This time it got us so lost in the back woods that we were out among the bears and the deer until my wife admitted that the GPS had gotten us lost, and allowed me to return to the original route I had planned. Apparently the lady in the satellite who bosses me around and tells me to turn left or right was asleep at the switch.

In the October, 2010 issue of Trains Magazine, columnist Fred W. Frailey sang the praises of Mike Haverty, Kansas City Southern's CEO. Haverty ruled over the Atchison, Topeka, and Santa Fe Railroad just prior to its merger with Burlington Northern, when it became BNSF, the railroad Warren Buffett had enough faith in to purchase. “Haverty would never be voted Mr. Congeniality by his fellow railroad CEOs,” said Frailey. “He is tenacious and unrelenting in pursuit of his railroad's goals. Nor is Haverty always easy to work for. 'I am a demanding boss,' he says.”

Haverty is also a boss who knows how to read a map, and through careful navigation he has turned KCS into the seventh major U.S. railroad. The line reaches far into Mexico, the Southeastern states (in partnership with Norfolk Southern), and taps the great petrochemical basin of the Gulf. Thus it connects the Gulf with the Pacific Ocean, making new shipping ports available. Haverty looked at the railroad maps, figured out where connections would make sense, and pursued them with vigor. He was most certainly not asleep at the switches!

Frailey noted one of Haverty's accomplishments in particular. While still at Santa Fe, Haverty invited the head of J. B. Hunt Transport, a major trucking firm, to Chicago to discuss using Santa Fe rails for its long-distance hauls. Haverty had a Santa Fe diesel locomotive painted in the “warbonnet” style at the head of the cars carrying Hunt trailers. Santa Fe's business car was at the rear, carrying the Hunt CEO and Haverty. As they roared out of Corwith Yard in Chicago on the non-stop path to Kansas City (the business train superseding other rail traffic), the train zoomed along beside Interstate 55, which was clogged with trucks and traffic. Hunt's CEO got the message, and J.B. Hunt Transport is now one of BNSF's biggest intermodal customers.

Insurers Asleep

A similar wake-up call is needed throughout the entire insurance industry, which seems to be asleep at every switch on the line. Just as Mike Haverty was one of the first to realize that the railroads were in the transportation business, not the “railroad” business, insurance executives need to realize that they are in the indemnification business, not the insurance policy-issuing finance business.

I spend much of the year reviewing hundreds of insurance court cases for the semi-annual supplementary updates to the five volumes of Thomson Reuters West textbooks, Casualty Insurance Claims, 4^th, and Excess Liability–Rights and Duties of Commercial Risk Insureds and Insurers, 4^th. Last September, I came across an 11th Circuit Court decision that left me muttering in anger about the insurer to my wife–even though the insurer had won the case. I'll not cite the names of the plaintiff or insurer involved, but for those who want to look it up on Westlaw, it is 2010 WL 1641369.

In the case, in which I will call the insured plaintiff “Keith,” his employer provided employee benefits to include medical insurance subject to the Employee Retirement & Income Security Act (ERISA). Keith was driving along properly when a truck crossed the center line and hit him head-on, sending Keith to the hospital. His medical bills, all paid by the employer's health insurer, totaled $262,611. When Keith was able, he sued the other driver, and Keith and the other parties agreed on a settlement of $1,286,457. Undoubtedly, Keith's attorney claimed a fairly large chunk of this amount.

When the medical insurer woke up and discovered what Keith had accomplished, they notified him that he had to reimburse them the full $262,611 plus interest. The employer's medical insurance plan had a reimbursement and subrogation clause that made no reference to any “made whole” doctrine.

Some Version of “Heck No!”

Keith was, unquestionably, incredulous. After all his legal expenses and other losses, he didn't have all that much of the “big award” left. After Keith expressed some version of “Heck, no!” the insurer sued Keith in federal court, and the court agreed with the insurer that, under the terms of the insurance contract (of which Keith had probably never received a full copy), the insurer was unambiguously and equitably entitled to full reimbursement–and it owed no share of Keith's legal expenses.

On appeal, the 11th Circuit concurred, pointing out that to have ruled otherwise would have been unfair to other plan recipients. Such is the law of equity. Fortunately, proceeds of the lawsuit were being held in trust by Keith's attorneys, so he did not have to pay his insurer back out of his own pocket.

Now, what ticked me off was that the insurer in this case must have been asleep at the switch. The case seemed to indicate that many group medical insurers are lax in pursuit of their own subrogation. The information on the case would appear to suggest that the insurer had no intention of pursuing its subrogated rights until after its insured had already retained an attorney and filed a lawsuit. Thus, as Keith had probably been asserting in court, the insurer benefited by not incurring the legal expenses that Keith incurred partially on its behalf. That seems unfair.

The Need for a Good Map

This case suggests several routes that claim adjusters for both liability insurers and group benefit insurers should consider when traveling down the road on any claim involving injuries or any other kind of damage. First, determine all of the liability factors for the injury. Would the same result have occurred if Keith had been comparatively negligent in the accident that caused his injury? How would the court have divvied up the settlement award then? Next, determine not only if the fully or primarily liable party has liability insurance, but also the limits of that insurance.

If you are the adjuster representing that liability insurer, then determine who is paying the medical expenses of the third-party claimant, and determine whether that payor has a right of subrogation. With greater emphasis on recovery of Medicare and Medicaid benefits cited last year in Claims, there is very little likelihood that the payor will not have a full right of recovery.

If representing the medical insurer, advise the insured or employee benefits recipient and, if represented, his or her attorney of the insurer's right of full recovery (unless the appropriate jurisdiction recognizes the “made whole” doctrine) and suggest that the insurer's subrogation rights be taken into consideration in any negotiations or litigation with the responsible parties. Place the responsible tortfeasors on notice of the insurer's right of subrogation, and keep the tortfeasor advised of payments being made.

Monitor Disability Benefits

Often a group medical insurer may also be paying long-term disability benefits which, under an ERISA plan, may or may not also be subrogable. When all the parties understand that the insurer is entitled to subrogation, litigation may be avoidable. Negotiation is always the preferred route over litigation, regardless of where the GPS tells the adjuster to turn.

If the assets of the responsible tortfeasor (either insurance limits or other assets) are obviously insufficient to fully reimburse both the insurer and the benefits recipient or insured for non-covered damages, or if the extent of the tortfeasors' liability is less than 100 percent, then consider negotiating with the insured about the subrogation. It's cheaper than litigating with the insured after a trial, as occurred with Keith. His case was subject to ERISA, and therefore subject to the federal courts. Had Keith's case gone before a jury in a state court, however, the insurer might have walked away with its head in a basket and not a penny in its pocket.

The case is a wake-up call for our industry. Insurers notoriously ignore subrogation, costing insureds millions of dollars annually. Some insurers might see subrogation as just swapping dollars between insurers, but as in Keith's case, real people are the victims when insurers fail to pursue subrogation until the insured has already filed a lawsuit. Warning: Wake up! The train is coming. Make sure the switches are aligned.

Ken Brownlee, CPCU, is a former adjuster and risk manager based in Atlanta, Ga. He now authors and edits claim-adjusting textbooks.