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.
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