Every subrogation professional wants to efficiently recover monies paid out to an insured from a responsible third party for causing the underlying claim. At the same time, most product manufacturers would choose to negotiate valid claims for damage caused by their product rather than engage in litigation. This editorial describes two key elements to a subrogation program used by many insurers to reduce subrogation processing costs and increase their bottom line recovery pre-litigation: having a set of qualified, vetted experts capable of accurately determining the cause of a loss and effectively communicating their findings and making a demand reflective of the maximum recovery allowed in the relevant jurisdiction.
Assemble an Effective Investigative Team
Certainly, the presentation of a clear liability claim to a third party tortfeasor increases the likelihood of a quick and low cost recovery. Likewise, it is axiomatic that the subrogating insurers’ experts play a critical role in this regard. The investigative team assigned to determine the cause of a loss must be adept at both evaluating the cause and at communicating it persuasively. In practice, however, this is difficult to achieve if your subrogation program utilizes outdated panels of “approved” experts or only presumes that the companies they retain for hiring experts have sufficiently screened their consultants. A successful subrogation program begins with the vetting and identification of qualified experts by the insurer.
The Expert Vetting Process
A vetting process can be applied to any type of insurance claim investigator and any type of loss. Fire loss subrogation, however, presents an area that is ripe for the development of a formalized vetting process because the identification of a fire’s origin and cause is often a scientific, complicated and difficult process that will make or break a subrogation claim. While it may be a relatively simple matter to determine the origin and cause of a fire that is extinguished in its very early stages, a fire that has spread and caused extensive damage presents a different kettle of fish. Certainly, not all experts are created equal; and, fire experts are increasingly held to a higher standard in the fire science community and in the legal field. Simple reliance on having attended “hundreds of fire scene investigations” to arrive at an opinion as to the area of a fire’s origin, is now met with a high degree of scrutiny. While experience remains of great value, advances in the science of fire investigation have led to a point where the use of the scientific method is mandatory and experts are precluded from testifying for failing to follow NFPA 921, Guide for Fire & Explosion Investigations, the accepted method of fire investigation. Today’s fire investigators must be well-versed in NFPA 921 and vigilantly keep abreast of the advancements in fire investigation techniques and concepts in order to present credible theories of causation and to avoid evidentiary challenges to their credentials and methodologies in litigation.
As such, the identification of qualified fire investigators who have maintained a current level of training and understanding of the advances in fire investigation methodology is one of the cornerstones of an effective subrogation fire program. The most successful subrogation programs have instituted formalized vetting procedures to prescreen and identify qualified fire origin and cause investigators. There are no short cuts for this selection process; however once instituted, it yields results by increasing the likelihood of presenting a valid claim; one that will encourage immediate negotiation.
“Cause” experts, such as those retained to attend laboratory inspections to examine potential ignition sources found in the area of origin, should likewise be competent and appropriately certified. Again, a selection process should be undertaken by the insurer to identify qualified cause experts and should not be accomplished on an ad-hoc basis. An effective subrogation program will have access to a stable of experts previously identified as being qualified who are ready to examine the types of ignition sources typically found at fire scenes, whether electrical, mechanical, or chemical. Some individuals may qualify as both origin and cause experts, but often two separate experts are required for these two separate and distinct tasks.
The expert selection process begins with the assembly of a vetting committee to evaluate potential expert candidates and monitor their eligibility on an ongoing basis. The committee itself should include at least one “qualified” fire investigator, a fire science attorney, and an expert in the scientific method as it is applied to fire losses. Committee members may be qualified to serve more than one role, but at least three members is preferred.
A committee with knowledge of the investigative and litigation processes involved in fire losses will likely have an existing network of experts to create a list of “pre-qualified” candidates. Such persons, who are proven experts in the field with a track record as origin and/or cause experts need not undergo the vetting process. This saves time and allows the insurer to start with a list of qualified experts.
Next, the vetting committee creates a list of both tangible and non-tangible qualifications for both the origin and cause categories of experts. Qualifications will include appropriate licensure, certification, and background education and investigative experience. The vetting committee should also set standards to evaluate a candidate’s experience in testifying at depositions, trial and Daubert/Frye hearings. If costs are an issue, the committee can set a fee schedule that is reasonable and acceptable to the insurer.
Candidates that meet the “on paper” requirements of the vetting committee should next be thoroughly interviewed in person or by video-conference. The interview should include discussion points to flesh out a candidate’s understanding of fire science and the scientific method as it is applied to fire losses. Moreover, such an interview will allow the committee to evaluate the candidate’s “jury appeal” and teaching ability.
Finally, once a candidate has been deemed acceptable and approved, a periodic review should be performed by the committee to monitor the expert’s performance and continued compliance with committee standards.
Seek Recovery Only For Lawful Damages
Even with a clear case of liability through qualified and effective experts, a subrogation program’s efforts at prompt recovery will be undermined if the damages sought are not recoverable by law in the relevant jurisdiction.
An effective subrogation program must ensure that its specialists understand the law of recoverable damages from third-party tortfeasors. The oft-cited measure of damages allows recovery so as to place the injured party (insured) in the position that the insured was in just prior to the time of the loss. The insurer “steps into the shoes of its insured” and recovers only to the extent that the insured could recover from a responsible third party. Consequently, the tortfeasor is liable only for the actual cash value (ACV) of the loss, not the replacement cost value (RCV) of the damaged property.
However, insurance policies today often provide for the insured’s recovery of the replacement cost for property damaged as a result of a covered casualty. In some instances, commercial policies provide coverage for the full retail value of goods damaged in a covered loss. These examples of broad coverage policies often provide payment for losses which are not fully recoverable from third-party tortfeasors. Regardless of whether the insured has recovered a greater value by virtue of its contract of insurance, if the jurisdiction only allows damages to make the insured whole, the insurer will only be able to recover the actual cash value. Thus, applying the majority rule, for commercial retail losses for example, the wholesale value, not the retail value, is recoverable. These are not new concepts, yet insurers often attempt to recover replacement cost or retail value in the course of settlement negotiations, thus, undermining their position, creating unnecessary questions about the value of a claim, and delaying claim resolution.
Even if liability is clear and both parties would like to cut costs and negotiate a settlement prior to litigation, a subrogator’s demand for damages reflective of what it paid on a loss as opposed to what the insured would be entitled to recover against a third party often leads to costly litigation. If the insurer professionals are alert to the nuances of damages law and the insurer makes its demand accordingly, an earlier recovery is more likely.
Conclusion
Subrogation specialists strive for increased recovery at diminished costs. Those ends can be achieved by utilizing vetted investigators who will present a sound determination of the origin or cause of the loss and by simply seeking to recover only lawful damages. Presentment of a claim that is sound in liability and reasonable in damages can lead the way toward an early resolution of a great percentage of an insurer’s subrogation claims.
— Frederick B. Tedford
