Subrogation gone wrong: The hidden financial exposure in self-insured programs

CFOs of self-insured organizations are under increasing pressure to optimize costs while navigating complex regulatory, legal and operational challenges. Yet one area is consistently overlooked, costing companies millions of dollars and that is subrogation.

Having a robust subrogation process ensures the recovery of claims dollars spent which are ultimately deemed the responsibility of third parties and not your balance sheet. Not engaging in this process or it being mishandled, results in lost recoveries, legal exposure and unnecessary risk.

Here’s why subrogation often goes wrong and what every CFO should be watching closely.

1. Overlooking the “made whole” doctrine can backfire

   The "made whole" doctrine is one of the most misunderstood legal principles in subrogation. In many jurisdictions, it stipulates that a plan participant must be fully compensated for their losses before any recovery can be pursued by the payer.  This doctrine is a legal principle that limits a payer’s right to recover funds until the insured party has been fully compensated for their losses. In other words, if a plan participant has not been “made whole” (i.e., fully reimbursed for all medical costs, lost wages, or damages), the self-insured plan or insurer typically cannot collect from a third-party recovery. This doctrine is intended to protect the interests of the injured party. However, it can often  prevent or significantly reduce the recovery potential for self-insured entities unless (even when preempted) it is specifically overridden in plan documents.

   Why it matters to CFOs:

   If your plan documents don’t contain language that clearly disavow the made whole doctrine, your recovery rights may be severely limited or unenforceable. What was expected to be a clean financial recovery can quickly devolve into a financial loss, costly compliance failure, a reputational risk and an unwanted legal distraction.

   For CFOs, this underscores the need to treat subrogation not just as a recovery mechanism, but as a regulated financial process that requires legal alignment, strategic oversight and airtight documentation.

   Executive takeaway:
   Ensure plan documents are clear, enforceable and that your legal team is actively involved in shaping subrogation terms contained within your plan documentation.

2. Procedural gaps in claim handling kill recovery potential

   Subrogation success hinges on swift, detailed and well-documented investigation; ideally from the moment a claim is filed. Yet many recoveries fail not due to legal complexities, but because of avoidable operational lapses: incomplete documentation, delays in pursuing liable third parties or poor coordination between internal teams and third-party administrators.

   In many self-insured claim scenarios, organizations risk losing significant recoveries when critical details about liability are missing from incident reports. If such gaps go unnoticed until after the statute of limitations expires, opportunities for recovery may be permanently lost. Often, the underlying issue is not the accident itself, but unclear workflows for documenting liability and the absence of escalation protocols to flag potential problems early.

   Why it matters to CFOs:
   These aren’t simply clerical errors, they’re missed recoveries with direct bottom-line impact. Without disciplined claim intake procedures, accountability structures and real-time coordination across stakeholders, even high-value subrogation opportunities can quietly slip away.

   Executive takeaway:
   Ensure there’s clear ownership of the subrogation process along with integrated communication between claims processing and those in the subrogation process. Operational excellence is just as important as legal entitlement when it comes to maximizing recoveries.

3. Workers’ comp and health plan claims require specialized oversight

   Subrogation becomes significantly more complex when it involves workers’ compensation and self-funded health plans due to the array of laws and regulations that govern each. Unlike straightforward liability claims, these types of subrogation matters are subject to a variety of distinct legal frameworks, especially at the state level.

   For workers’ compensation, states impose strict notice requirements, timelines and sometimes, limits on recoveries that vary widely. Some states require the injured employee’s consent before pursuing subrogation, while others place caps on the amount that can be recovered. Failing to comply with these nuances can invalidate a claim or expose the employer to penalties.

   Similarly, self-funded health plans are often governed by ERISA, which preempts many state laws but introduces its own complex legal standards around plan language, participant rights and recovery procedures. ERISA mandates fiduciary responsibility, meaning plan sponsors must act in the best interests of plan participants by balancing recovery efforts against participant protections.

   This regulatory patchwork creates operational and legal challenges:

   • Determining which laws apply to each claim
   • Coordinating recoveries with other benefit programs (e.g., Medicare, Medicaid, or auto no-fault insurers)
   • Managing overlapping claims and subrogation rights among multiple parties
   • Navigating participant consent and notification obligations

   Without specialized expertise and carefully tailored processes, self-insured companies risk costly delays, forfeited recoveries or legal disputes; any of which can erode the value of subrogation efforts and increase overall plan costs.

   Why it matters to CFOs:
   A misstep in these areas can create legal and reputational exposure. Misapplying jurisdictional rules, failing to coordinate with other benefit administrators or ignoring notice requirements can invalidate a claim or delay recovery indefinitely.

   Executive takeaway:
   Given the regulatory complexities and operational challenges inherent in workers’ compensation and self-funded health plan subrogation, CFOs must ensure their organizations approach these recoveries with a high degree of legal and operational sophistication. This requires more than routine claims processing and demands:

   • Specialized expertise: Partner with subrogation vendors with legal counsel who have deep, proven knowledge of state-specific workers’ compensation laws and ERISA regulations. Generic or one-size-fits-all approaches risk costly missteps.
   • Integrated processes: Develop tightly coordinated workflows that align claims handling, legal review and recovery actions. Clear communication between benefits administration, legal teams and third-party administrators is critical to navigate overlapping claim rights and timelines.
   • Proactive compliance management: Implement systems to monitor and ensure compliance with notification, consent and reporting requirements across jurisdictions. Regular audits and training can prevent avoidable mistakes that jeopardize recoveries.
   • Strategic plan design: Review and, if necessary, revise plan documents to clarify subrogation rights and procedures in compliance with applicable laws. Well-crafted plan language can prevent disputes and enhance enforceability.

   By embracing these principles, CFOs can transform a complex and risk-laden function into a strategic financial lever that maximizes recoveries while minimizing legal exposure and operational inefficiency.

4. Legal ambiguity around self-insured rights demands proactive legal strategy

   Self-insured entities operate in a complex legal landscape where their subrogation rights are often less clearly defined and more contested than those of traditional insurers. Self-insured employers may face varying interpretations of their authority to recover third-party payments.

   This legal ambiguity creates significant risk. Without a deliberate, informed legal strategy, self-insured companies can inadvertently weaken their recovery position or expose themselves to lawsuits alleging overreach or violation of participant rights.

   From a CFO’s perspective, this uncertainty underscores the critical need for:

   • Ongoing legal review: Regularly assess plan documents, subrogation policies and evolving case law to ensure alignment with current legal standards.
   • Strategic plan design: Craft clear, enforceable subrogation provisions that explicitly define the company’s rights and participant obligations, reducing ambiguity before disputes arise.
   • Fiduciary diligence: Understand the company’s fiduciary duties under ERISA and structure recovery efforts to prioritize participant interests while protecting financial outcomes.
   • Risk mitigation: Develop protocols for handling disputes, appeals and litigation to minimize disruption and reputational risk.

   Assuming your organization’s recovery rights are clear and enforceable is a risk. Without deliberate legal strategy and careful plan language, your ability to recover may be constrained or challenged outright.

 
Subrogation is a strategic financial lever — if you treat it that way

Subrogation is a critical financial lever for self-insured companies, but to unlock its full value and avoid costly legal and operational pitfalls, CFOs must ensure it is managed strategically with rigorous legal alignment, disciplined processes and clear accountability at the executive level.

CFOs should elevate subrogation as a strategic priority just like vendor management or capital planning because the financial upside is substantial and the risk of inattention is real.

Ask yourself:

• Do we know our current recovery rate and its trend over time?
• Are we leaving recoverable dollars on the table due to poor process or legal gaps?
• Do we have the right partners in place and are they held accountable?

In today’s environment, every dollar matters. Subrogation, when managed strategically, returns real value with minimal risk. But when mismanaged, it quietly erodes the financial performance of your self-insured programs.

The choice is clear: own the process or pay for the oversight.