Notes on Subrogation
We all know how subrogation is supposed to help employers: A worker is injured through the actions of a third party; workers comp covers lost wages and medical bills from the time of the injury; the employee files a tort liability suit against the third party; the tort claim is eventually settled, the insurer is reimbursed for the comp claim and the employer's experience rating is retroactively recalculated for any year impacted by the claim. Premium dollars flow back to the employer. All's well that ends well, right? Not quite.
The devil, as usual, is in the details, and the details of subrogation generally do not work in favor of the employer. Here's why:
- A judge will divide funds in the settlement between the injured worker and the comp carrier; most of the money goes to the worker (as it should);
- When the experience mod is recalculated, the carrier is able to include the claim's (substantial) expenses in their total costs (in the usual experience rating process, these expenses are excluded from the calculation);
- If the total cost of the claim has gone up, the retroactive calculation will be based upon the new, higher rate, thus potentially mitigating any drop in the mod;in fact, subrogation on rare occasions results in a retroactive increase in the mod;
- For catastrophic injuries, the cost of the claim is likely to exceed the state rating point (cap) on individual claims, which range from $138K in ME to $283,500 in CT; if the recalculation does not dip below the rating point, there will be no change in the value of the claim in the mod;
- In the mod calculation, primary losses, the first $16,500 of every claim ($5,000 in MA), go into the calculation valued at 100 per cent; subrogation usually impacts only excess losses, those above the primary split point, where usually only 10 to 15 percent of the losses are included in the calculation; a modest reduction in excess losses will have little if any impact on the ex mod.
Thus, in subrogation the deck is sort of stacked against the employer. I routinely caution employers not to expect any substantial savings through the process.
The Illustrative Mod
MA has a unique program to offer some psychological (if not financial) relief to employers whose ex mods have been inflated by a subrogated claim. If you can provide supporting evidence that subrogation on a claim is likely to succeed, the MA Workers' Compensation Rating and Inspection Bureau will issue an "illustrative mod" on Bureau stationary that zeroes out the claim in question. In the real world, subrogation will never zero out a claim; but this program quite fairly reasons that an employer should not be held accountable for an injury caused by a third party. So for bidding purposes, or just for feeling better, the illustrative mod provides a clean slate. It won't save a penny in premiums, but it offers a fairer and more accurate picture of the employer's workers comp record. In that one respect, it beats subrogation by a mile.
Senior Workers Compensation Consultant