Learn how insurers can recover claims from third parties and improve financial performance effectively.
Introduction
An insurer’s primary focus is understandably on dealing with a claim presented to them but their policyholder may not be the only party at fault. There may often be the opportunity to seek a contribution from other parties, either at the time of dealing with the claim or as a recovery once the claim has been dealt with. This article aims to give you an introduction to and some top tips for bringing subrogated recoveries, which present a significant but often under-utilised opportunity for insurers.
Subrogation is a crucial part of the insurance industry, allowing insurers to seek recovery of claims paid out to policyholders when a third party is responsible for the relevant loss or damage. We will be looking at what subrogation involves, some of the benefits of it and practical steps for a successful recovery.
Where an insurer has paid out an insurance claim under any type of indemnity insurance policy, the right of subrogation allows the insurer to "step into the shoes" of the policyholder, and to use the policyholder’s name to bring proceedings against a third party who was responsible for causing the losses which were paid out by the insurer. It is also an opportunity to recover uninsured losses.
Subrogated recovery claims can arise in various insurance contexts, including property damage claims such as fires, escapes of water and oil and cases where defective products cause damage to property.
Successful subrogated recovery operations can bring significant benefits. Most notably they can substantially improve insurers’ financial performance which in turn can help to maintain balanced premiums for policyholders.
Policyholders can also benefit because uninsured losses, such as the excess or other uninsured losses, can be included as part of the recovery claim. This can offer policyholders a real incentive to participate in the recovery process.
Practical considerations
Whilst many recoveries are simple and straightforward, others can involve complex legal issues and evidential requirements. There are various steps that can be taken to ensure that recovery claims are managed efficiently and effectively.
Time is of the essence, with various steps being required in the early stages to ensure that evidence is preserved and the claim does not become statute barred.
As with all disputes, evidence is key, so it is vital to identify what evidence is needed to establish which party was responsible for the damage and to secure and preserve relevant evidence as soon as possible. This will generally require documents from the policyholder and expert evidence on causation.
It should always be borne in mind that a recovery claim can only be successful if a defendant is good for the money. You will therefore need to identify potential targets at an early stage and consider whether they’re likely to be able to satisfy a claim. This will involve solvency or credit checks, considering whether they are likely to be insured and, if not, whether there are sufficient assets to cover a claim for damages and costs. It is worth noting that the Third Parties (Rights Against Insurers) Act 2010 allows a subrogation claim to be pursued directly against the insurer of an insolvent third party.
The limitation periods as set out in the Limitation Act 1980 is a crucial consideration for all recovery claims and should be calculated and recorded as soon as possible. If limitation is missed, the claim will become statute barred. This can be a tricky area, because any one claim can involve several causes of action, which may all have different limitation periods. You should therefore identify the earliest limitation date for each claim. If a claim is close to the end of the limitation period then steps will have to be taken to enter into a standstill agreement with the relevant defendants. Failing this, court proceedings may be required if the evidence is sufficient to do so.
Getting the policyholder on board is another key step. It is common for an insurance policy to set out an insurer’s right of subrogation and, whilst the insurer does not necessarily need the policyholder’s consent to enforce their subrogation rights, it is preferable to have the policyholder’s cooperation from a practical perspective because they will usually have the documents and information necessary to pursue the third party.
Importantly, at the outset, insurers and the policyholder should seek to agree the distribution of any funds recovered and consider entering into a subrogation apportionment agreement to specify how the recovery sums will be distributed. In the absence of an agreement, the “pay up, recover down” model will apply which will result in the policyholder recovering its uninsured losses first, followed by the insurer recovering its outlay, with any funds remaining going towards the policyholder’s excess (Napier and Ettrick (Lord) v R F Kershaw Ltd and Others (1993)). In such cases the insurer could be out of pocket if a large uninsured loss is claimed and the settlement sum is not sufficient.
Key takeaway
Insurers should consider the possibility of seeking to recover their outlay whenever it appears that a third party might be responsible for causing loss or damage which is the subject of a claim. Insurers who successfully identify and pursue subrogated recoveries will reap significant financial benefits for themselves and potentially policyholders.
