In one of our most widely-reprinted and widely-read articles, “Ten Subrogation Mistakes Insurance Companies Keep Making”, the number one most prevalent and most costly mistake is waiting too long to involve subrogation counsel. It sounds like an MWL marketing pitch, and of course, in many ways it is. But it is also the truth. The dollars lost because claims with subrogation potential are referred to subrogation counsel mere weeks, days, or even hours before a statute of limitations or other deadline is about to expire, is almost incalculable. I refer not to cases in which subrogation potential is discovered late or notice of a pending third-party action filed by the insured or claimant is received late in the game. Rather, I refer to files in which subrogation potential is obvious, but a conscious decision is made to avoid incurring subrogation attorneys’ fees or costs resulting in the wholesale avoidance of referring the file. Claims deteriorate with age and we see far too many files entrusted to us at the very last moment which contain literally dozens of identical demand letters – with little or no substance or subrogation “proof” to support them – sent to the third-party carrier every six weeks like clockwork for years, each a carbon copy of the one which preceded it. When the file is submitted to subrogation counsel with very little time left on the clock, there is frequently no opportunity to conduct a thorough investigation. Evidence has disappeared or been destroyed. Deadlines have passed. Lawsuits have been settled. Releases have been signed. Witnesses have vanished or been “reached” by the other side. Money has been lost. It is the number one subrogation-killer we have seen over the years, in terms of the volume of dollars lost and the number of claim files.
The most surprising aspect of this particular insurance practice is it appears to transcend file size. It is one thing to sit on a $3,500 med pay claim – quite another on a $350,000 workers’ compensation claim. Trial lawyers have developed a well-known body of law in almost every state which allows them to take tremendous advantage of carriers who protect their interests either passively or not at all. Subrogation is a serious investment that deserves both respect and a dedication of time and resources. A successful subrogation program is never an accident, and it cannot be developed as an after-thought or a last resort. It is always the result of a commitment to excellence, informed decision-making and planning, subrogation knowledge, an investment of time and money, and an intensely-focused effort and perseverance.
A perfect example of the high cost of simply not pushing a button—a button which would have prevented the lost reimbursement of a $250,000 property claim payment made by state Farm, is illustrated in a recent New York Supreme Court case. In State Farm Fire & Casualty Company v. Moving & Storage, Inc., 2024 WL 1061574 (N.Y. Sup. Ct., 2024), the defendant rented a warehouse insured by Selective Insurance Company, an MWL client. K & B Global Corporation rented space next door to Moving & Storage in the warehouse and was insured by State Farm. On May 4, 2020, a fire started in Moving & Storage’s space and quickly spread to the area that was rented by K&B. As the result of the fire, K&B’s merchandise sustained significant damage. K&B filed a claim for the property damage with its insurer State Farm. State Farm paid $250,000 to K&B on the claim.
An inspection took place in June of 2020, with multiple attendees, and it was determined by experts that the fire started in Moving & Storage’s rented space and spread to the area rented by K&B. The various individuals at the inspection served different roles (fire inspector, architect, photographer, unidentified). At least some of those present signed an attendance sheet (“the Attendance Sheet”) which includes the name of the entity or person each represented. On May 7, 2020, June 10, 2020, and October 12, 2020, the State Farm Investigator conducted physical inspections of the property to determine the origin and cause of the fire. He concluded that the fire was caused by Moving & Storage’s negligence. On or about August 26, 2020, State Farm sent a letter to Traveler’s Insurance Company notifying it of State Farm’s subrogation rights. Of import, it is undisputed that State Farm never sent a notice of its subrogation rights in connection with the incident to Moving & Storage’s insurer, Selective.
On November 16, 2020, Selective and K&B entered into the Release for the amount of $92,424.24. In exchange for the payment, K&B agreed to release all claims it or any insurance company on its behalf had or would ever have against both Selective and Moving & Storage. Four months after the execution of the Release, State Farm sent a letter to Moving & Storage advising Moving & Storage of State Farm’s subrogation rights. On April 19, 2021, State Farm commenced this action against Moving & Storage. It was uncontroverted that the first written notice that Selective received of State Farm’s subrogation rights was the summons and complaint served on Selective on May 3, 2021. Moving & Storage moved for, and the court granted summary judgment dismissing State Farm’s subrogation complaint based on the Release.
This was an expensive lesson for State Farm, wherein, in an effort to avoid getting subrogation counsel involved, the wrong button was pushed. Successful subrogation requires the best – not the cheapest. Recall the story of the engineering consultant who was called to repair a broken machine that had brought a factory to a stand-still. He tightened a single screw and within about five minutes the whole factory was back on line. When a $1,000 bill was received, the factory owner was outraged, “You spent just five minutes here, tightened one screw, and we received a bill for $1,000!” The consultant smiled, “The tightening of the screw was free. The $1,000 was for knowing which screw to tighten!”
No matter how easy or how difficult it is to run an effective subrogation program, there is one simple and inescapable truth which cannot be ignored: even a task as simple as pressing a button requires you to know that you must press the button, you must know which button to push, when to press the button, and then you must press it. You cannot put a value or price on pushing the button if failure to do so costs you a significant amount of money. Pushing a button sounds easy, but it clearly is not a simple and straightforward as it sounds. Successful subrogation requires that the pointy end of the subrogation sword – a genuine threat of litigation – must always be hanging over your adversary’s head. Value, experience, legal knowledge, availability, prompt and thorough reporting, and the willingness to strong-arm top dollar recoveries in every matter entrusted to it are the trademarks of a good litigation law firm. Everything else is smoke and mirrors. Successful subrogation requires the best – not the cheapest.
In our experience (and we see tens of thousands of claim files every year), the number one reason for failing to push the button was that a claims handler or a company wanted to avoid getting subrogation counsel involved. In-house may even require that efforts be made to recover subrogation dollars without use of subrogation counsel. Or sometimes, claims handlers are directed to send files to cut-rate vendors with promises of lower contingent fees. The idea is that with lower contingency fees, the net recovery will be higher. But nothing could be further from the truth. Subrogation files are most frequently handled on a contingency fee basis, which makes the cost containment goal less elusive but limits the litigation management options available to the insurer. As a result, one illusion which the insurance industry seems to be chasing is the specious notion that lower contingent fee percentages translate into higher net recoveries and, therefore, a more successful subrogation program. If 35+ years of subrogation litigation experience has taught our firm anything, it is the fallacy behind that premise.
The only path to true subrogation success is a genuine partnership between an insurer and a law firm it trusts. Coupons, discounts, and weekly specials only limit the amount of time a vendor can spend on your file without it becoming cost-ineffective. A new generation of opportunistic subrogation and claims vendors, often owned by lawyers who have experienced firsthand the cost-conscious insurance industry’s attraction to low rates, has had great success by offering contingent fee rates too good to be true. Idioms which have weathered the test of time usually have a basis in fact and the pejorative phrase “built by the lowest bidder” is no exception. The lowest contingent fees guarantee that many files will be settled for less than their true value and that larger files that should see the inside of a courtroom in order to get top dollar never will. Like insurance catnip, however, the low contingent fees serve up the mirage of fee containment while simultaneously devaluing an entire book of business. The only winner here is the short-lived vendor, who profits by selling short the wheat and leaving the client with the devalued chaff.
We know the above to be true because we are approached weekly by vendors desperate to find lawyers capable of accepting the files that won’t settle on an even lower percentage contingency fee basis. We regularly hear from frustrated insurance managers being told that their files which did not settle quickly suddenly have no subrogation potential and should be closed. Decision makers are sold on a PowerPoint presentation and the lure of quick results at bargain basement prices. Without exception, they are later universally disappointed and must scramble to salvage what they can. It is similar to the unfortunate phenomenon of “sign and settle” trial lawyers who advertise using celebrities or sports figures, but try no cases. If a case doesn’t settle, they must try to refer the case out and retain a percentage, all but ensuring the devaluation of the poor victim’s case.
A $75,000 recovery in a $90,000 subrogation claim litigated on a 1/3 contingency fee is preferable to a $30,000 recovery on a 15% contingency fee. The subjective nature of subrogation success allows a good file to be easily misrepresented as a bad file in order to justify a quick settlement. Unfortunately, it is often easier for subrogation claims managers to sell an 18% contingent fee than to assess the true recovery potential of a large case which is settling for little or nothing at all. Far too many in our industry go for the quick buck – skimming the cream while leaving behind a treasure trove of subrogation potential to slowly decay until statutes of limitations are mere weeks from running. Taking the road less travelled means that the bulk of files referred by such vendors have less than 30 days left before being time-barred.
Lawyers know the number of hours necessary in order to ready a file for trial and, if that number exceeds the potential profitability of success based on a reduced contingency, they won’t stay in business long. The subrogation vendor working on cut-rate contingency fees is faced with that stark truth when they try to assign to counsel the majority of files that do not settle quickly at discounted value. When even lower rate vendors undercut the cut-rate vendors, the result is disaster. For these entrepreneurial opportunists it is not about getting good results across a wide spectrum of files for their client – it’s about making any promise necessary to get the business in the door and milking the files for settlements the client could have achieved with by pressing a button. Unlike law firms, subrogation vendors don’t have to follow attorney ethics rules and obligations and owe no fiduciary duty to ensure that the client’s best interests are being served. Time and time again we see independent audits revealing millions of dollars unrecovered and left on the table and, by then, it’s often too late.
There are no short cuts in life, and that includes subrogation. Fast food is popular because it’s convenient, it’s cheap, and it tastes good. But the real cost of eating fast food never appears on the menu and is rarely discovered until it is too late.
If you have any questions regarding this article or subrogation in general, please contact Ashton Kirsch at akirsch@mwl-law.com.
