Coppelman on Subrogation: Not-So-Great Expectations?

WorkersCompensation.com President and CEO Bob Wilson's recent ruminations on subrogation in Texas remind me that subrogation is a frequently misunderstood part of the work comp system. The general perception is this: When a worker is injured, comp benefits kick in almost immediately; if a third party is at fault for the injury, the claim is subrogated and works its way through the courts. Eventually, the third party claim is settled, the worker receives a payment well beyond what workers comp paid, the insurance company is paid back, and the claim is retroactively wiped off  the insured’s experience modification. In other words, the cost to the employer eventually goes away. Except that it doesn’t.

For a number of reasons, all deriving from the nature of NCCI’s experience rating process, the experience mod following completion of subrogation usually does not drop a whole lot. It might even go up.

Here’s why:

1. A judge will determine how much of the settlement goes to the injured worker and how much to the carrier. Needless to add, most of the money goes to the worker, as it should. Usually, carriers are reimbursed for only a small portion of the total claim cost.

2. Carrier expenses — in this case, substantial legal fees — are excluded from the original experience mod calculation; however, carriers are allowed to include these and other expenses in determining the cost of the claim during the subrogation process.  

3. In the normal course of events, the value of a claim is locked in when the Unit Stat report is completed; it cannot be changed retroactively. However, during subrogation, the final cost of the claim becomes the basis for the retroactive calculation: if the total cost to the carrier is higher than the original (Unit Stat) amount, the experience mod may  actually go up following subrogation.

4. Where the claim involves a catastrophic loss, the costs may exceed the state’s cap on the amount included in the mod calculation. These caps range anywhere from $138K in Maine to $375K in Louisiana. For these large losses, the subrogation usually involves dollars that remain above or just slightly below the cap and thus the post-subrogation experience mod may drop a bit or not at all.

5. In the mod calculation, the first $16,500 of the claim (primary loss) goes into the calculation without any discount. Once the claim goes above $16,500, the “excess” losses are discounted substantially, especially for smaller insureds. Subrogation rarely lowers the carrier portion of the settlement enough to dramatically reduce excess, let alone primary, losses.

There is considerable irony in this entire process: Subrogation usually absolves the employer of responsibility for the injury to its worker. Nonetheless, the costs of the injury are still borne by the employer, with the recalculated experience mod still substantially impacted by the claim. Adding insult to injury, so to speak, the inflated mod is often interpreted as an indication of an unsafe employer, even though a court has determined that the loss was not the employer’s fault. 

When it comes to employers saving premium dollars through subrogation, it’s best to have modest expectations.

ABOUT THE AUTHOR

Since 1990 Jon Coppelman has trained thousands of business owners from Main Street to Fortune 500 on the fundamentals of workers’ compensation cost control. From 2006 to 2012 he was a principal writer for the Workers’ Comp Insider, LynchRyan’s first-in-the-nation blog dedicated to risk management issues. He currently divides his time between his consulting businesses and his role as Senior Workers’ Compensation Consultant for the Renaissance Alliance, an aggregator based in Wellesley, MA serving more than 90 local agencies across New England.

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