The right to reimbursement

ITIJ 192, January 2017

Lucie Wood looks at some of the benefits and pitfalls involved in the complex practice of subrogation. How well is this practice working for travel and health insurers at present?

What is subrogation? In civil law, it means to substitute one person or group/company for another with reference to a debt or insurance claim, along with the transfer of any associated rights. Typically, an insurer will pay a claim and then ‘subrogate’ to seek reimbursement from a responsible third party, perhaps another insurer, to recoup some or all of the claim, where appropriate. 
“The right arises as a result of an accident caused by a third party and will usually be specifically referred to within the policy of insurance,” explains Mark Lee, partner and head of travel at law firm Penningtons Manches LLP, UK. “The doctrine enables the insurer to ‘step into the shoes’ of the policyholder and to include its expenses as part and parcel of the action for damages.” So, for example, where a policyholder is injured in an accident, the insurer might pay £30,000 to cover medical bills. The same company would be entitled to collect £30,000 from the party at fault.
Subrogation is an important practice for insurers in recouping costs. Bronwen Courtenay-Stamp, solicitor and partner at law firm Trowers & Hamlins LLP, UK, says: “We often see large subrogation claims in cases where an insured has required medical treatment and repatriation back to the UK. We have also dealt with cases where a travel insurer pays a cancellation claim because an insured has sustained injuries in an accident before their holiday, and then the insurer wishes to reclaim those monies from the person who caused that original accident.”
Enacting subrogation
When can an insurer enact subrogation? “The insurer will normally (but not always) have to bring the claim in the name of the insured,” explains Magdi Riad, vice-president, operation and chief operation officer at Alliance Global Assistance Canada. And here is the first complication of subrogation – ensuring the co-operation of the insured. “The insured is obliged to assist with the recovery since such a duty is implied in law… and will usually be included as a policy condition,” says Lee. “It is difficult, but not impossible, to pursue a subrogated claim without the co-operation of an insured. On most occasions, the insured will be the only person with detailed knowledge of how an accident occurred. The inclusion of a subrogated claim within the insured’s claim for out-of-pocket expenses will normally afford the insurer the best chance of making a recovery and at the lowest cost.”
Complex and costly
The clear benefit of subrogation for an insurer is that the money recovered allows it to offer reduced premiums and remain competitive. But while subrogation is of paramount importance to insurers, it can also be a lengthy, costly and complex process. “While recovery can be as much as 100 per cent of the medical expenses paid by the underwriter, not all subrogation cases have successful recoveries,” says Mireille Dionne, legal counsel and subrogation director at medical cost containment company Global Excel Management. “The timeline between case opening and successful recovery also varies greatly. We see cases take as little as two months and others as many as three years.”
Dionne agrees that the process of subrogation can be complex. “If one doesn’t know the rules or the applicable legislation, subrogation can often be a headache. That’s why there are companies that specialise in this type of service. Those who are experts in the field will tell you that the earlier you get involved and identify the responsible parties or potential avenues for recovery, the better chance of success you will have. The industry is definitely more knowledgeable today about subrogation.”
The ’made whole’ doctrine
Importantly, while the principle is the same, subrogation is viewed and treated differently according to country or jurisdiction. In the majority of US states, the ‘made whole’ doctrine is applied to injury cases in the interests of fairness to limit the loss of the insured through the subrogation process. In basic terms it means that an insurance company cannot take funds from a claims settlement until all the insured’s damages have been covered. Often this is tough luck for the insurance company as Riad explains: “In some situations, an insured may quote the made whole doctrine as a defence against having to allow his insurer to subrogate and recover its cost. If the insured presents proof that his or her claim is in excess of the coverage available for subrogation, the insurer cannot subrogate. It is only if the insured receives a ‘double recovery’, which is a recovery that goes beyond his or her legally recoverable amount, that his or her insurer becomes entitled to exercise its subrogation right.”
Conversely, in the UK, no ‘made whole’ doctrine applies. Courtenay-Stamp says: “[A 1993 House of Lords ruling] held that the insured is ‘made whole’ when he is indemnified under the policy, at which point the insurer may exercise its right of subrogation, regardless of the continued existence of uninsured losses.” She continues: “Therefore, in the UK, insurers are still able to recover costs they have incurred from a third party despite the insured not being compensated for his/her injuries and made whole.”
Benefits of subrogation
So, if the process of subrogation is so complicated and costly, why use it at all? Firstly, it is paramount as part of cost containment and the recovery of funds. “From an insurer’s perspective, subrogation’s first and foremost benefit is to improve the loss ratio,” says Riad. “A recovery of money paid out is an improvement to the insurer’s bottom line. It allows for an affordable, yet comprehensive, insurance product to be introduced to the market which leads to growth.”
Subrogation can also help to ensure customer loyalty. “Since in most subrogation cases the insurer would take on the case and include the insured’s claim in the action,” explains Riad. “This may come at no or minimal cost to the insured.” The practice is also key in cost containment as Dionne explains: “In the travel insurance world, every ounce of savings counts. In this market, premium setting and claims cost containment strategies are the only ways to remain competitive. That’s why insurers do not want to leave any money on the table. Subrogation is one way to reduce claims costs and remain competitive.”
Often subrogation means that the insurer can make significant savings. Dionne backs this: “We had a case in California revolving around an accident where the client was injured on a guided tour. We were able to recover 64 per cent of the claim – the claim was approximately CA$125,000 and recovery was $80,000 – through our subrogation efforts.” Meanwhile in the UK, the figures are similarly impressive. “We are currently engaged in multiple large subrogation claims on behalf of insurer for amounts between £10,000 and £150,000,” says Courtenay-Stamp. “We have recently settled one matter where the insured suffered a nasty injury to her hip and the insurer’s outlay was over £40,000. The insured recovered compensation for her injuries and her own financial losses and the insurers recovered 100 per cent of their outlay for medical costs and repatriation.”
Common pitfalls 
In the subrogation process there are manifold perils that the insurer should be aware of. “Travel policies are often underwritten and administered by different entities,” explains Lee. “For example, an assistance company may deal with the medical expenses, whereas a claims administrator or legal expenses insurer may deal with legal and personal injury claims. In our experience, these different entities do not always share information and consequently the insurers’ subrogated claims may be overlooked or initiated a long time after the accident. This can result in various difficulties, including: limitation periods being missed and claims becoming time barred; an inability to secure the co-operation of an insured whose own claim has already settled; witnesses’ inability to recall key facts and defendants being less likely to co-operate.”
There are other issues too. In some US states there are anti-subrogation laws that prohibit health insurers from seeking reimbursement from settlements reached with victims in tort cases – thus, where possible, insurers should carefully select their jurisdiction. 
Dionne says that poor policy wording can also be a problem. For one thing, terms used do not always mean the same in different countries: “In some instances, the intent to subrogate or to be second payer needs to be spelled out in the policy in order to recover. Leaving this out of the policy could mean the difference between a 100-per-cent recovery and a zero-per-cent recovery.”
Then, in some cases, there are limited funds to subrogate against, as Dionne explains: “When subrogating on a claim, you don’t control the means of compensation of the liable party. As such, policy limits and the lack of assets could be detrimental to one’s ability to fully recover. For example, many medical non-liability benefits are capped at CA$50,000 in certain Canadian jurisdictions. [In the US], medical benefits for non-liability claims are often capped anywhere between US$1,000 and $10,000. Policies in the US can be much lower than they may be in other jurisdictions.”
Recommendations for improvement
The key question is: are global travel and health insurers using subrogation effectively and to their full advantage? “I don’t think global travel insurers are using the doctrine of subrogation effectively and there is a lot of education required,” says Riad. “Some of the lawyers at the International Travel & Health Insurance Conference have made a very good job at explaining the subrogation process but we are still far from perfect. To improve, insurers must create a subrogation programme and keep it active. Training on subrogation is a must, as well as assigning someone to lead the charge. Claims examiners must put themselves in the shoes of the insured and think twice before they mark the claim as ‘no subrogation’. They must see the opportunity and escalate it. Insurers or claims examiners must educate the insured on how the process works. They must advise the insured not to settle before the entire cost of the claim is visible and that there is a right to the insurer to subrogate,” he says. 
More knowledge accrued by insurers around subrogation is key, adds Riad. “As part of the education process, [we must recognise that] not every slip and fall is a subrogated claim. We must prove negligence on the part of the third party. Sending a claim for subrogation when the insured was drunk and fell is a waste of everybody’s time.”
Courtenay-Stamp backs education and says that insurers often fail to see subrogation opportunities. “It is common for our lawyers to actively request confirmation from insurers if they would like to include any subrogation claim rather than the other way around!” she says. “Insurers could train their claims handlers to spot possible recoveries at as early a stage as possible – often where the assistance team is initially involved,” she suggests. 
Lee agrees this is fundamental. “It is important that insurers create a foolproof system that enables them to identify potential recoveries early so viable claims are actioned as soon as possible Although the profit margins for UK travel insurers remain challenging, this is one obvious way to reduce leakage and to improve the bottom line.