Choose Your Own Adventure

You, the insurance company, have paid out money to the insured as the result of some negligent third party’s conduct. Now you must decide whether, and how, to recover that money from the third party. This is subrogation.

The word “subrogate” stems from 15th century Middle English, deriving from the Latin word for “substitute” or “to nominate a substitute for another.” To subrogate a claim is to obtain relief or reimbursement for the injured party when a third party is clearly liable. Recovery, however, in most cases means offsetting rather than eliminating the insurance company’s innate cost.

For some, subrogation is a foreign concept that is often too difficult to litigate. We will simplify it here with an example of an employee who is injured in the course and scope of employment, resulting in the payment of workers compensation benefits.

There are three ways the insurance company can pursue the responsible third party: file a complaint against the third party (Labor Code § 3852); join as a party plaintiff or intervene in an action brought by the employee against the third party (Labor Code § 3853); or allow the employee to prosecute such action and apply for a lien upon the net amount of the employee’s judgment (Labor Code § 3856 (b)) (Gilford v. State Compensation Ins. Fund).

The employer’s rights with respect to settlement of the employee’s claims against the third party are set forth in Labor Code §§ 3859 and 3860 (Marrujo v. Hunt).

Filing a complaint when a lawsuit has not been brought seems like a no-brainer, but there are still preemptive considerations. If the statute of limitations is about to expire and no claim has been filed, then that’s one thing. But if there is time and the employee continues to seek treatment, then it is best to wait and allow the lien to mature. This is fairly straightforward.

But what if the plaintiff has already sued the third party? When do you file a lien and when do you intervene? To determine the best, most practical avenue to maximum recovery, the considerations are manifold, and there is no formula that provides the right answer. Instead, experienced counsel should take a holistic look at the entire picture and know how to weigh mutually competing factors.

Here are five key tips, concepts, and crucial criteria to help you maximize subrogation recovery.

1. Keep expectations realistic. In an ideal world, the responsible party would pay 100 percent of what the insurance company pays the insured, especially when liability is clear. On the surface, it is easy to look at a situation such as a rear-end auto collision with admitted liability and say, “I paid the insured; now I want 100 percent of that payment back,” but an attorney should never guarantee 100 percent recovery. Even in situations where all sides agree the insured was free of fault, there is a cost associated with recovery. Open lines of communication and in-line expectations are crucial elements for successful subrogation claims. If either of these elements are missing, you need to rethink your strategy.

2. Is it worth it? It may appear obvious that the insured was free of fault, but the third party may decide to fight recovery anyway. When you file a lien or intervene, it is best to have an honest talk with counsel early in the process. Ask about what you can expect percentage-wise in a best- and worst-case scenario, and the fees associated with each. Subrogation efforts can, and do, end up losing money sometimes. Attorneys should do everything in their power to avoid a net loss; the client’s bottom line is always more important than their billable hours. However, in general, it is important to remember that more money is left on the table through failure to subrogate than through ill-advised subrogation efforts where the cost of collection outweighs the potential recovery.

3. Filing a notice of lien. Once you have decided to pursue cost recovery, and you have a good attorney/claims professional relationship, the next step is to prepare to act. Increasingly, filing a notice of lien is an in-vogue solution.

When you file a notice of lien, you are putting all parties and the court on notice of your lien against any recovery to plaintiff. Once a notice of lien is filed, it is best to let plaintiffs prosecute and get out of their way. By so doing, you avoid the additional risk of exposing yourself to discovery, potentially affording the defendant additional defenses, and causing runaway litigation costs. Insurers can still participate in the process behind the scenes with settlement discussions or provide information to plaintiff’s counsel. These factors are highly attractive to insurers.

Keep in mind that when filing a notice of lien, your lien is subject to the common fund doctrine. The common fund doctrine is an equitable principle that stands to reduce the lien by the insured’s reasonable attorney’s fees and a pro-rata share of litigation costs (Civ. Code § 3040 (f)).

4. When should you NOT file a notice of lien? The purpose of subrogation is to actually recover a portion of the lien from the third party. If plaintiff’s counsel is asleep at the wheel or consumed by a malicious and destructive cycle of spite including discovery battles and law and motion, then you may want to consider the alternative: intervening in the action. Be sure to make this decision in a timely manner, as you will need to justify to the court any unreasonable delay that may cause a continuance in the underlying action.

5. The advantages of intervening. Perhaps plaintiff’s counsel is responsive and competent but the defense has decided to fight tooth-and-nail rather than admit liability, or the particulars of the insured’s suffering are so ghastly that the defendant is fighting scared. Intervening allows the insurance company to regain control in a situation that could quickly escalate into something so big you cannot get out. Additionally, you may get stuck litigating a case to trial because it becomes too big to settle.

There are several factors to consider when making your determination as to whether and how to pursue subrogation, and these are only a few. The most important factors are a good working relationship with your counsel of choice, and clear communication.