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January 24, 2006

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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?

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.

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.

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.

"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.

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.

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.

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