In which I propose a solution

Kevin Drum had an interesting post about a subject I know things about:

Today's lecture on Republican pandering to special business interests concerns the soon-to-be-extinct legal doctrine known as "equitable subrogation." You're excited already, aren't you?

Here's the nickel explanation. Suppose you're in a car accident and you suffer a bunch of damages: medical bills, lost wages, lawyers' fees, and so forth. Your insurance company pays your medical bills, and then you sue the other guy and recover damages. What happens to the money you recover?

Your insurance company naturally thinks the first priority should be to repay them for the medical bills they covered. However, anyone who's not a paid spokesman for the insurance industry probably disagrees. After all, the insurance company has been collecting premiums for years and has enormous financial resources, while the victim is the one who's actually suffering from both physical injury and financial distress. Common sense suggests that the injured party should get first crack at the dough, and only after he's "made whole" should the insurance company get repaid. This is the doctrine of equitable subrogation.

That's fair, and it's also the law in most states. But of course, insurance companies hate it, and we all know that the insurance industry's best friend is the Republican Party. Isn't it about time for all those campaign contributions to start paying off?

You betcha! And the magic answer to the insurance industry's woes is "ERISA," a federal law that has grown since 1974 to oversee 130 million workers covered by employer pension and health plans — and oh-by-the-way, a law that sweeps away any pesky state regulation in its path. Wouldn't it be nice if ERISA were amended to get rid of equitable subrogation and give insurance companies first crack at any money recovered in legal settlements?

Back when I was a paralegal I worked for firm which specialized in insurance subrogation.  Typically subrogation involves suing the person who did the harm to get back insurance money.  A classic case would be: 

Person N negligentily starts a fire which destroys Building B.  The building was owned by O and insured by Company I.  Company I pays O for the damages (up to the limits of the insurance) and then Compnay I sues Person N to try to get some of the money back. 

This usually works ok in property cases because there isn't much in the way of general damages.  Everything is of the quantifiable "special damages" type.  (In theory, though if you want to see the problems even there you can talk to me about the case where we had to value multiple vineyard's wines when they were destroyed in a warehouse while they were aging). 

In a personal injury case, a large part of the award can sometimes be "general damages" which tend to be harder to quantify things like pain and suffering.  And one really annoying issue is that some jurisdictions or some judges won't make the jury break down the difference between the two. 

On the nuts and bolts of things, I'm really torn.  I've seen equitable subrogation where the plaintiff gets a huge recovery and still claims not to be "made whole".  Then you the insurance company has to litigate the "made whole" issue--a real waste of time and money on all sides.  It ends up being a real crap-shot with no fixed idea of what "made whole" means.  The Republicans have accurately identified a real problem with how the insurance system and tort system interface, but their proposed solution (to eliminate the whole idea of equitable subrogation) is stupid. 

If I were designing a the system  I would define "made whole" (for purposes of insurance subrogation ONLY) as some multiple of the total special damages. This would not be total special damages paid, but rather total special damages incurred. It would work like this:

You get in a car accident where a UPS driver hits your car. You total out-of-pocket expenses are $100,000. This includes medical bills, car repairs, lost wages while recovering, a rental car during repairs, etc. For some reason or other (perhaps policy limits) your insurance only covers $50,000 of that.

You sue UPS and for some reason they foolishly don't settle. You are awarded $500,000 in total damages. $100,000 for special damages (the expenses) and $400,000 for general damages (pain and suffering or perhaps punitive damages because UPS should have know this particular guy was an unsafe driver).

Let's say we set the "made whole" multiple was 3 times special damages. (This could clearly be some other number but I think 3 is probably pretty fair.) So everything until 3 times the special damages amount is not subject to subrogation. In this case the threshold would be $300,000. Money after that has to be paid back to the insurance company until their payments are fulfilled. That would be the next $50,000 after $300,000. We could also mandate that it be paid on a less than dollar for dollar basis. Perhaps the insurance company would be paid on a 50 cents per dollar over $300,000 basis until it was fully repaid.

In any case, if I were designing a system it would probably work like that--it acknowledges the reality of general damages, while not letting plaintiffs generally off the hook if they get fairly large payouts and don't feel that they are "made whole" but the recovery that they got. 

Comments

[kenB]

Please clarify something for a non-lawyer -- why would a plaintiff be allowed to sue for money that the insurance company has already paid him? In your example, if the insurance company has paid $50K of the actual financial cost of the accident, why wouldn't the special damages portion of the award be limited to the remaining $50K?

[Sebastian Holsclaw]

Recovery from the party who did the harm isn't limited by insurance payments. That is one of those things that I know, but now that you ask I don't know the policy reason why it is true.

[DaveL]

Recovery from the party who did the harm isn't limited by insurance payments. That is one of those things that I know, but now that you ask I don't know the policy reason why it is true.

That's the collateral source rule. I believe the policy justification is supposed to be that the tortfeasor shouldn't get the benefit of the plaintiff's insurance.

On Drum's post, it's maybe more of an ERISA wonk issue than an insurance wonk issue. As I read it, all that's happening in the proposed legislation is that Congress is trying to overturn another of the Court's bizarre ERISA remedies decisions (Great-West Life), which held that if medical coverage is provided through an ERISA plan (insured or self-insured), the plan may have a legal right to subrogation, but ERISA doesn't give it any way to enforce that right (and state law claims are probably preempted by ERISA, although some of the lower courts have tried using semi-bizarre preemption analyses as work-arounds for Great-West). The proposed law overturns that decision and basically says that if a plan has a legal right to subrogation, it can enforce that right under ERISA.

The impact on equitable subrogation comes from other ERISA doctrine that basically says an ERISA plan is enforced according to its terms. IIRC, there's strong authority, maybe including the Supremes, that says that if the ERISA plan says that the plan gets paid from the first dollar of any third-party recovery, that's what has to happen. (Do not ask how the Court could decide one day that the language of an ERISA plan governs over any contradictory laws and equitable principles and compels full reimbursement, and another day decide that even though the plan has a RIGHT to full reimbursement, ERISA doesn't let it enforce that right. If you have to ask such questions, you have not yet attained sufficient enlightenment to contemplate the higher mysteries of ERISA (as revealed by God to Scalia, J)). So throwing out one funky ERISA decision that screws the employers gives free rein to another that screws the injured parties.

[dmbeaster]

Sorry to be wonky, but at least in California, the insurer's right of subrogation does not work as set forth in the post.

First of all, it usually is a contractual right that flows from the insurance policy itself. Equitable subrogation is a separate doctrine that won't matter if there is contractual subrogation, and its always in the policy.

Second, it does not require the plaintiff to be made "whole" before the insurer gets its first dime.

It is a problem to determine how much the insurer should get by subrogation when there is a settlement, which by definition is not "full recovery." It gets easier with a judgment (although insurers will argue for full subrogation even when the award deducts a percentage for contributory fault).

A policy that automatically gives a pro tanto (i.e., off the top) right to recovery for insurers is terrible, since they do nothing to support the lawsuit for recovery that creates the fund and should not benefit from a partial recovery by getting full payment.

[Sebastian Holsclaw]

"First of all, it usually is a contractual right that flows from the insurance policy itself."

Absolutely, but it is a right that nearly all insurance companies insist upon having, so I glossed over that. Sorry if I oversimplified. Equitable subrogation is really a limiting factor on it though. It works differently in different jurisdictions (and is sometimes called different things) but the general effect of it is to modify the contract language into something other than the obvious words. (This happens quite a bit with insurance contracts. States often change the way they actually function in ways that wouldn't be obvious by looking at the contract. These usually get incorporated into the contracts which then get bent in weird directions making for a very complicated dialectic.)

"A policy that automatically gives a pro tanto (i.e., off the top) right to recovery for insurers is terrible, since they do nothing to support the lawsuit for recovery that creates the fund and should not benefit from a partial recovery by getting full payment."

I sort of agree (hence my post) but I do want to note that in some cases (and almost all of the ones I worked on in the past) the insurer is the one driving the subrogation lawsuit. I often had trouble getting necessary support from the underlying insured because they had already been paid for their loss--they didn't feel they should have to waste time on a litigation when they had already been paid. I suspect this happens more often when there is sufficient insurance than when there are very limited insurance payouts.

[jcricket]

Sebastian - I think you make some reasonable arguments. And if there were two reasonable parties in the government, it might be useful to debate them. However, this is clearly the insurance companies trying to f* over individuals, nothing else. Despite things like Katrina, insurance companies (including malpractice insurance) are reaping in record profits. There's no need for "reform".

The past 5 years should also make it crystal-clear that Republicans should never be given the benefit of the doubt WRT any "reform" policy initiatives. The intentions of Republicans concerning anything reform have nothing to do with making things equitable or fair (or even really reform). Every single Republican reform policy (or initiative) ends up hurting the individual citizien and rewarding the a tiny number of big business owners (not even the workers at the business, really). Moreover, everything the Republicans say about their initiatives turn out to be false (down to how much they will cost, who they will benefit, etc.). See Medicare Part D. This goes double for every big company that claims something needs reform to protect them (like the malpractice insurance companies who claim there is a crisis, despite their record profits).

You just can't trust a party whose fundamental plank is "government is the problem" to offer productive, realistic, pragmatic solutions to be provided by the same government.

[Bernard Yomtov]

Sebastian,

I didn't really understand Drum's post.

Maybe it's too complex to explain briefly, but could you try one more time? Take your UPS example, but suppose the plaintiff only is awarded $100,000 - the special damages. These consist of $50,000 in medical bills, covered by medical insurance, and $50,000 in other direct expenses. Now it is clear that the accident damaged the medical insurance company. Without it they would not have had to pay the $50K claim, so it seems reasonable to me that they should be able to recover this from UPS. Under current law what is the situation?

1. The medical insurer must sue UPS separately for $50K. Plaintiff thereby nets $50K above special damages.

2. The plaintiff (the accident victim) must turn over $50K to the medical insurer, on the grounds that he is not entitled to collect twice - from UPS and his insurance company - for the same expense - the medical bills.

3. Something else.

Thanks.