To Subro or Not to Subro, That Is the Question

Deep pockets are not the only things to consider when an insured suffers a loss at the hands of someone else. Most commercial and personal policies provide an insurer a right of recovery from the tortfeasor when it pays indemnity to its insured for a loss.

Subrogation is defined in Black’s Law Dictionary as “the substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor.” However, just because a defendant has a claim with the right of subrogation does not mean it is the wise thing to do. Thus, one must declare: “To subro or not to subro…that is the question!” Here are some points to consider:

Statute of Limitations. You don’t want to arrive late to the party. It is important to assess subrogation potential early on in the life of a claim. Too often, subrogation inquiries are made after the underlying claim is already settled. In many instances, the statute of limitations blocks an otherwise excellent opportunity to recoup indemnity payments.

Opportunity to Participate in Global Resolution. Another problem with arriving late to the underlying claim is the inability to participate in early settlement discussions and alternative dispute resolution. Early participation by a subrogee, often at mediation, is a great way to obtain quick results for very little investment of time and legal fees. This is true particularly when the parties have some interest in ending the litigation to preserve an ongoing business relationship. Get involved in any settlement discussion of the underlying claim as soon as possible.

Insured’s Business Considerations. The insured may have reasons for not wanting his carrier to assert subrogation against another business, particularly when there is an ongoing business relationship that exists beyond the life of the litigation. Buyers or sellers of sub-parts in a supply chain have an interest in minimizing litigation. It may be to the insured’s advantage to assert subrogation during the pendency of the underlying claim.

Assets of Wrongdoer. This is the most obvious consideration. If an individual tortfeasor has no personal assets and is living month to month, then subrogation may not have any value. However, don’t assume this is always the case. Investigate assets to the extent allowed by law and don’t foreclose on the possibility of additional liability coverage existing to satisfy
subrogation liability. Although most jurisdictions do not allow post-judgment discovery to take place before a subrogation judgment is entered, parties may allow it if it means the litigation will not be protracted.

Which Firm to Use? Subrogation efforts are not always best carried out by the defense firm handling the initial claim. Many firms have specialized subrogation practices. Using counsel that employs a more offensive mindset can increase recoverability. These firms may be more willing to use creative fee arrangements for lower-value subrogation claims, particularly when they can get a high volume of assignments.

Damages. In many cases, the damages—specifically, the amount—are very clear. Whatever the insurer paid to its insured is the amount of the claim. The investment of time, resources, and legal fees to prove damages should be a strong consideration in deciding whether or not to assert a subrogation claim. 

Adequacy of Pre-Suit Investigation. Oftentimes, the investigation into a claim can be cursory. Turning over a few more stones prior to filing suit to assert such a claim may reveal evidence that impacts the wisdom of doing so. Early investigations by those looking at the liability aspect of a case may not consider aspects that would impact subrogation. A quick call to defense counsel may shed some light on the value of pursuing subrogation.

Impact on Reserving. If subrogation potential exists, that opportunity may increase the global reserves available to a carrier. The ability to effectively pursue subrogation can affect the bottom line.

In deciding whether or not to commit to a subrogation effort, consider the remainder of the famous passage from Hamlet: “To [subrogate] or not to [subrogate]: that is the question / Whether ’tis nobler in the mind to suffer / The slings and arrows of outrageous fortune, / Or to take arms against a sea of troubles / And by opposing end them?”

In continuing wisdom from The Merchant of Venice, the bard wisely reminds us that “a pound of that same merchant’s flesh is thine; the court awards it and the law doth give it.”

However, if you know the rest of that story, that pound of flesh has disastrous consequences. Subrogate wisely.   

Jim Pattillo is a partner with Norman Wood Kendrick & Turner, an Alabama-based law firm. He has been a CLM Member since 2010 and can be reached at jpattillo@nwkt.com, www.nwkt.com.