workers’ Compensation insurance premium of American employers.
This means that the calculation of insurance premiums for an employer takes into consideration a number of factors, including prior years’ payroll, loss history, and subrogation recoveries. One common misconception is that these factors are calculated by the state. In most states, this is not true. Experience mods are usually calculated by rating bureaus (or as they are now designated, Advisory Organizations). Many states use the National Council on Compensation Insurance, Inc. (NCCI) for this work, but other states have their own rating bureau. California, for example, uses the Workers’ Compensation Insurance Rating Bureau (WCIRB), which is a rating bureau independent of NCCI. NCCI is a private corporation, created and funded by member insurance companies. It is approved by the states, but it is not connected with government in any way. California, Delaware, Indiana, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina, Pennsylvania, Texas, and Wisconsin have their own separate rating bureaus. Some of these other rating bureaus are run by their state governments.
As with most rating bureaus, the WCIRB is permitted to revise an experience modification under a limited number of circumstances. The WCIRB also contains specific instructions for calculating the effect of subrogation recoveries on experience mods which reduce premiums. Once such circumstance is when the insurer reports a successful subrogation effort. The WCIRB also contains specific instructions for calculating the effect of subrogation recoveries on experience mods which reduce premiums. Other states follow similar scenarios and have similar rules. Insurance executives extol the virtues of subrogation and its effect on American insurance premiums. “Subrogation is a critical tool to control costs for workers’ comp policyholders,” Bob McNeil, manager of subrogation and recovery at Liberty Mutual in Boston stated in a March, 2006 interview with Risk & Insurance. “Using subrogation, we can make a significant bottom-line contribution to our customers’ workers’ comp costs, reducing their paid losses, maintaining their experience modification rating, and ultimately mitigating or eliminating future exposures.” McNeil continued, “Subrogation provides one of the few opportunities an insured has to actually get money back from their insurer. For example, if a case is valued at $500,000, and $200,000 has been paid by the insurer in workers’ comp benefits, we can go after the responsible third-party to recover those payments. In addition, we can negotiate a future credit of $300,000 to the customer into the settlement so the employer is not responsible for those remaining costs.”
John Marr, senior vice president of claims at Maine Employer’s Mutual Insurance Co., based in Portland, Maine, stated in the same article, “Subrogation has been around since the first workers’ comp policy was written. Unfortunately, many insurance carriers haven’t followed up on subrogation opportunities as closely as they should.” Facilitating subrogation serves to encourage, rather than discourage, carriers from pursuing a legal option available to them which serves to benefit their insureds and hold down both the cost of insurance and the devastating effect which unfortunate accidents can have on the cost of doing business – especially accidents for which a company was not at fault.
In 2005, the Workers’ Compensation Subcommittee of the American Academy of Actuaries reported to the U.S. Senate Judiciary Committee on the dangers and economic harm associated with efforts to limit subrogation rights in the workers’ compensation arena, acknowledging that insurance premiums for employers are generally determined in the process of underwriting taking into consideration and counting on the fact that subrogation rights will apply. The role subrogation plays in holding down workers’ compensation premiums is even much more pronounced than in some lines of insurance because when the employee makes a successful third-party recovery, the workers’ compensation carrier not only has a right to recover past benefits it has paid, but in most states, it has the right to take a credit in the amount of the worker’s net recovery toward any future benefit payments it might owe. This combination of subrogation and future credit plays a large role in erasing negative loss histories, positively affecting risk modifiers, and helping to hold down insurance premiums for one of the key operating costs for American businesses large and small – workers’ compensation insurance. The subcommittee reported that elimination of subrogation in the field of workers’ compensation for just the limited area of asbestos claims would result in “tens of billions of dollars” in additional costs to the workers’ compensation system. When you consider that asbestos claims constitute less than 1% of workers’ compensation claims in the United States, simple math demonstrates rather cogently how significant subrogation is in holding down costs for American employers.
Often overlooked by those who wish to limit or destroy workers’ compensation subrogation rights is the fact that, in some states, a workers ’ compensation carrier’s rights of reimbursement are not technically subrogation rights. In Wisconsin, for example, a carrier’s rights of reimbursement under Wis. Stat. § 102.29 are actually not even subrogation rights. A careful reading of this statute reveals that the rights granted by this statute are distinct from subrogation. Section 102.29 provides for a direct cause of action by an employer against a third-party. This is not the same as merely “stepping into the shoes” of an insured, as is the case with subrogation. Nowhere in the text of § 102.29 is the word “subrogation” even mentioned. That is because this statute is a legislative mandate for courts to apportion third-party recoveries using the formula set forth therein. This right of reimbursement is part of the compromise that was struck with employers who were legislatively made responsible for the injuries of employees which occur through no fault of the employers. In many cases it should not be treated as simple subrogation, nor overcome based on some of the traditional arguments against subrogation.