Plan B Forum

This thread is triggered by the following exchange:

Lord Jim wrote:At long last, we've found a lawsuit that Sue doesn't like....

It is time for great feasting and rejoicing! Let us slaughter the fatted calf!

Sue U wrote:For the record, I don't like defamation or libel suits, SLAPP suits, subrogation actions and non-compete litigation. (Although I never begrudge a litigant access to the courts.)

Andrew D wrote:

Sue U wrote:For the record, I don't like ... subrogation actions ....

What do you have against subrogation actions?

Gob wrote:Bugger to spell for a start!

WTF are they?

Andrew D wrote:

Gob wrote:Bugger to spell for a start!

WTF are they?

A subrogation action is an action brought under (sub) the right (rogat) of another.

Suppose that you are a general contractor, and I hire you to build me a house.

You hire various subcontractors: an electrician, a plasterer, a carpenter, a plumber, etc.

Six months after I move into the house, various parts of the plumbing explode, flooding my house and causing significant damage.

I sue you, because you are the one who agreed to build me a house, and the house turned out to be defective. I win that lawsuit, so you have to pay me $200,000.

But the problem is not really your fault. The problem is really the fault of the plumber. So justice requires that you get the $200,00 from the plumber.

You can't sue the plumber for property damage, because your property was not damaged. So how do you get your $200,000 from the plumber whose fault the whole mess actually is?

You bring a subrogation action.

I had the right to sue the plumber, but because my contract was with you, not with the plumber, I sued you instead. So you can sue the plumber, not because the plumber did anything to you, but under (sub) my right (rogat) to sue the plumber.

At bottom, a subrogation action is a vehicle by which we try to ensure that the person who caused the damage is the person who, in the end, pays for the damage.

Which is why I don't get why Sue U does not like subrogation actions. What is wrong with seeing to it that the person who caused the damage pays for the damage?

Gob wrote:Thanks for the explanation Andrew.

Sue U wrote:

Andrew D wrote:A subrogation action is an action brought under (sub) the right (rogat) of another.

***

Which is why I don't get why Sue U does not like subrogation actions. What is wrong with seeing to it that the person who caused the damage pays for the damage?

I don't want to hijack this thread, but very briefly, the type of construction defect/property damage claim that Andrew describes is ordinarily covered by contractual indemnification between the GC and the subs, who agree to be responsible for their own work. What I am talking about is a claim by an insurance company -- which has already been paid a premium in exchange for assuming a particular risk -- trying to get a second payment out of its insured's third-party recovery. (Technically, the theory is one of "reimbursement," but commonly -- and inaccurately -- termed "subrogation" because the target funds and ultimate liability originate with a third party.) I see this most commonly in personal injury cases, where a health insurer has been paid to cover medical expenses for its insured who was injured in an accident, and then demands repayment of those expenses out of the injured person's tort recovery. The health insurer demands 100% repayment from the first dollar of any recovery, regardless of whether the amount recovered is sufficient to cover the injured person's other losses, or whether it included compensation for the covered medical expenses at all. Because of our stupid system of private for-profit health insurance, the injured person is victimized again. That's the kind of subrogation action that I abhor.

It is the last bit which I do not follow. I do property insurance, not health insurance, so maybe the rules are different. But this:

Sue U wrote:I see this most commonly in personal injury cases, where a health insurer has been paid to cover medical expenses for its insured who was injured in an accident, and then demands repayment of those expenses out of the injured person's tort recovery. The health insurer demands 100% repayment from the first dollar of any recovery, regardless of whether the amount recovered is sufficient to cover the injured person's other losses, or whether it included compensation for the covered medical expenses at all.

I do not understand at all.

I understand reimbursement.

The injured person has been damaged to the tune of $500,000. The insurer has paid $100,000 of that. The injured person gets an award of $500,000. So the injured person gets $600,000 dollars -- $500,000 from the lawsuit plus $100,000 from the insurance company.

The injured person is entitled to the full amount of damages which he or she has suffered -- $500,000. But the injured person is not entitled to $100,000 more than the damages which he or she has suffered.

If someone wrongfully wrecks one of my pianos, and that piano is worth $20,000, I am entitled to $20,000. But I am not entitled to $30,000 for the wrongful wrecking of my $20,000 piano.

So I do not understand this bit: "regardless of whether the amount recovered is sufficient to cover the injured person's other losses or whether it included compensation for the covered medical expenses at all". At least in California, last time I looked, the insurance company is entitled to a portion of what the injured person gets only after the injured person is "made whole". Only if after the injured person is fully compensated for all of her or his monetary damage can the insurance company go after whatever money might be left over.

Am I missing something?

Andrew, you have opened up a big ol' can of ugly that I will try to address further when I have some time tomorrow. But for now, let me just say that the made-whole doctrine is treated very differently in different jurisdictions, some of which do not recognize it at all and many of which allow the insurer to override it by contract. Montana treats it as a constitutional right. Many states and the federal courts consider it only a rule of interpretation if the contract is otherwise ambiguous. There is a split of opinion on whether you need magic words or whether abrogation of the doctrine can be implied. And then there is the issue of whether it might apply at all to "self-funded" plans governed by ERISA. The public policy implications of these and related issues are huge, especially with Obamacare being rolled out, but they are arcane and complex and not sexy so no one talks about them.

they are arcane and complex and not sexy so no one talks about them.

That's okay Sue...

After all the recent cricket postings, I look forward to hearing about something far more interesting and exciting like the obscure details of arcane insurance law provisions...

I'd rather memorize an actuarial table than view a Cricket match.

Lord Jim wrote:After all the recent cricket postings, I look forward to hearing about something far more interesting and exciting like the obscure details of arcane insurance law provisions...

There's nothing quite so bracing as a dissertation on statutory aspects of subrogation theory in policy and practice; it really get the blood pumping. (For quite a number of years I have been a speaker on these issues at seminars for lawyers, and even I have a hard time staying awake during my talks.)

I've got a lot on my desk today, so I'm going to take this piece by piece as I can. Let's start with some historical background:

Andrew D wrote:The injured person has been damaged to the tune of $500,000. The insurer has paid $100,000 of that. The injured person gets an award of $500,000. So the injured person gets $600,000 dollars -- $500,000 from the lawsuit plus $100,000 from the insurance company.

The injured person is entitled to the full amount of damages which he or she has suffered -- $500,000. But the injured person is not entitled to $100,000 more than the damages which he or she has suffered.

If someone wrongfully wrecks one of my pianos, and that piano is worth $20,000, I am entitled to $20,000. But I am not entitled to $30,000 for the wrongful wrecking of my $20,000 piano.

While your example has logical appeal, Andrew, it is not the only way of looking at the issue and is not always the case. The modern insurance business developed largely out of 18th and 19th Century property and marine lines insuring against building fires and loss of goods/cargo. At common law, the "collateral source rule" holds that it is none of the tortfeasor's business whether I might have protected myself from loss by buying insurance; the tortfeasor is on the hook to compensate me for all the damages he caused, regardless of whether I have also received compensation for some or all of those losses from a collateral source of benefits (i.e., insurance). Likewise, at law it was held to be of no concern to the insurer whether I might receive compensation in tort for losses covered by its insurance under contract; the insurer had contracted to assume the risk of loss and was obligated to pay on the policy. If I had been prudent enough to purchase insurance and lucky enough to be damaged by a solvent tortfeasor, I could obtain a so-called "double recovery" for an insured loss -- which of course is not a "double recovery" at all, since I had actually paid a premium for the insurance coverage in a commercial exchange with a business enterprise specifically organized for that purpose; that was the the bargain made, and I would be getting no more than I had bargained for.

But with the development of concepts of indemnity, surety and constructive trust in the insurance context, the equity courts began articulating principles of subrogation (although that term wasn't used until the mid-19th Century) as a kind of natural transfer of rights based on the practices of the business, since insurers were commonly acting on behalf of and in the name of their insureds. Initially, insurers' claims against third parties to recoup insured losses were justified on an equitable theory of contribution. Eventually, because insurers were considered to be putting themselves in the place of their insureds by absorbing the insureds' risk, they were deemed to succeed to the rights of their insureds once they had themselves incurred their insured's losses (i.e., paid on the contract) -- including the right to seek compensation (whether styled contribution in equity or damages at law) from the party responsible for causing the loss.

However, this succession of rights resulted in situations where insurers were competing with their insureds in claims against an at-fault party when the insurance didn't cover the full value of the loss, either because the amount of the policy was insufficient to fully compensate for the property insured or because losses included other property that was not insured. This was particularly problematic when the at-fault party didn't have the means to fully compensate all of the losses. As a result, the "made-whole doctrine" began to appear in the early 20th Century as another rule of equity to temper an insurer's subrogation rights, holding that an insurer could not seek recovery until the insured had been fully compensated (made whole) for all uninsured losses, and then only from whatever excess funds might be available. But not every jurisdiction has even ruled on the made-whole doctrine, and some that have have chosen not to adopt it (Maryland and Illinois off the top of my head). Other states apply it only as a default rule where the contract does not expressly provide otherwise; some jurisdictions apply it only as a rule of interpretation if the contract is first determined to be ambiguous.

Over the last century, subrogation has been incorporated into the law of unjust enrichment on the equity side and into contract law on the law side. No longer limited to property and casualty policies, it has expanded throughout the insurance industry into health and disability coverage as well. In addition, there are various statutory applications of subrogation theory with respect to, for example, hospital and medical provider payments and governmental health and welfare programs (particularly Medicare and Medicaid).

Some jurisdictions, however, have taken a dim view of subrogation, particularly in the context of health and disability policies. For example, Arizona has outlawed it by judicial decision, considering it to be in substance an alienation of rights to a personal injury claim, and therefore prohibited on public policy grounds. A number of states have specific anti-subrogation statutes that apply in personal injury cases (see, e.g. the Pennsylvania motor vehicle statute that was the subject of the 1990 US Supreme Court case FMC Corp. v. Holliday and New York General Obligations Law currently at issue in Wurtz v. The Rawlings Company, (EDNY 2013)). As I noted in my previous post, Montana has effectively outlawed subrogation by constitutionally guaranteeing an injured party's right to be made whole.

On the other hand, a number of states also enacted collateral source statutes, which prohibit an injured party from recovering as damages any loss that has already been compensated by way of a collateral source of benefits. These statutes were an early effort in the "tort reform" drive and were primarily intended to benefit the liability insurance industry, which was complaining that it was forced to bear the costs of "double recoveries." The collateral source statutes, by abrogating the common-law collateral source rule, also effectively fixed the burden of loss within the insurance industry and relieved liability carriers from any responsibility for losses covered by health and disability payers.

Although subrogation is by definition a third-party claim, over the last 20 years, insurers (especially health and disability insurers) have also been including reimbursement clauses in their policies' subrogation and third-party recovery provisions, requiring the insured to repay the insurer if he obtains any recovery at all on a personal injury claim -- regardless of whether it was sufficient to make him whole for other losses, and regardless of whether any compensation from a third party was obtained for medical expenses. Some states allow these provisions. My state has held such clauses to be a violation of the legislative policy articulated by the state collateral source statute, and has prohibited or voided them.

That's all I have time for now. Gotta go.

Wow, I'm a lawyer and that made my eyes flutter -- and not in a charming flirtatious way, but in a now I've got to go find a Diet Coke to get through the rest of the day way

Andrew is correct that in the health insurance field, this is properly called reimbursement, as opposed to subrogation. If the health insurer chose to sue the third party who injured their insured, then it would be subrogation. Usually the health insurer requires their insured to sue the third party and then seeks to be reimbursed for the amount of health claims it paid.

The "make whole" doctrine is inapplicable to many health plans: US Airways v. McCutcheon http://scholar.google.com/scholar_case? ... i=scholarr. This means that the health insurer can be reimbursed for the amounts it forwarded for the care of its insured, and the injured party has to seek full recovery from the person who injured them.

While Sue's view is that the insured paid for their health policy and should be covered even if there are third party funds to cover their damages, this does not address two considerations. First, the insured only gets coverage according to the terms of the policy and the policy can exclude injuries caused by third parties, or it can say that the insurance company as a convenience to the insured will front the medical expenses and expect reimbursement from the third party payout. If the insured wants a better deal, he or she can buy a more expensive policy. Second, the medical expenses are an objectively identifiable amount; lost income damages are somewhat objective; and other damages are non-objective, especially pain and suffering and the value of a loss of partial of full use of a body function. While injured parties should be compensated for those latter damages, those amounts, as well as the objective losses for medical expenses, should be paid by the third party. By saying that the health insurer should not be reimbursed for the medical expenses means that the health insurance company is indirectly also paying for pain and suffering and other non-objective damages.

Long Run wrote:The "make whole" doctrine is inapplicable to many health plans: US Airways v. McCutcheon http://scholar.google.com/scholar_case? ... i=scholarr. This means that the health insurer can be reimbursed for the amounts it forwarded for the care of its insured, and the injured party has to seek full recovery from the person who injured them.

In the first place, McCutchen involved a self-funded (not an insured) plan governed by ERISA, so state insurance law doesn't even apply to such plans as it is preempted. (I haven't even gotten to the issue of insured v. self-funded plans and ERISA preemption with respect to employee benefit plans.) Second, McCutchen actually says next to nothing about the made-whole doctrine, apart from noting that it doesn't apply to a self-funded ERISA-governed health plan where the issue is a contractual reimbursement claim rather than an equitable subrogation issue. Finally, the issue actually in dispute in McCutchen was whether ERISA's apparent statutory limitation of a plan's claim to "appropriate equitable relief" meant that principles of unjust enrichment could limit the plan's recovery rights; the Court said not in this case, because the claim was based in a contract that expressly provided otherwise, not an independent equitable theory.

Long Run wrote:While Sue's view is that the insured paid for their health policy and should be covered even if there are third party funds to cover their damages, this does not address two considerations. First, the insured only gets coverage according to the terms of the policy and the policy can exclude injuries caused by third parties, or it can say that the insurance company as a convenience to the insured will front the medical expenses and expect reimbursement from the third party payout. If the insured wants a better deal, he or she can buy a more expensive policy.

First, most state insurance laws that I have seen would prohibit that kind of exclusion. (But again, self-funded ERISA plans are not considered "insurance" and are not subject to state law -- which I was planning to address later.) Second, most people get their health coverage through their employment, which is usually one or two group "options" offered on a take-it-or-leave-it basis; to purchase insurance individually is cost-prohibitive for most people. Third, the health insurance industry is an oligopoly, with maybe three or four significant players max in each state, so there is no better deal. Finally, no one outside a very very tiny world of practitioners gives any consideration at all to subrogation and reimbursement provisions in selecting a health plan. No one I have ever met (apart from actual subrogation agents and some plan administrators) has ever had any idea what their health plan's subro/reimbursement provisions even are.

Long Run wrote:Second, the medical expenses are an objectively identifiable amount; lost income damages are somewhat objective; and other damages are non-objective, especially pain and suffering and the value of a loss of partial of full use of a body function. While injured parties should be compensated for those latter damages, those amounts, as well as the objective losses for medical expenses, should be paid by the third party. By saying that the health insurer should not be reimbursed for the medical expenses means that the health insurance company is indirectly also paying for pain and suffering and other non-objective damages.

That might be fine if the third party were actually liable for the insured medical expenses, but in states like mine with a collateral source statute, the liability insurers have already convinced the legislature that health insurers should bear the costs of medical expenses, and third-party liability insurers should pay for other damages. It's a policy determination the legislature has already made, and it's not unreasonable. If a claimant is precluded from recovering medical expenses in the underlying case, there is simply no basis for saying the health plan is "indirectly paying" any part of any other damages.

The fact is, the health insurer has already been paid its premium for providing the benefits due under its policy; there was never any guarantee that its insured would even pursue a personal injury claim, let alone be successful in obtaining a recovery, and under those circumstances any reimbursement to the plan would be a sheer windfall. Moreover, where the underlying personal injury case involves limited sources of recovery or disputed liability, why should a health insurer -- which has already been paid for medical expense coverage -- be "reimbursed" at the expense of the insured's recovery of other elements of loss? If the case involves $500k in medical expense and $1 million in other economic and non-economic losses, but there's only $500k available for a recovery, why should the health insurer be "reimbursed" anything?

Guinevere wrote:Wow, I'm a lawyer and that made my eyes flutter -- and not in a charming flirtatious way, but in a now I've got to go find a Diet Coke to get through the rest of the day way

Did you read that brief I sent you? If that doesn't cure insomnia, nothing will.

I am really interested in reading what SueU wrote (really I am) but the AC here at work is not working, I am hot and sweating and nodding off as it is. Maybe tomorrow.
Thanks SueU

Mush as I admire Sue's eloquence and rationality, it still reads like Chinese algebra to me!

Gob wrote:Mush as I admire Sue's eloquence and rationality, it still reads like Chinese algebra to me!

It looks pretty much like mush to me too...

What part of "big ol' can of ugly" and "arcane and complex and not sexy" did you guys not understand?

I don't know Sue, it sounds sexy to me.

However just like the vet said when I had the dog neutered, "he may chase after it every now and again but by the time he gets there he'll forget what it was he was after"...

I think we all agree that reimbursement and subrogation are different. (And let's not even get into contribution.)

Reimbursement is an insurer's trying to get something back from its own insured. Subrogation is an insurer's trying to get something from the person who harmed its insured.

There are public-policy considerations involved in determining whether to allow reimbursement actions that are not involved in whether to allow subrogation actions. The reimbursement-action questions are difficult, but the subrogation-action questions should not be: Once the insured has been made whole, is it not obvious that the insurer should be able to recover against the wrongdoer? Why should the wrongdoer not be liable, simply because the harmed person had the foresight to purchase insurance?

Bear in mind that in today's complexly insured society, recovery against the wrongdoing usually means recovery against the wrongdoer's liability insurer. If the wrongdoer does not have liability insurance, the odds are overwhelming that he or she or it is either rolling in dough or judgment-proof (i.e. has no money to pay a judgment anyway). So most subrogation actions, as distinct from reimbursement actions, are one insurance company suing another insurance company.

And that is a big part of what we pay for when we buy insurance: peace of mind.

We pay our insurance companies to make who owes what to whom their problem, not ours.

Fred and Jill and I, driving our separate cars, get into a wreck. All of us are injured, and all of our cars are damaged.

Am I liable to Fred? Is Fred liable to me? Am I liable to Jill? Is Jill liable to me? Am I liable to both Fred and Jill? Are Fred and Jill both liable to me? Am I liable to Fred while Jill is liable to me? Am I liable to Jill while Fred is liable to me? Are Fred and I both liable to Jill? Are Jill and I both liable to Fred? Is Fred liable to Jill for some portion of Jill's liability to me? Is Jill liable for some portion of Fred's liability to me? Am I liable to Fred for some portion of Fred's liability to Jill? Am I liable to Jill for some portion of Jill's liability to Fred?

AAAGH!

The answer: I submit a claim to my auto insurer. Fred submits a claim to his auto insurer. Jill submits a claim to her auto insurer. The ensuing clusterfuck is the insurance companies' problem.

Which is exactly as it should be: We paid our insurance companies to deal with this crap, and we should never have to think about it again.

And if people have good insurance, that is how it will turn out.

Some time back, our erstwhile housemate got into a wreck with two other vehicles while driving our Jeep. Our insurer settled with us for the damage to the Jeep (it was a total loss). Some time later, our insurer informed us that the drivers and/or occupants of the other vehicles were claiming personal injuries.

Since then, I have not heard a word about it. I have no idea whether our insurer paid any claims for damage to the other vehicles. I have no idea whether our insurer paid any claims for personal injuries.

I do not know, and I do not want to know. More than that, I affirmatively want not to know. I paid my insurer to spare me everything it possibly can about whatever claims may have ensued from the wreck.

And because I have good insurance, I got what I paid for.

One nuts-and-bolts point that matters for everyone who has insurance: Insurers set premiums primarily on the basis of risk. (As one underwriter once put it to me, "if the perfume of the premium overwhelms the stench of the risk, you underwrite the policy.")

One component of the risk is the insurer's ability or inability to recover from someone else -- almost always, at least in the property insurance (first- and third-party) context, from some other insurance company -- what it pays you. If the insurer does not have the ability to recover from someone else what it pays you, your premium will be higher.

Probably a lot higher.

I have been abrogated by my insurance company...