SUBROGATION Volume 1 | Issue 8 June 2011 1 Volume 1 | Issue 8 June 2011 2 STRITMATTER KESSLER WHELAN...

STRITMATTER KESSLER WHELAN COLUCCIO 1

Real Justice for Real People

SUBROGATIONVolume 1 | Issue 8

June 2011

STRITMATTER KESSLER WHELAN COLUCCIO2 STRITMATTER KESSLER WHELAN COLUCCIO 3

ABOUT THE COVER ART

“Table of Four” illustrates the concept of subrogation. While the pot should rightfully belong to your client, uninvited interlopers want an unfair share.

ABOUT THE ARTIST

Jose Ramirez is an artist, teacher and the father of three girls, Tonantzin, Luna, and Sol.

He received a BFA (1990) and an MFA (1993) in art from UC Berkeley. In 2001, he received the Brody Award/Getty Visual Arts Fellowship.

Jose has illustrated seven children’s books, including Quinito’s Neighborhood, Frog and Friends Save Humanity, Zapata para los Niños, Papito Dios, and Quinito Day and Night.

Among his commissions, he has worked for several non-profit organizations, hospitals, cities, film and television companies and cultural centers across the country. In addition, he has lectured and exhibited his work in museums, universities, galleries and cultural centers in New York, Washington DC, San Francisco, San Diego, Texas, Japan, and Mexico.

For more info please visit ramirezart.com. You may contact him at [email protected] or 323.377.4967.

ABOUT THE COVER ART ........................................................................... 2

ABOUT THE ARTIST ................................................................................... 2

ABOUT STRITMATTER KESSLER WHELAN COLUCCIO .................................................................................. 7

ABOUT PAUL L. STRITMATTER ................................................................ 8

SUBROGATION ..................................................................................... 10

WHY SHOULD YOU CARE ABOUT SUBROGATION? ............................ 10

CONCEPT AND HISTORY OF SUBROGATION ....................................... 13

Definitions ......................................................................................... 13

Subrogation in Personal Injury Law is New ................................... 14

Historical Criticism of Subrogation ................................................. 15

Washington Summary of Subrogation from Mahler .................... 17

Subrogation is Equitable To Prevent Unjust Enrichment and To Do Justice ............................................................................. 21

I Don’t See Anything Wrong with a Double Recovery................... 22

Insurers Do Not Reduce Premiums Based on Subrogation Recovery ..................................................................... 23

Seldom Is There a True Double Recovery in Personal Injury Litigation ................................................................................. 23

Subrogation Creates Collateral Issues ............................................ 24

WASHINGTON COMMON LAW ............................................................... 26

The Made Whole Rule of Thiringer ................................................. 26

You Cannot Prejudice the Insurer’s Rights ..................................... 27

Insurance Commissioner ................................................................. 28

A Case Example – Homewood ........................................................ 29

You Need an Expert to Prove Your Client Was Not Made Whole ...................................................................................... 30

When Do Insurers Have to Pay Attorney Fees & Costs? ............... 32

Practice Tip No. 1 ....................................................................... 38

Practice Tip No. 2 ....................................................................... 39

TABLE OF CONTENTS


Comparative Negligence Establishes the Client Was Not Made Whole ...................................................................... 39

Practice Tip No. 3 ....................................................................... 40

Practice Tip No. 4 ....................................................................... 40

WASHINGTON STATUTORY LAW ........................................................... 41

Labor and Industries Statutory Subrogation.................................. 41

Practice Tip No. 5 ....................................................................... 42

Crime Victims Statutory Subrogation ............................................. 44

Practice Tip No. 6 ....................................................................... 45

Practice Tip No. 7 ....................................................................... 45

Practice Tip No. 8 ....................................................................... 47

Practice Tip No. 9 ....................................................................... 47

FEDERAL STATUTORY LAW .................................................................... 47

MEDICARE ......................................................................................... 47

Medicare Subrogation for Past Medical Expenses ........................ 48

Practice Tip No. 10 ..................................................................... 53

Practice Tip No. 11 ..................................................................... 53

Practice Tip No. 12 ..................................................................... 54

Medicare Subrogation for Future Medical Expenses .................... 55

Practice Tip No. 13 ..................................................................... 58

Practice Tip No. 14 ..................................................................... 59

MEDICAID .......................................................................................... 60

Practice Tip No. 15 ..................................................................... 60

The U.S. Supreme Court Decision in Ahlborn ............................... 62

The Washington Supreme Court Decision in Wilson .................... 65

A Case Study – Pattison ................................................................... 67

Provide Enough Evidence to Support Your Defense of a Subrogation Claim ........................................................................... 71

EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) ................ 73

The Federal ERISA Statute ............................................................... 73

Knudson Limited ERISA Subrogation Claims ................................ 74

ERISA Plans Believe Sereboff Has Authorized Subrogation Claims .......................................................................... 76

Equitable Defenses to ERISA Subrogation ..................................... 77

ERISA Plans Rely On Any Plan Language They Wish to Draft...... 80

A Case Study – Rose ........................................................................ 81

Defenses to ERISA Subrogation Claims ......................................... 82

Your Right to Secure All Relevant Plan Documents ...................... 85

Practice Tip No. 16 ..................................................................... 87

Practice Tip No. 17 ..................................................................... 89

Practice Tip No. 18 ..................................................................... 90

Practice Tip No. 19 ..................................................................... 90

ETHICAL CONSIDERATIONS ................................................................... 91

CONCLUSION ........................................................................................... 95

POST SCRIPT ............................................................................................ 98

Law Enforcement and Firefighters .................................................. 98

Indian Health Services ..................................................................... 98

Federal Medical Care Recovery Act ................................................ 99

SUPPLEMENT TO BOOKLET ................................................................. 100

Medicare Update ............................................................................ 100

Ethical Considerations Update ...................................................... 102


ABOUT STRITMATTER KESSLER WHELAN COLUCCIO

Stritmatter Kessler Whelan Coluccio (SKWC) is a premier Pacific Northwest law firm devoted to representing plaintiffs in personal injury and wrongful death claims. Experienced in trial, SKWC attorneys welcome tough, complex cases. Our verdicts and settlements include product liability, nursing home, government liability, medical negligence, highway design, premise and construction site, class action, vehicle crashworthiness, major vehicle collision, maritime and aircraft crash cases.

The attorneys at SKWC are committed to making a difference in the lives of our clients, in helping to ensure justice for the injured, and in contributing to the legal community through leadership and education.

Visit FightSubro.com

Paul Stritmatter created this website/blog for the same reason why he wanted to write this booklet: He forever wants to educate, inspire, and motivate other plaintiff personal injury trial lawyers to serve as strong advocates for their clients in fighting subrogation issues.

“Paul Stritmatter has stepped up to meet the challenges subrogation liens present to making clients whole, attacking the problem with characteristic public spirited tenacity. I keep this book within arm’s reach at all times. I strongly advise you to do the same.”

— Bill Bailey

“Paul knows our clients get real justice only when we resolve a case, including “subrogation” claims, with knowledge and tempered aggression. Subrogation, lien, right of reimbursement and offset are words that describe this important and growing battlefield. Paul’s treatise helps us maximize our clients’ recoveries by showing us how to pay subrogation claims only when we must… and only on what we must.”

— Ron Meyers

“Paul Stritmatter makes muddy waters clear and provides the arguments and citations for fighting subrogation claims. His roadmap and forms for handling Medicare reimbursement claims alone makes this little booklet a must for every personal injury lawyer.”

— Jan Peterson


the Washington State Bar Association. The American Bar Association awarded Paul its Pursuit of Justice Award in 2003 for his lifelong devotion to the profession and for significant contributions to the pursuit of justice.

While his cases and legal association duties take him across the country, Paul is happy to work from the firm’s office in Hoquiam, Washington, where he was born and raised.

Paul’s interest in subrogation is the perfect example of why he is considered one of the top trial lawyers in the country. Few attorneys want to tackle, let alone think about, the troublesome topic of subrogation. However, Paul’s passion for getting the best results for his clients motivates him to understand every facet of this evolving area of law.

Paul has been a leader in the legal community for decades. Most recently, he received the prestigious 2010 Champion of Justice award from the national public interest firm, Public Justice. He is a founding member and former president of the Trial Lawyers for Public Justice. He also served as president of the Washington State Trial Lawyers Association and of

ABOUT PAUL L. STRITMATTER

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SUBROGATIONBy PAUL L. STRITMATTER

The topic of subrogation has interested me since I tried my first plaintiff personal injury case in 1970. That interest derived from my puzzlement and anger that after a hard fought case, another insurance company was trying to take some of my client’s recovery that we had worked so hard to obtain.

I didn’t want them to get away with that.

This, in turn, has led me to be active in this field. I have tried three subrogation cases to successful judgment, pursued several other subrogation lawsuits through summary judgment and appeals, and aggressively negotiated subrogation claims that would impact the bottom line of my clients’ recoveries.

This booklet, another in a series of booklets written and produced by Stritmatter Kessler Whelan Coluccio, is my attempt to educate, inspire and motivate other plaintiff personal injury trial lawyers to be strong advocates for their clients in fighting subrogation issues.

WHY SHOULD YOU CARE ABOUT SUBROGATION?

There are many reasons why the active personal injury lawyer should be interested and up-to-date on subrogation issues.

• The growing complexity of the field could result in your facing a malpractice claim if you handle the issue improperly.

• One law firm in Seattle prosecuting subrogation claims was routinely filing bar complaints against personal injury lawyers who did not comply with their requests.

• What you know in one area of subrogation may not apply in another. Certainly the differences in ERISA subrogation law compared to Washington common law provide a stark contrast in how subrogation may differ from case to case.

• The implications and practical applications of the Tobin1

decision to subrogation in the Labor and Industries setting alone require that you keep up with the latest developments.

• Demands being made by liability insurers because of the potential of a Medicare subrogation claim are difficult to deal with, because most insurers are not properly applying the law. If you don’t know the law, they will take advantage of you and your client.

• If you properly know and understand Medicare Set-aside requirements, then you should be teaching the rest of us. Talk about a mine field!

• While subrogation may involve the insurer stepping into the shoes of its insured, some insurers so aggressively take this action that one is reminded of a professional basketball player trying to force his feet into the delicate

1 Tobin v. Department of Labor & Industries, 165 Wn.2d 1016, 199 P.3d 411 (2009).


shoes of a ballerina. Taking the metaphor one step farther, you need to learn to defend those Red Shoes or you will turn into the Black Swan from failing to preserve your client’s personal injury recovery.

Let me put it another way. Assume that Penny Plaintiff is in an automobile crash and suffers a fractured hip. Her medical bills are $25,000 because of the surgery that is necessary to pin the fracture. Terry Tortfeasor negligently caused the automobile crash and is insured by Indifferent Insurer. His liability limits are $100,000. A jury determines that Penny’s total damages are $200,000, $25,000 of which is for the medical bills, $15,000 for wage loss, $10,000 for family services, and $150,000 for pain and suffering, disability, disfigurement and loss of enjoyment of life. Terry has no substantial assets to pay the excess damages above Indifferent’s liability insurance limits. Penny has no UIM coverage. She collects only $100,000 on her claim. She pays her attorney $33,333 in fees, and $6,667 in reimbursement for costs, leaving her with $60,000 for her $200,000 claim. Now she faces subrogation claims clamoring at the gates. What is the amount of the subrogation claim against Penny’s recovery?

I will give you a hint. It could be $0, $25,000, $11,250, $7,500 or $15,000 (absent a negotiated different number). Which is it? (The suggested answer is in the Conclusion of this booklet.)

If I have properly scared you into worrying that you may not know or understand all there is to know in this field, then read on and hopefully I can be of some help to you.

CONCEPT AND HISTORY OF SUBROGATION

Definitions2

Subrogation, according to my personal definition, is one insurance company attempting to steal money from a tort victim, after that victim has been subjected to denial, abuse, delay and untoward pressure in an attempt to recover a reasonable and adequate money award for personal injuries from another insurance company. I must admit, my definition will probably not gain wide acceptance from legal scholars.

More traditionally, subrogation is defined as:

[t]he substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities.3

It refers to circumstances in which an insurance company tries to recoup for a claim it paid out when another party should have been responsible for paying at least a portion of the claim. Subrogation allows an insurer who has indemnified an insured to stand in the shoes of the insured on the insured’s claim for damages against a third party, usually a tortfeasor.4

2 Technically if the insurer seeks a recovery from the tort claim settlement or judgment, it is a “reimbursement.” If the insurer steps into the shoes of the tort victim and makes the claim directly against the tortfeasor, it is “subrogation.” The terms are often used interchangeably, and are generally collectively referred to as subrogation. However, this distinction can at times be key to the court’s analysis and the outcome of a case.

3 Black’s Law Dictionary (6th ed. 1990). 4 Robert E. Keeton & Alan I. Widiss, Insurance Law, §3.10 (1988).


Subrogation in Personal Injury Law is New

Claims for reimbursement against personal injury victims are of only recent vintage. Although frequently available in property insurance cases, before the mid-20th century courts almost universally prohibited this type of recovery in the personal injury context. Chief among the reasons why subrogation was unavailable for personal injuries was the recognition that, for those victims suffering a bodily injury, there is no such thing as a true “double recovery,” both because the injured party “gets his insurance money under a contract as a quid pro quo,” Suttles v. Ry. Mail Ass’n5, and, more fundamentally, because personal injury victims are never truly made whole by money damages, let alone deemed to have obtained a double recovery. Double recovery is the basis for subrogation because the relief is premised on “the notion that the insured should not unduly benefit from a loss” by recovering twice “from both the insurer and the tortfeasor.”6 As one court cogently observed, “[l]egal ‘compensation’ for personal injuries does not actually compensate. Not many people would sell an arm for the average or even the maximum amount that juries award for loss of an arm.”7

In fact, because injured parties are never truly made whole by money damages, many critics of insurer-based subrogation have argued that the practice actually amounts to a windfall for the insurer, which gets to keep the premiums it received

5 141 N.Y.S. 1024, 1027 (N.Y. App. Div. 1913).6 Roger M. Baron, Subrogation: A Pandora’s Box Awaiting Closure, 41 S.D. L. Rev. 237,

241 (1996).7 See Hudson v. Lazarus, 217 F.2d 344, 346 (D.C. Cir. 1954).

and get reimbursed for benefits paid.8 Additionally, courts viewed the likelihood that an injury victim would obtain a double recovery as marginal.9

In the property insurance setting, the certainty of an insured’s actual loss meant that a victim could routinely expect to obtain a full recovery. By contrast, the indefiniteness of a personal injury victim’s loss, among other factors, leads to a recovery that is almost always less than the full amount of damages.10

Nevertheless, as World War II came to a close, medical insurance had become a profitable and commonplace product. Insurers began to systematically include subrogation clauses in their insurance agreements, and, in turn, aggressively pursued recovery for advanced medical expenses under a subrogation or reimbursement theory.11

Historical Criticism of Subrogation

Courts were initially dismissive of these efforts, routinely rejecting insurers’ claims for subrogation on the basis that equitable principles limit or outright prohibit any attempt

8 See, e.g., Roger M. Baron, Subrogation: A Pandora’s Box Awaiting Closure, 41 S.D. L. Rev. 237, 242 (1996) (concluding that the “double recovery” rationale is “flawed” and “proven to be duplicitous” because, in most cases, “the insurer who asserts that the insured will receive an unwarranted ‘double recovery’ is itself picking up a windfall recovery if subrogation is permitted”).

9 See, e.g., Frost v. Porter Leasing Corp., 436 N.E.2d 387, 391 (Mass. 1982) (holding that, for an injury victim, “duplicative compensation is both uncertain and unlikely”).

10 See id.; see also Allstate Ins. Co. v. Reitler, 628 P.2d 667, 670 (Mont. 1981) (discussing factors that limit recovery in the personal injury setting); Philip G. Peters, Jr., What Do We Know About Malpractice Settlements, 92 Iowa L. Rev. 1783, 1803 (2007) (explaining that empirical data “indicate that the plaintiffs who receive a settlement are unlikely to recover the full amount of their damages”).

11 See Brendan S. Maher & Radha A. Pathak, Understanding and Problematizing Contractual Tort Subrogation, 40 Loy. U. Chi. L.J. 49, 73 (2008).


to recover from an injured insured.12 But a key turn came when the insurers began repackaging their claims as based not on equitable grounds, but as rooted in “freedom of contract.” They found they could convince courts that the enforcement of a contract should trump any traditional equitable limitations.13 This shift, as recent scholarship has demonstrated, was the linchpin in the birth of these types of actions.14

Scholars and commentators (not to mention a majority of states), in near universal terms, criticize the practice of insurance subrogation as both inequitable and producing perverse consequences for settlement and tort law. Yet the industry is now a $1 billion a year profit center for ERISA insurance plans alone.15 In some cases, victims have even been rendered unable to care for themselves and their families because the plan’s reimbursement action stripped them of any means of support.16

The highest profile example of what is now de rigueur for health insurance plans is in Admin. Comm. of Wal-Mart Stores, Inc. Associations’ Health and Welfare Plan v. Shank.17

Wal-Mart’s ERISA Plan pursued reimbursement against one of its beneficiaries who was paralyzed and brain damaged

12 See, e.g., Maxwell v. Allstate Ins. Co., 728 P.2d 812, 815 (Nev. 1986); Garrity v. Rural Mut. Ins. Co., 253 N.W.2d 512, 514-16 (Wis. 1977); Blue Cross v. O’Donnell, 230 So. 2d 706 (Fla. Dist. Ct. App. 1970).

13 See Maher & Pathak, Understanding Tort Subrogation, 40 Loy. U. Chi. L.J. at 74.14 Id. at 74-75.15 See Maher & Pathak, Understanding Tort Subrogation, 40 Loy. U. Chi. L.J. at 77 n.133,

82-90. 16 Id.; see also Vanessa Fuhrmans, Accident Victims Face Grab for Legal Winnings, Wall

St. J., Nov. 20, 2007, at A1 (detailing the plight of several injured beneficiaries suffering this consequence as a result of their ERISA insurance Plans’ pursuit of subrogation).

17 500 F.3d 834 (8th Cir. 2007)

in a car accident. The Plan was awarded all of the money it had paid to cover Deborah Shank’s medical expenses (approximately $470,000). Ms. Shank was left with nothing from the tort recovery. This meant that her family was left to rely on Medicaid and Social Security payments to keep up her round-the-clock care.18 The financial burden was shifted to the taxpayers

Washington Summary of Subrogation from Mahler

The Washington Supreme Court in Mahler v. Szucs19 took the opportunity to set forth in detail basic principles of subrogation. While the discussion was expansive, it was at the same time succinct in explaining this area of the law for Washington residents. Thus, I will quote the opinion at length:

Subrogation is an equitable doctrine the essential purpose of which is to provide for a proper allocation of payment responsibility. It seeks to impose ultimate responsibility for a wrong or loss on the party who, in equity and good conscience, ought to bear it. RONALD C. HORN, SUBROGATION IN INSURANCE THEORY AND PRACTICE 3 (1964). Two law review commentators have referred to this allocation rationale stemming from “the moralistic basis of tort law as it has developed in our system.” Spencer L. Kimball & Don A. Davis, The Extension of Insurance Subrogation, 60 MICH. L. REV. 841, 841 (1962). The general purpose of subrogation is

18 See Vanessa Fuhrmans, Accident Victims Face Grab for Legal Winnings, Wall St. J., Nov. 20, 2007, at A1.

19 135 Wn.2d 398, 957 P.2d 632 (1998).


to facilitate placement of the financial consequences of loss on the party primarily responsible in law for such loss.” HORN, supra, at 24.

Subrogation has existed in civil law longer than in common law. HENRY N. SHELDON, SUBROGATION 3 (2d ed. 1893); James Morfit Mullen, The Equitable Doctrine of Subrogation, 3 MD. L. REV. 201, 201 (1939). It applies in cases involving multiple claims upon the same property, suretyship, joint debtors, parties to bills and notes, the administration of estates, and contracts of insurance. Subrogation is favored in Washington law. “Subrogation is always liberally allowed in the interests of justice and equity.” J.D. O’Malley & Co. v. Lewis, 176 Wash. 194, 201, 28 P.2d 283 (1934).

. . .

By virtue of payments made to a subrogor stemming from the actions of a third party, a subrogee has a right of reimbursement under general subrogation principles. That reimbursement may be enforced as a type of lien against any recovery the subrogor secures from the third party. Alternatively, the subrogee, standing in the shoes of its subrogor, may pursue an action in the subrogor’s name against the third party to enforce the reimbursement right.

In the insurance context, the “doctrine of subrogation enables an insurer that has paid an insured’s loss pursuant to a policy . . . to recoup the payment from the party responsible for the loss.” Elaine M. Rinaldi,

Apportionment of Recovery Between Insured and Insurer in a Subrogation Case, 29 TORT & INS. L. J. 803, 803 (1994).

. . .

It has been only in the last 30 to 40 years that subrogation disputes regarding personal injury cases have arisen. “During this period, subrogation clauses have been inserted in first party medical payments coverage in automobile policies, uninsured and underinsured motorist coverage, and medical and hospitalization coverage.” Roger M. Baron, Subrogation on Medical Expense Claims: The “Double Recovery” Myth and the Feasibility of Anti-Subrogation Laws, 96 DICK. L. REV. 581, 583 (1992). In the personal injury context, where insureds may wish to pursue claims for noneconomic damages, i.e., pain and suffering, disputes regarding the right to subrogation have proliferated.

Until 1958 the subrogation clauses that were included in the standard forms for automobile insurance specifically were not applicable to medical payments coverages. ROBERT E. KEETON & ALAN I. WIDISS, INSURANCE LAW 228 (1988). “Automobile medical payments coverage is of comparatively recent origin. It was conceived and reared without benefit of subrogation, and only during the past few years have some automobile insurers undertaken to wrap it in a mantle of subrogation.” Travelers Indem. Co. v Chumbley, 394 S.W. 2d 418, 425, 19 A.L.R.3d 1043 (Mo. App. 1965).

. . .


The complexities are readily apparent. By contrast with a property loss case, where the damages are all economic and usually readily determinable, so that the insured can be made whole by the payment of money, in a personal injury case, the claimed noneconomic damages typically amount to many multiples of the economic damages and are almost always disputed because they are not objectively ascertainable. Thus, rather than stepping aside and allowing the insurer to pursue the tortfeasor by means of subrogation for the money it paid its insured, the injured insured will often sue the tortfeasor to recover noneconomic damages, and include in the claim the medical expenses and other special damages he or she has incurred as a result of the injury. In effect, the injured insured does not abandon its shoes, and its insurer thus has no shoes to step into to pursue subrogation.

The potential for conflict of interest abounds in such circumstances. Both insurer and insured, having entered into an insurance contract, are bound by the common law duty of good faith and fair dealing, as well as the statutory duty “to practice honesty and equity in all insurance matters.” RCW 48.01.030. We have said the statute creates a fiduciary duty for insurers running to their insureds. Industrial Indem. Co. of the Northwest, Inc. v. Kallevig, 114 Wn.2d 907, 916-17, 792 P.2d 520 (1990). Yet the injured insured seeks recovery from the tortfeasor, the same source to which the insurer may look to recover its payments to its insured.

Most jurisdictions, however, now allow subrogation. J. A. Beck, Annotation, Subrogation Rights of Insurer Under Medical Payments Provision of Automobile Insurance Policy, 19 A.L.R.3d 1054.20

Subrogation is Equitable To Prevent Unjust Enrichment and To Do Justice

For my purposes here, subrogation is being discussed in a medical payments insurance context. It may take the form of health care insurance, PIP insurance, ERISA plans, DSHS administration of Medicaid benefits, Medicare or any other plan that pays medical expenses. It may evolve from the common law, from legislation or from contract, but it is importantly recognized as an equitable doctrine.21 Any insurance policy that creates a right of subrogation parallels the equitable right.22

Subrogation is a corollary of the more general principle that unjust enrichment should not be allowed; unjust enrichment is what the principle of subrogation is intended to prevent.23 The doctrine seeks to impose ultimate responsibility for a loss on the party who “in equity and good conscience, ought to bear it.”24 The courts will protect subrogation rights “only when justice so requires.”25

20 Mahler at 411-415.21 Thiringer v. American Motors Ins. Co., 91 Wn.2d 215, 220, 588 P.2d 191 (1978). 22 Johnny’s Seafood Co. v. City of Tacoma, 73 Wn. App. 415, 421, 869 P.2d 1097 (1994).23 Johnny’s Seafood Co., supra. 24 Mahler, supra at 411. 25 Winters v. State Farm Mut. Auto Ins. Co., 144 Wn.2d 869, 875, 31 P.3d 1164 (2001).


I Don’t See Anything Wrong with a Double Recovery

This entire concept of allowing subrogation to prevent a double recovery has long troubled me. What does it matter if the insured does receive a double recovery? The insured paid an insurance premium for these insurance benefits. They may have paid those premiums for a long time without having ever before received any benefits. The principles of subrogation do not require that insureds be reimbursed for their premium payments. It seems like it is the insurer who is receiving the double recovery. They collect the premium for providing the insurance coverage, but they are also repaid the very payments they were required to pay under the terms of the insurance policy. By any definition used, this is certainly a windfall.

My clients constantly pose these questions to me. They don’t understand the logic of the law in this regard, and rightfully so. This confusion is not limited to my clients. It is consistent with the common person’s view of insurance. Is this an area where the law is an ass? (“The law is an ass” originates in Charles Dickens’ Oliver Twist, when Mr. Bumble is informed that “the law supposes that your wife acts under your direction” and Mr. Bumble responds, “If the law supposes that, the law is an ass, an idiot.”)

Further, the collateral source rule says that a tortfeasor cannot take advantage of the fact that its victim paid insurance premiums to assure medical care and thereby pay less than the actual damages incurred. Why should the insured victim be limited to the same total recovery that the non-insured

victim would receive? The insured is not gaining a double recovery, but is simply recovering on a contract for which a premium has been paid.26 In fact the insured is worse off because he or she gets the same recovery as the non-insured victim, but is out the premium paid. If the contract is for life insurance, subrogation is not enforced against a wrongful death award. The entire concept is troubling.

Insurers Do Not Reduce Premiums Based on Subrogation Recovery

In the conflict between the insurer, who claims that without a right of subrogation the insured receives a double recovery, and the insured who claims that, with a right of subrogation the insurer receives a windfall, the issue should be resolved on the basis for the premium paid. Does the premium charged reflect the subrogation collected? In fact, insurers consistently fail or refuse to introduce the factor of subrogation recoveries into determining rates charged, and instead simply apply these recoveries to excessive CEO salaries and increased dividends to shareholders.27

Seldom Is There a True Double Recovery in Personal Injury Litigation

Another reason that the justification for subrogation of avoiding a double recovery is invalid stems from the fact that most personal injury cases are settled for less than a

26 See, e.g., Allstate v. Reitler Ins. Co., 628 P.2d 667 (Mont. 1981); Allstate Ins. Co. v. Druke, 576 P.2d 489, 492 (Ariz. 1998).

27 John F. Dobbyn, Insurance Law in a Nutshell, 284 (3d ed. West 1996). See also, Roger M. Baron and Delia M. Druley, ERISA Reimbursement Proceeds: Where does the money go?, Minnesota Trial, Spring 2010.


full recovery. Setting aside issues of lack of sufficient liability insurance coverage, claims of comparative negligence, risks and costs of litigation, and the difficulty of accurately evaluating non-economic elements of a personal injury claim, settlement by definition generally involves a compromise. Each side in the tort action gives up something for the certainty from a settlement. As a result, whether or not there is a double recovery in fact is elusive. It really cannot be proven without a full trial of each tort case.

Subrogation Creates Collateral Issues

Another problem with subrogation is the adverse impact it has on tort litigation in general. It raises collateral issues that impede the litigation process. This list, certainly not exhaustive, gives just a few examples of adverse impacts routinely encountered in tort litigation from subrogation.

1. Health insurers delay or refuse to pay benefits in hopes that the tortfeasor’s insurer will pay the bills;

2. Insurers seek to intervene in tort actions to “protect” their subrogation interests;

3. Insurers seek written guarantees from the insureds and/or personal injury counsel to “guarantee” their rights of subrogation;

4. Insurers attempt to contract with personal injury counsel to represent the insurer’s interest, thereby setting up conflicts of interest for counsel;

5. Insurers threaten to refuse to cover future medical expenses unless they are given written guarantees of subrogation rights. There is federal case law finding it unlawful in some cases to require a beneficiary to execute a subrogation agreement as a condition to processing and paying ongoing medical bills. See Burgatt v. MEBA Medical and Benefits Plan, 2007 WL 2815745 (E.D. Tex. 2007). See also ACS/PRIMAX v. Polan, 2008 WL 5213093 (W.D. Pa. 2008); Sheet Metal Workers Local 27 Health & Welfare Fund v. Beenick, 2008 WL 5156663, slip op. (D.N.J. Dec 9, 2008);

6. Subrogation administrators demand constant reports regarding the status of the tort action;

7. Insurers claiming subrogation rights delay or fail to timely provide information to support claims;

8. Tortfeasors’ insurers demand hold-harmless agreements and other forms of indemnity from subrogation claims;

9. Tortfeasors’ insurers insist on subrogation insurers being named on settlement checks;

10. Medicare, Labor and Industries and ERISA Plans will take months and sometimes years to respond to inquiries to determine subrogation numbers and thereby delay disbursement of settlement funds. I have been waiting for nine months for a response from Labor and Industries on one case.


11. Personal injury counsel refuse to claim damages for items subject to subrogation, thereby increasing litigation in the courts.

In short, despite my personal objections and constant questions, subrogation seems here to stay. So, how do we deal with it?

WASHINGTON COMMON LAW

The Made Whole Rule of Thiringer

No insurance company that has paid the medical bills of its insured in Washington has a right to subrogation unless the injured person has first been fully compensated for his or her injuries. This rule is known as the “made whole” rule or “last dollar theory of subrogation.” It is based on Washington’s public policy in favor of full compensation for injured persons. “Washington law … places great emphasis on the just compensation of accident victims.”28 The seminal case establishing this law is Thiringer v. American Motors Ins. Co.29

The general rule is that, while an insurer is entitled to be reimbursed to the extent that its insured recovers payment for the damage, it can recover only the excess which the insured has received from the wrongdoer, remaining after the insured is fully compensated for his loss.

28 Jain v. State Farm Mut. Auto Ins. Co., 130 Wn.2d 688, 693, 926 P.2d 923 (1996).29 91 Wn.2d 215, 588 P.2d 191 (1978).

This rule embodies a policy deemed socially desirable in this state, in that it fosters the adequate indemnification of innocent automobile accident victims.30

Because the rule is based on public policy, an insurance company cannot place contract language into its policies to circumvent the made whole rule. In commenting on the insurance policy language in the American Motors Insurance Company policy, the court stated:

It does not provide that if the insured recovers less than his total damages from such party, the amount recovered shall be allocated first to those losses covered by the PIP endorsement and then to other damages suffered by the insured. Such a provision, were it included, would be obviously unfair, since the insured pays a premium for the PIP coverage and has a right to expect that the payments promised under coverage will be available to him if the amount he is able to recover from other sources, after diligent effort, is less than his general damages.31

You Cannot Prejudice the Insurer’s Rights

To be sure, the tort victim cannot prejudice the subrogation rights of the insurer. In Metropolitan Life Ins. Co. v. Ritz,32 the insured entered into a complete release of all claims against the tortfeasor without specifically referencing the insurer’s interest. The court found that the general release

30 Thiringer at 219-20. 31 Thiringer at 220.32 70 Wn.2d 317, 422 P.2d 780 (1967).


deprived the insurer of its subrogation rights and noted that the insurer was entitled to either reimbursement from the insured or to be subrogated to the insured’s claim for the medical expenses against the tortfeasor. The court then allowed the reimbursement, subject to the obligations to share proportionately in the expenses to obtain the settlement.

Conversely, in Leader Nat’l Ins. Co. v. Torres33, both the insured and the tortfeasor were aware of the insurer’s subrogation right and the insurer did not consent to the settlement. Because the tortfeasor had additional assets, the court held that the settlement did not extinguish the insurer’s subrogation rights against the tortfeasor. Of interest is that the court held that the risk of loss in this context was to be borne by the tortfeasor, not the insured.

Insurance Commissioner

As a result of the Thiringer decision, the Washington State Insurance Commissioner adopted rules which incorporate the Thiringer Made Whole Rule.

Recently, the Insurance Commissioner adopted WAC 284-30-393 which requires an insurer to include the insured’s deductible in any subrogation demand, and then any recovery must first be allocated to the insured for any deductibles incurred in the loss.

33 113 Wn.2d 366, 779 P.2d 722 (1989).

A Case Example – Homewood

Our firm handled the case of British Columbia Ministry of Health v. Homewood34. In that case we had settled the claim of Ms. Homewood against several different defendants. While we obtained all of the liability coverage of the one defendant who was primarily at fault, we settled for less than all of the liability coverage of two other defendants because of liability risks and claims of comparative negligence. The health insurer claimed there had been a full recovery. The court found, based on the evidence we presented, that there had not been a full recovery and so Ms. Homewood was not made whole. The health insurer then claimed it had been prejudiced by the settlements. The court, citing Elovich v. Nationwide Insurance Co.,35 reiterated that in order to prove it was prejudiced by the settlement, the insurer has the burden of proof that the settlement was less than the amount of the tortfeasor’s fault times the injured person’s total damages:

In other words, to establish prejudice [the insurer] must show (1) the percentage of negligence of [each of the three tortfeasors]; (2) the total losses the plaintiff suffered; (3) that the settlement as a percentage of plaintiff’s total injuries was less than the percentage of the settling entities’ comparative negligence. Only if the latter percentage exceeds the former will [the insurer’s] subrogation rights have been prejudiced and Lou apply. Otherwise the rule from Thiringer applies: the insurance company’s subrogation rights arise only

34 93 Wn.App. 702, 970 P.2d 381 (1999).35 104 Wn.2d 543, 707 P.2d 1319 (1985).


after the plaintiffs have received full compensation for their injuries.36

You Need an Expert to Prove Your Client Was Not Made Whole

In Homewood, the insurer did not meet its burden to prove that the plaintiff was made whole. That burden was placed squarely on the insurer.37 I have tried three subrogation cases to verdict and each time the insurer has failed to meet that burden. In fact, each time the insurer has insisted that all it needed to show was that less than policy limits had been accepted. Thus, my evidence that the plaintiff had not been made whole was essentially uncontested. These insurers are incorrect that acceptance of less than liability policy limits meets the burden of proving that the plaintiff was made whole.

To prove that my client had not been made whole in all three trials, I hired an experienced personal injury lawyer to act as an expert witness and render an opinion that under the facts of each case the plaintiff was not made whole. The expert considered all liability and all damage evidence in the tort action, and then opined that the plaintiff was not made whole for various reasons, usually that liability facts forced a settlement for less than full value of the case.

Liberty Mutual v. Tripp,38 laid this issue to rest, ruling specifically that there is no presumption of full compensation or prejudice to the insurer simply because a plaintiff settles for less than policy limits. In Tripp, the plaintiff settled for 36 Homewood at 713.37 Brown v. Snohomish Co. Phys. Corp., 120 Wn.2d 747, 759, 845 P.2d 334 (1993).38 144 Wn.2d 1, 25 P.3d 997 (2001).

$35,000 out of a $50,000 policy. The court held that it was a question of fact whether the plaintiff had been fully compensated.

A troubling decision came out of Division I of the Court of Appeals of Washington in Truong v. Allstate Property and Casualty Insurance Company.39 While the case is certainly fact specific, it demonstrates the potential problems that arise in proving that a settlement did not make the victim whole.

The case involved liability limits of $25,000. The case was settled for $9,347.54. The court stated that Allstate set forth facts showing that Truong accepted an arms-length settlement for less than policy limits. The adjuster in fact testified that she thought she was paying the claim based on 100% liability. In response, Truong submitted evidence that Allstate and PEMCO adjusters had agreed on the property damage based on 50% fault for each driver. Truong presented a two-paragraph expert opinion by an attorney that the settlement represented a compromise and that Truong was not made whole.

The court found the expert’s opinion entirely conclusory and unsupported by reference to specific facts and so disregarded it. The court found that the settlement itself was “some evidence, even if not irrefutable evidence, that the settlement fully compensated Truong.”40 Finding that Truong did not meet his burden of rebutting the evidence by the insurer, the court found Truong was made whole and

39 151 Wn.App. 195, 211 P.3d 430 (2009).40 Truong at 201.


allowed the reimbursement claim. This underscores the need to have an expert opinion that relies on specific facts of the case to establish that the plaintiff was not made whole.

In Peterson v. Safeco Ins. Co. of Illinois,41 the plaintiff argued that since attorney fees had to be paid in order to obtain the tort recovery, plaintiffs could never be made whole. The court sided with the insurer and rejected the argument.

When Do Insurers Have to Pay Attorney Fees & Costs?

After Thiringer established the Made Whole Rule, case law began developing regarding the determination of the specific amount of any reimbursement. The issue was what share of the legal fees and costs should the insurer seeking subrogation/reimbursement be responsible to pay?

First, some necessary background. People purchase PIP coverage to cover the immediate costs of a motor vehicle accident, such as medical expenses and loss of income; people purchase UIM coverage against the very real possibility that they will be injured by a motorist who has insufficient insurance to pay a judgment.42 A separate premium is charged by the insurer for each of these coverages. The UIM coverage is fault-based; the PIP medical and wage loss are not fault-based and are similar to no-fault insurance in other states.

When one pursues a UIM claim, the insurer is said to stand in the shoes of the tortfesasor. Thus, payments made by the UIM carrier are treated as if they were made by the 41 95 Wn.App. 254, 976 P.2d 632 (1999).42 See RCW 48.22.030 (UIM); RCW 48.22.085 (PIP).

tortfeasor.43 Accordingly, the UIM carrier is entitled to set-off the amount of any tortfeasor recovery from the amount owing under the claim.44 UIM coverage becomes a second floating layer of coverage over and above the liability coverage to provide protection in every case in which the insured is legally entitled to recover damages from the negligent tortfeasor.45 Because the UIM insurer stands in the shoes of the uninsured tortfeasor, the claimant insured likewise bears his or her own attorney fees.

But PIP carriers, who as a matter of course seek subrogation/reimbursement from tort recoveries, stand in a different position. PIP carriers provide benefits to cover the insured’s immediate needs. When they seek reimbursement from their insured who has been made whole from a third-party tort claim, what is the insurer’s responsibility for paying the legal expenses of recovery?

The seminal case of Mahler v. Szucs46 answers this question. In Mahler the tortfeasor was fully insured and the injured party was made whole. Thus, subrogation/reimbursement was allowed. The court ruled, however, that the victim’s PIP carrier seeking reimbursement from the fund created by the insured must pay a pro rata share of the legal expenses the insured incurred in order to recover from the tortfeasor.47

As explained in Mahler: “This equitable sharing rule is based on the common fund doctrine, which, as an exception to the

43 Britton v. Safeco Ins. Co. of Am., 104 Wn.2d 518, 529, 707 P.2d 125 (1985).44 Hamilton v. Farmers Ins. Co. of Wash., 107 Wn.2d 721, 728, 733 P.2d 213 (1987).45 Tissell v. Liberty Mut. Ins. Co., 115 Wn.2d 107, 120, 795 P.2d 126 (1990).46 135 Wn.2d 398, 957 P.2d 632, 966 P.2d 305 (1998).47 Mahler at 436.


American Rule on fees in civil cases, applies to cases where litigants preserve or create a common fund for the benefit of others as well as themselves.”48 The “common fund” in Mahler consisted of the recovery the insured obtained from the tortfeasor only. From this fund, the insured was compensated and the PIP carrier was reimbursed. Because the PIP carrier reimbursed itself from a fund that the insured created, the PIP carrier was obligated to pay a pro rata share of the legal expenses incurred by the insured to create the fund.49

Next came Winters v. State Farm Mutual Automobile Insurance Co.50 In Winters, the insured was injured by an underinsured tortfeasor. Her immediate medical expenses were covered by her own PIP carrier. Winters then sought recovery from the tortfeasor and recovered the maximum limits of the tortfeasor’s liability coverage. Because the tortfeasor recovery did not fully compensate her, she also pursued a UIM claim. Unlike the insured in Mahler, Winters was not fully compensated until she recovered from both the tortfeasor and her UIM carrier. Once she was fully compensated, her PIP carrier was able to seek reimbursement for the PIP benefits it paid, subject to its obligation to pay a pro rata share of the legal expenses incurred by Winters in creating the fund.51 As explained in Winters, “[t]hese pooled funds became the common fund from which the PIP insurer was able to recoup payments it had made.”52 Winters clarified

48 Id. at 426-27.49 Id. at 436.50 144 Wn.2d 869, 31 P.3d 1164, 63 P.3d 764 (2001).51 Winters at 881.52 Id.

that the pro rata sharing rule articulated in Mahler is based on equitable principles, not specific policy language, and applies to PIP reimbursements from UIM recoveries as well as from tortfeasor recoveries.53

In cases like Winters, where PIP coverage and UIM coverage are provided by the same insurance carrier, the reimbursement to the PIP carrier typically comes in the form of an offset applied to the UIM obligation. Even though the offset appears to result in a reduction to the UIM obligation, the offset functions as a mechanism to account for the PIP reimbursement and is available only when the same insurance carrier provides both PIP and UIM coverage.54

In cases where the PIP and UIM carriers are separate companies, the PIP carrier remains entitled to receive actual reimbursement, and the UIM carrier remains obligated to pay the entire amount of the UIM award. In such cases, no opportunity for an offset exists. In fact numerous cases have held that a provision in an insurance policy that allows an offset for PIP payments made by another insurer is not enforceable because it is against public policy.55

When the PIP and UIM carrier is the same, however, and the injured party paid for the coverage, an offset against the UIM obligation is an acceptable mechanism to account for the PIP reimbursement rights.56

53 Winters at 878-79, 881.54 See Keenan v. Industrial Indemnity Ins. Co. of NW, 108 Wn.2d 314, 738 P.2d 270 (1987).55 Schlener v. Allstate Insurance Company, 121 Wn.App. 384, 88 P.3d 993 (2004).56 Mahler at 436. (“Provided the insurer recognizes the public policy in Washington of

full compensation of insureds and its other duties to insureds by statute, regulation, or common law, the insurer may establish its right to reimbursement and the mechanism for its enforcement by its contract with the insured.”)


Next came Hamm v. State Farm Mutual Automobile Insurance Co.57 There the court extended the rule announced in Mahler and Winters to cases where the insured recovers only from a UIM carrier.

The rule from Mahler, Winters and Hamm all involve the PIP and UIM coverage that is owned by the injured party. The rule is said to be different if the coverage is from policies owned by the tortfeasor.

In Matsyuk v. State Farm Fire & Casualty Co.,58 Matsyuk was riding as a passenger in the Stremditsky car. Stremditsky caused an accident injuring Matsyuk. Matsyuk recovered under both the Stremditsky PIP and liability coverages. Citing Young v. Teti,59 the court denied a request for Mahler fees. Because Matsyuk was not a State Farm insured, but instead a third-party beneficiary, it was said she did not create a common fund. Further, the opinion claims her suit did not benefit State Farm. State Farm had no contractual right of reimbursement from Matsyuk’s recovery fund for the PIP payments it made. The court ruled that Matsyuk did not purchase any coverages and obtained a full recovery. The offset taken functioned simply to prevent Matsyuk from receiving a double recovery.

The same analysis has been applied if a pedestrian or bicyclist is struck by a motor vehicle.60 The pedestrian or bicyclist is covered by the PIP coverage on the covered

57 151 Wn.2d 303, 88 P.3d 395 (2004).58 155 Wn.App. 324, 229 P.3d 893 (2010), review granted, 170 Wn.2d 1008 (2010).59 104 Wn.App. 721, 16 P.3d 1275 (2001).60 Weismann v. Safeco Ins. Co. of Illinois, 157 Wn.App. 168, 236 P.3d 240 (2010), review

granted, 170 Wn.2d 1010 (2010).

vehicle.61 Subsequent liability on the driver of the vehicle would allow an offset for the PIP paid by the carrier. But as in Matsyuk,62 it has been ruled that this would not result in creating a liability for Mahler fees. The injured plaintiff received PIP payments, not from her own insurer, but from the tortfeasor’s insurer. Thus, when the injured plaintiff sued the driver and recovered, she did not create a fund to benefit, or to reimburse, anyone other than herself.

The Supreme Court has granted review in both Matsyuk and Weismann. The reliance on Young,63 seems wrong in light of the decision in Hamm. PIP and liability are two separate coverages. The PIP coverage is the responsibility of the insurer because passengers and pedestrians are insureds under the policy. RCW 48.22.005(5)(b). They are third-party beneficiaries of the PIP coverage.64 The PIP payments are not made on behalf of the tortfeasor. On the other hand, the liability payments are made on behalf of the tortfeasor, just like the UIM payments made in Hamm. I expect the Supreme Court to reverse Matsyuk and Weisman and provide for Mahler fees in this scenario.

I have often heard inquiries about whether an insurer owes Hamm and Winters fees if the insurer has made PIP payments and paid UIM limits. (I confused myself on this issue in one case.) The answer is no. The payment of the UIM limits seems to concede that there has not been a full recovery. Since your client has not been made whole, the PIP carrier

61 RCW 48.22.005(5)(b)(ii).62 155 Wn.App. 324, 229 P.3d 893 (2010), review granted, 170 Wn.2d 1008 (2010).63 104 Wn.App. 721, 16 P.3d 1275 (2001).64 Maziarski v. Bair, 83 Wn.App. 835, 924 P.2d 409 (1996).


is not entitled to any subrogation. Without any subrogation rights, you have not created any benefit for the insurer.

Stated another way, if the settlement is for less than the UIM limits, the insurer is taking advantage of the offset so you have created a benefit for the insurer and you are entitled to the Hamm and Winters fees. This creates the anomaly where the insurer may be better off paying the UIM limits than negotiating for something less than limits, because of the liability it will create on itself for paying its share of attorney fees.

Practice Tip No. 1

With the interplay between UIM and PIP coverages and the mixture of Hamm and Winters fees, we now see insurance adjusters in negotiations holding UIM funds hostage in exchange for waiver of the PIP and Hamm and Winters fees. Under WAC 284-30-330 an insurer may not delay settling a claim under one portion of the insurance policy in order to influence settlement under another portion of the policy. You must aggressively oppose such a tactic.

Practice Tip No. 2

Always negotiate with UIM adjusters in terms of gross offer figures. UIM adjusters often try to negotiate in new money terms. Later they claim that they have waived PIP and so you have recovered nothing for them so that they don’t have to pay Hamm and Winters fees. Remember,

medical expenses are part of the UIM claim for which they are entitled to a PIP offset and therefore, obligated to pay Hamm and Winters fees.

Comparative Negligence Establishes the Client Was Not Made Whole

The next issue was the impact of comparative negligence on the subrogation/reimbursement claim. The court dealt with this in Sherry v. Financial Indemnity Company.65 The court ruled that an insurer is entitled to reduce a UIM award by previously paid PIP benefits only when its insureds are fully compensated for their actual damages, without reduction to account for the insured’s fault.66

Importantly, the Sherry court reiterated that Washington’s jurisprudence relating to UIM and PIP insurance “is based largely on public policy, and where subrogation-like concepts are involved, equitable principles.”67 The court said that insureds are not fully compensated, as required by Thiringer, until they have recovered all of their damages as a result of a motor vehicle accident.68 To rule otherwise would result in insurers seeking to reduce PIP medical insurance because of fault.69

65 160 Wn.2d 611, 160 P.3d 31 (2007).66 Sherry at 625.67 Sherry at 620.68 Sherry at 621.69 Sherry at 625.


Practice Tip No. 3

I have often objected to boilerplate language in settlement release documents that the settlement is for the resolution of “a disputed liability claim and the defendant specifically denies liability” when you have an obvious liability fact pattern.70 But for subrogation purposes you should embrace this language. You should expand this language. You should insert in the release language describing why you are accepting less than full value for the claim, and specifying that your client is not being made whole. Then use this language to support your defense of a subrogation claim.

Practice Tip No. 4

Some attorneys involve the mediator in the tort case in resolving subrogation claims. This can be very helpful, especially in Labor and Industries claims where the Department often has an Assistant Attorney General present at the mediation. However, I like to deal with the issues generally myself. But I often ask the mediator to write a letter from the mediator’s perspective, showing the need for, and the amount of, the compromise necessary because of the facts of the case. Such a letter is a great independent analysis of the subrogation claims and goes a long way in helping resolve these claims.

70 See materials from WSAJ seminar, “A Day with Paul Stritmatter,” December 4, 2009.

WASHINGTON STATUTORY LAW

Labor and Industries Statutory Subrogation

The Department of Labor and Industries has a statutory right to reimbursement for benefits paid from third-party tort recoveries.71 The Department pays for medical expenses and time loss for on-the-job injuries. Other benefits are also paid for partial disabilities and permanent disability pensions.72 An injured worker is permitted to sue “a third person, not in the worker’s same employ [who] is or may become liable to pay damages on account of a worker’s injury.”73

“[A]ny recovery” obtained from a third party suit “shall be distributed” according to the statute’s distribution formula.74 The distribution formula requires payment in the following order: (a) attorney fees and costs, (b) 25 percent to the injured worker free of any claim by the Department, (c) to the Department “the balance of the recovery made, but only to the extent necessary to reimburse [the Department] for benefits paid” and (d) to the injured worker “[a]ny remaining balance.”75

Equitable doctrines do not apply to claims by the Department. The Department’s right to reimbursement is a statutory right, and enforceable as a statutory lien. Equitable principles cannot be asserted to establish equitable relief in derogation of statutory mandates.76 Thus, the equities in common law subrogation do not apply.71 RCW 51.24.060(1)(c).72 RCW 51.04.060.73 RCW 51.24.030(1).74 RCW 51.24.060(1).75 Id.76 Phoad v. McLean Trucking Company, Inc., 102 Wn.2d 422, 686 P.2d 483 (1984).


However, the statutes themselves do provide for the application of equitable doctrines in the discretion of the Department. While the Department, or self-insurer, does have the sole discretion, the statute says they “shall consider at least” the amount of coverage,77 factual and legal issues of liability, including negligence of the worker,78 and problems of proof.79 Further, if the Department or self-insurer has not properly exercised its discretion, it is possible to appeal any “distribution order” to the Board of Industrial Appeals.80 The appeal gives an opportunity to settle with a reasonable compromise, often a three-way split among client, attorney and Department, or to argue the matter to the Board.

Practice Tip No. 5

Be sure to review the figures claimed by the Department in its lien. The lien can only include benefits paid and not processing costs such as monitoring nurses, IMEs or vocational examinations.

In Flanigan v. Department of Labor & Industries,81 the court held that “recovery” excludes damages for loss of consortium, and in dicta, suggested that other noneconomic damages, such as pain and suffering, may also be excluded.82 The court observed that the workers’ compensation statute makes no statement clearly defining the types of damages that benefits are supposed to compensate for, leaving the

77 RCW 51.24.060(3)(a).78 Id. at (3)(b).79 Id. at (3)(c).80 RCW 51.24.81 123 Wn.2d 418, 423-24, 869 P.2d 14 (1994).82 Flanigan at 426.

court to interpret the legislature’s intent.

The court found the Department did not pay the claimant any benefits for the purpose of compensating for loss of consortium.83 Referencing the language of RCW 51.24.060(1)(c), the court concluded that where the Department has not paid out benefits for a type of damages, it cannot seek reimbursement from a recovery for that type of damages.84

In Tobin v. Department of Labor & Industries,85 an injured worker settled a third-party claim for $1,400,000, $793,083.16 of which was categorized as compensation for pain and suffering in the settlement agreement. The Department calculated its right of reimbursement under RCW 51.24.060(1) and included the $793,083.16 in its calculation. The case reached the Washington State Supreme Court on the issue of whether the Department could include the allocation for pain and suffering. The court concluded it could not. The court based its ruling on the prior decision in Flanigan, and rejected Department arguments that the statute had been amended to limit the Flanigan decision or that the decision would have a significant impact on the Department’s fund and potentially its solvency. Following the reasoning in Flanigan, the court found that the Department can be reimbursed only for benefits paid, and that the Department had not compensated Tobin for pain and suffering. Thus, the Department is not allowed to include a claimant’s pain and suffering recovery in the distribution calculation under RCW 51.24.060(1).83 Id.84 Id.85 165 Wn.2d 1016, 199 P.3d 411 (2009).


Past medical bills and wage loss is pretty straightforward, following the statute for guidance. The chief issue is usually the “offset.” The offset is the calculation of a number that will affect future benefits. This is calculated from the “excess” in the settlement after the Department is paid for past benefits paid, less its proportional share of attorney fees and costs. The Department has a form it uses at: http://www.lni.wa.gov/forms/pdf/F249-006-111.pdf. You can plug in the applicable numbers to get the relevant reimbursement figures.

The offset figure is thus a calculated figure based primarily on the amount of the recovery. Once the offset is determined, the worker is taken off the rolls and receives no benefits until he/she has used that amount of the settlement funds. However, medical bills are still reported through the system and so the worker does receive the benefits of the Department’s negotiated rates with medical providers.

Crime Victims Statutory Subrogation

The Crime Victims’ Compensation Act, RCW 7.68, provides certain benefits for victims, including medical expenses. However, the benefits paid must be reimbursed out of any third-party tort liability recovery, less a proportionate share of reasonable attorneys’ fees and costs.86 Calculations are made under the Labor and Industries formula set forth in RCW 51.24.060.

86 RCW 7.68.130.

In Department of Labor and Industries v. Dillon,87 the court in a Crime Victim’s scenario refused to apply the equitable doctrine in Thiringer to the Department’s lien. “A statutory right to reimbursement (i.e., the Department’s lien on recovery) is not to be diminished absent an express statutory provision. We may not do so under the guise of statutory construction. (citation omitted) Equitable principles cannot be asserted to establish equitable relief in derogation of statutory mandates.”88

Practice Tip No. 6

Any time liability factors force a settlement for less than a full recovery of damages, one may end up recovering something less than the full reimbursement for the Department. This is a deficiency settlement and you must obtain Department authorization for such a recovery.89

Practice Tip No. 7

The Tobin case is still recent. The Department is still struggling with how to deal with its ramifications. It is imperative that when reaching a third-party settlement you make an allocation in the settlement documents for what portion of the settlement is for pain and suffering. While this allocation may not automatically bind the Department, it will be strong evidence regarding this issue. You may have to negotiate this issue with the Department.

87 28 Wn.App. 853, 626 P.2d 1004 (1981).88 Dillon at 855.89 RCW 51.24.050(6).


Always remember that you have the option of securing a court determination of this issue. Make sure you give the Department notice of any such court hearing.

Although it is a Medicare case, see Bradly v. Sebelius,90 for the consequences of the Department failing or refusing to attend a court hearing to allocate the proceeds of a settlement for determining subrogation rights in a wrongful death case. On the other hand, the importance of specific language in the settlement documents is shown in Benson v. Sebelius,91 where the injured party secured a probate court order approving an allocation of the settlement, but did not specifically allocate the medical bills.

Questions as to how to apply Tobin still abound. Do all the litigation costs of the case apply to the formula, or only that percentage subject to the Department’s lien? Same question as to the attorney fees? How will the exclusion of pain and suffering damages affect the issue of a deficient settlement? These issues are yet to be resolved.

90 621 F.3d 1330 (11th Cir. 2010).91 2011 U.S. Dist. LEXIS 30438.

Practice Tip No. 8

I have always requested a jury verdict form that asks the jury to break down the various elements of damages. There are many reasons for this, too numerous for this booklet. But the Tobin decision now makes it imperative that the jury set separate and distinct numbers for economic and non-economic damages. Draft your verdict forms accordingly.

Practice Tip No. 9

The Department’s lien does not extend to a UIM policy paid for by the worker. However, it does extend to a UIM policy paid for by the employer.92

FEDERAL STATUTORY LAW

MEDICARE

The federal government has a right of subrogation for medical care payments made under the Medicare Act.93

Because of the unlimited scope and reach of the lien, it has been referred to as a super lien.94 The statute gives the government rights far in excess of traditional subrogation rights.

Under the Medicare Secondary Payer Act,95 medical bills paid by Medicare for tort victims are conditional payments.

92 RCW 51.24.030(4).93 42 U.S.C. § 1395y(b)(2)(ii).94 Hoffman & Acosta, Beware of the “Super Lien”: Medicare Payments’ Effect on Personal

Injury Cases, 81 ILL. B.J. 82 (1993).95 42 U.S.C. § 1395, §1862


If there is a tort recovery, Medicare is required to be reimbursed.

The administrative process for this reimbursement is a nightmare. It will confuse and anger the most patient of lawyers. However, my suggestion is that you not buck the system, and instead seek to comply. Further, failure to comply not only has negative consequences for your client, but also personal liability for the attorney.96

Medicare Subrogation for Past Medical Expenses

Use the Medicare website for assistance. They have many mandatory forms. The following is a step-by-step analysis I drafted for our firm of how to navigate through this mine field. Be mindful that this all relates to past medical bills.

MEDICARE STEPS

STEP #ONE: Phone the Coordination of Benefits Coordinator. (COBC) 1-800-999-1118. Be prepared to give them the following information.

oThe client’s/beneficiary’s name.oThe Health Insurance Claim Number (HICN).

Typically this is the client’s Social Security Number, plus an alpha character.

oThe gender and date of birth.oThe client’s/beneficiary’s address and phone

number.oThe date of the incident/accident.

96 42 C.F.R. § 411.24(g).

oA description of the injury by body part. If possible, they would prefer ICD-9 codes. You can get such codes at www.icd9.chrisendres.com.

oThe type of claim. For these claims it would be a liability insurance claim.

oYour attorney and firm name along with your address and phone number.

Now, here is the disconnect. Step #2 is to a DIFFERENT ENTITY! In a different location.

STEP #TWO: Proof of Representation to Medicare Secondary Payer (MSPRC) in Oklahoma City, OK. Use their PROOF OF REPRESENTATION form.

oCheck the box for attorney. oProvide the attorney name, your relationship as an

attorney, the firm name and address and phone number.

oFill in the client’s name and HICN and the date of the incident.

oHave this signed by the client and dated. oFax this to them at 405-869-3309.

STEP #THREE: They will now send you a RIGHTS AND RESPONSIBILITIES LETTER. This will be a standard form but with the particulars regarding your claim. You should then prepare a tickler for 65 days later in order to monitor the process as shown below.


STEP #FOUR: In response to the RIGHTS AND RESPONSIBLITIES LETTER, you need to respond and send the following:

oSend a copy of your retainer agreement. Be sure it is fully filled out and signed by both the client and by your firm.

oPlace on the top of the retainer agreement the client’s name and the HICN number.

oSend them the name, address and telephone number of the insurer and also the adjuster.

STEP #FIVE: 65 days from the date of the RIGHTS AND RESPONSIBILITIES LETTER, they will send you a CONDITIONAL PAYMENT LETTER (CPL). This will be a listing of the conditional payments that Medicare has made up to that time. You do not need to make a request for this. It is supposed to come automatically. However, if it has not been received by this time, you may want to call and inquire. (Do not call in less than 65 days; if you do, your request will put you at the end of the line. Each call is considered a new request and, as such, the time restarts.) At this time, they post all conditional payments information under the “MyMSP” tab of the www.MyMedicare.gov website, which is updated weekly. Thus, you can track it thereafter whenever necessary.

It is at this point that they will have also sent you a CORRESPONDENCE COVER SHEET which includes pre-printed information on your case and will have boxes to check. This will facilitate all matters with them.

NOTE: Sometimes the treating provider is having trouble getting paid by Medicare. It will assist the provider if they check the box for a conditional payment. This will facilitate their getting paid by Medicare.

STEP #SIX: Now is the time when you need to review the CPL and send back a letter to MSPRC if you claim that some payments are not related. This is a big deal with a Medicare client. A Medicare client may, and probably will, be receiving other medical services unrelated to the injury claim. So you have to review these bills carefully and be sure that they are bills related to your case. This is all part of why you sent a description of the injury and why when possible you want to include the ICD9 codes.

If you object, this will trigger another 65 day wait for a NEW CONDITIONAL PAYMENT LETTER. So put in another tickler for 65 days. Once again, do not call in less than 65 days. But after 65 days, if you call they will escalate the review.

STEP #SEVEN: The next step is after you have reached a settlement. At this point, you need to send a letter to MSPRC with all the pertinent information. Again, they have a form. Use their FINAL SETTLEMENT DETAIL DOCUMENT.

oThe date of settlement or judgment.oThe amount of the settlement or judgment.oAn itemized statement of the attorney fees and costs.oWhether or not any PIP or Med-pay was applicable.


oIf the case has been dropped, or lost, send them the documentation so that they can close their file.

Do remember that Medicare pays its proportionate share of attorney fees and costs. They will make that calculation.

STEP #EIGHT: They will now send you a final demand. It will have an itemization of the bills they paid. Once again, carefully check to be sure that these are accident related bills. If not, you must file a letter contesting that fact.

You have 60 days within which to pay their demand. You have to pay the demand even if you are contesting it. You pay the demand, and file the contest. They will reimburse you when you win. If you fail to pay within 60 days, they will charge interest and penalties.

NOTE: Another matter of interest. It is possible to claim a hardship and ask them to reduce their demand even though they did pay all the bills listed. 42 U.S.C. § 2652. But they do not negotiate at this level. Negotiations will go through the regional offices. For Washington cases that is in Seattle. There are specific guidelines for this. We have been successful in obtaining a hardship reduction, but it required repeated appeals of the initial denials.

Irrespective of these administrative steps, the process is often not smooth. The delays are exasperating. One way to aid in the process is to register your client’s Medicare account at www.mymedicare.gov. Once you are registered, you can

scroll to “MyMSP” and print out the conditional payment ledger, along with the total amount Medicare is currently assigning to your claim. This is not a final demand letter, and you must be careful with this information. In a recent case we found double billings and non-related care. It runs the risk of creating even greater confusion.

Practice Tip No. 10

Liability insurers have become obsessed with demanding Social Security numbers of all claimants, claiming that Medicare requires them to do so. Medicare does not require liability carriers to obtain this information in all instances. It is only if the claimants are eligible for Medicare or will reasonably soon be eligible. If your client is not Medicare eligible, then there is no obligation to provide the Social Security number. The reporting form itself confirms this fact. Further, any information that is required is not until the settlement of the case. You need to do no more than to fill out the Medicare form relating to Social Security numbers.

Practice Tip No. 11

Many liability insurers are insisting that Medicare be named on the settlement check or that a separate check be written to cover the amount of any Medicare claim. Medicare does not require this, and in fact doesn’t want to deal with this.97 Adding Medicare to the settlement check interferes with contractual and business relations

97 See Tomlinson v. Landers, 2009 WL 1117399, U.S. Dist. Court, M.D. Florida.


and is actionable in tort law. Suggestions to solve this problem include: 1) Have the settlement check made out to your firm in trust for your client and Medicare; 2) offer a hold harmless agreement signed by your client; 3) have a separate check made payable to the trust account of defense counsel for the benefit of Medicare and your firm to hold the funds until final numbers are determined with Medicare; or 4) file a motion with the court to enforce the settlement.

Practice Tip No. 12

It may be good practice to insert a “settlement czar” clause in any CR2A agreement following mediation. “To the extent that there are any disputes concerning the form or substance of settlement documents, all such disputes shall be submitted to the mediator for final and binding arbitration thereof.” In this way, you have an immediate forum to deal with the issue.

Medicare’s right to reimbursement is statutory, not equitable. As a result, they do not consider factors that limited the recovery, such as insufficient insurance coverage, comparative negligence, etc. However, Medicare does contribute its proportionate share for attorney fees and costs.98 But that is only as to past bills. With regard to future bills covered by Medicare Set-aside Accounts, they do not contribute. This is different from the Washington State Department of Labor and Industries scheme where attorneys’ fees and costs are provided for in the setoff.

98 42 C.F.R. 411.37.

Medicare Subrogation for Future Medical Expenses

The latest area of interest in Medicare subrogation is the Medicare Set-aside Account to cover future medical expenses. This issue has again prompted reactions from liability insurers that “the sky is falling.” First, the sky has not yet fallen; and even if it ultimately does (they have postponed the applicable date three times), there will be limited application except in catastrophic damage cases.

A Medicare Set-aside Account (MSA) is a separate account established after a settlement or judgment which a claimant uses to fund his/her reasonably expected future medical expenses related to the injury which is the subject of the tort case. Medicare’s interest in the establishment of an MSA is to provide for future payment of injury-related healthcare expenses which would otherwise be covered by Medicare. Medicare’s concern is that following a settlement or judgment, responsibility for payment of future medical expenses is not shifted from worker’s compensation or liability insurance to Medicare.

The Centers for Medicare and Medicaid Services (CMS) have published various memos, answers to Frequently Asked Questions (FAQs) and checklists regarding the required contents of an MSA and submission of a proposed MSA to CMS for approval. The primary task in establishing an MSA is to determine the amount necessary to fund the set-aside arrangement in order to ensure payment of injury-related future medical expenses. The CMS-required contents in an MSA include rated age information or life expectancy, a


life care plan, any proposed settlement agreement, medical records, medical expense payment history, and a future treatment plan.

Importantly, all of the CMS published information regarding MSAs is in reference to workers’ compensation. In those CMS publications, there is no reference to the use of MSAs in liability insurance claims which do not involve workers’ compensation. However, the statutory basis for the CMS memos regarding the use of MSAs in workers’ compensation cases to ensure payment of future medical expenses by available sources other than Medicare, is the same statutory basis for Medicare’s status as a secondary payer in cases where liability insurance is available. The statutory basis for both scenarios is 42 U.S.C. § 1395y(b)(2), which provides that Medicare payment is not available (or must be reimbursed) where “payment has been made or can reasonably be expected to be made under a workman’s compensation law or plan … or under an automobile or liability insurance policy…” Accordingly, when a Medicare recipient is a claimant in a claim or lawsuit involving liability insurance, the claimant (and his or her attorney) cannot ignore the statutory proclamation that Medicare will not pay post-settlement or post-judgment future medical expenses when payment “can reasonably be expected to be made … under an automobile or liability insurance policy.”

There is no current law, nor any regulations, which require the establishment of a Medicare Set-aside Account (usually an annuity funded trust) for a third-party liability settlement. Current legal advice is that it is not necessary. If insisted on

by a liability carrier, “Just say no!” But watch this area of the law. It may change in the future. If it does, CMS will have to promulgate new regulations and we will be put on notice.

CMS has issued 11 memoranda addressing workers’ compensation settlements or judgments involving Medicare beneficiaries. As part of this guidance, CMS advises that it must review any workers’ compensation cases involving currently enrolled Medicare beneficiaries where the gross settlement value is greater than $25,000. For beneficiaries who are not enrolled in Medicare at the time, CMS advises that beneficiaries and their attorneys should seek CMS approval for any cases where they expect to be enrolled in Medicare within 30 months of settlement and the gross settlement value is greater than $250,000.99

In the case of a workers’ compensation settlement, Medicare will not pay for future injury-related medical expenses until the amount of the settlement that was specifically allocated to the MSA to pay for such care has been properly exhausted.100

The size of the MSA depends on the amount of future care that Medicare would otherwise pay and is usually determined by a team of professionals that the client’s lawyer or insurer retains. This team includes a financial consultant to address funding options and a nurse or other medical professional to determine the expected future medical expenses that Medicare would otherwise pay for. A medical examiner will review the client’s medical records and recommend how 99 See Ctrs. Medicare & Medicaid Servs., Workers Compensation Medicare Set-aside

Arrangements, www.cms.gov/WorkersCompAgencyServices/04_wcsetaside.asp. 100 See 42 C.F.R. §411.46(d)(2) (2010).


much of the settlement or judgment should be placed in the MSA, and then he or she will send a report to CMS, which administers Medicare, for review and approval, assuming the case meets CMS’s review thresholds. There are several entities out there that provide the service of both drafting these MSAs and later administrating them.

On approval, the MSA will be funded from the settlement proceeds. Then the client must file yearly accountings with CMS until the account is exhausted.101 If an MSA is not set up in a case where CMS thinks it should be, CMS may suspend or stop Medicare payments.102

CMS will not automatically respond to and accept or reject a proposed MSA. They are understaffed. This is not presently a priority for them. In fact, CMS approval of an MSA is not required. But their lack of response is not necessarily an approval of a submission and does not create a safe harbor. This is of course fraught with danger for the attorney and his/her client. I submitted an MSA ten months ago to CMS and have yet to hear back from them.

Practice Tip No. 13

It is good practice to put into any settlement documents in the third-party case that the parties have considered and provided for the interests of Medicare in the settlement. However, do not be bullied into overfunding the MSA by an aggressive defense attorney or insurance

101 See Ctrs. Medicare & Medicaid Servs., Administering WCMSAs, www.cms.gov/Workers CompAgencyServices/07_administeringwcmasas.asp.

102 See Ctrs. Medicare & Medicaid Servs., Introduction to WC, www.cms.gov/Workers CompAgencyServices/02_workerscompensationoverview.asp.

company. A letter to the file that the insurance company has recommended a larger funded MSA and Plaintiff has refused should suffice to protect the insurer from any future Medicare claim.

Practice Tip No. 14

Twice I have been involved in catastrophic injury cases where the need for an MSA has come into play. We had our own life care planner in the tort action who the defense said was setting the figures too high. The defense had their own life care planner in the tort action who we argued was setting figures too low. Now with the settlement of the case, the liability insurer demanded an MSA funded consistent with our life care plan. We wanted to use theirs. But these life care plans are not necessarily consistent with the needs for an MSA. The MSA only covers expenses paid by Medicare. For instance, Medicare does not cover attendant care which is often a huge component of a life care plan. The MSA need only cover Medicare reimbursement rates, not reasonable rates in the medical community. Again, this can make a big difference in the total costs. Life expectancy is another huge variable that can make a difference in the size of an MSA as compared to evidence in your life care plan. These issues need to be carefully considered.

Sometimes, a health insurer will say its insurance policy does not have a specific subrogation clause, but it is a Medicare Supplementation policy and as such a specific clause is not required since its payments are dependent upon Medicare’s


conditional payments. Actually, in Care Choices HMO v. Engstrom,103 and Nott v. Atena U. S. Healthcare, Inc.104 the courts held that the Medicare Act did not create a subrogation right for health insurance companies. It only permitted them to include a subrogation provision in their plan with the beneficiary. Without that, there is no subrogation interest.

MEDICAID

Medicaid is administered in Washington State by the Department of Social and Health Services. Washington statutory law states that when DSHS provides assistance for injuries to a recipient, “. . . the department shall thereby be subrogated to the recipient’s rights against the recovery had from any tortfeasor or the tortfeasor’s insurer, or both, and shall have a lien thereupon to the extent of the value of the assistance furnished by the department.” 105

Practice Tip No. 15

RCW 43.20B.070 requires the attorney representing an injured party who is receiving DSHS benefits to notify the Department of the filing of any claim, commencement of any lawsuit or settlement of any tort case. We do make sure that we provide that notice when we undertake a case. Our practice, however, is not to notify the Department if we are settling just one portion of the case. This may be UIM proceeds, settlement with one of several defendants or other partial settlement

103 330 F.3d 786, 790 (6th Cir. 2003).104 No. 03-cv-4044 (E.D. Pa. 2004).105 RCW 74.09.180.

of the case. You don’t yet have enough information to resolve any subrogation claim. You don’t know yet what the full amount of the recovery will be. However, do be sure to withhold sufficient funds to protect DSHS from whatever it may ultimately be entitled to recover. You can base that calculation on a preliminary analysis that this partial recovery is all that will be obtained, and calculate the Department’s share from those numbers. Hopefully, further legal action will increase your tort recovery, which will then correspondingly increase the subrogation rights of DSHS.

RCW 74.09.185 prohibits DSHS from reducing or prorating its subrogation rights:

Recovery pursuant to the subrogation rights, assignment, or enforcement of the lien granted to the department by this section shall not be reduced, prorated, or applied to only a portion of a judgment, award, or settlement, except as provided in RCW 43.20B.050 and 43.20B.060.106 The doctrine of equitable subrogation shall not apply to defeat, reduce, or prorate recovery by the department as to its assignment, lien, or subrogation rights.

But because federal funds are involved, federal law also applies. Under 42 U.S.C. §1396a(a)(25)(B) states are authorized to seek reimbursement from tort recoveries. The case of Arkansas Dept. of Health and Human Services

106 RCW 43.20B.060(4) provides that, “If recovery is made by the department under this section and the subrogation is fully or partially satisfied through an action brought by or on behalf of the recipient, the amount paid to the department shall bear its proportionate share of attorneys’ fees and costs.”


v. Ahlborn,107 dealt with the clash between state and federal statutes. The Washington statutes are similar to the Arkansas statutes in question in that case.

I believe that Ahlborn will be the future of subrogation law. Its equitable pronouncements by the United States Supreme Court will drive the focus of all subrogation/reimbursement law in this country. As a result, I will present this decision in detail.

The U.S. Supreme Court Decision in Ahlborn

In Ahlborn, the Supreme Court held that when a Medicaid recipient settles a tort claim against a third party, federal Medicaid law prohibits a state from asserting a lien in excess of the medical expenses portion of the settlement proceeds.108

In Ahlborn, 19-year-old Heidi Ahlborn suffered severe and permanent injuries in an automobile accident. She sued two alleged tortfeasors in state court. The Arkansas Department of Health Services (ADHS), which paid for her care under the state’s Medicaid plan, intervened in the case to assert a lien on the proceeds of any third-party recovery that Ms. Ahlborn might obtain. The case was settled for $550,000. The parties did not allocate the settlement between categories of damages. ADHS did not participate in the settlement negotiations nor seek to reopen the judgment after the case had been dismissed. ADHS did, however, assert a lien against 107 547 U.S. 268, 126 S.Ct. 1752, 164 L.Ed.2d 459 (2006).108 Ahlborn, 547 U.S. at 283; see also Paopao v. State, 145 Wn. App. 40, 47-48, 185 P.3d 640

(2008) (recognizing that, under Ahlborn, “a state may place a lien on any recovery from a third party only in an amount that represents payments for medical care.”).

the entire settlement proceeds in the amount of $215,645.30 – the total payments made by ADHS for Ms. Ahlborn’s care.

Under Arkansas law, when the amount paid by ADHS for the beneficiary’s care exceeds the portion of the settlement that represents medical costs, satisfaction of the lien requires payment out of proceeds meant to compensate the recipient for damages distinct from medical costs, such as pain and suffering, lost wages and lost future earnings.109 This is the same as Washington’s statute, RCW 74.09.185. The parties stipulated that Ms. Ahlborn’s entire claim was reasonably valued at $3,040,708.18, and that the settlement amounted to approximately one-sixth of that sum.

Based on its interpretation of federal third-party liability provisions, the U.S. Supreme Court agreed with Ms. Ahlborn that Arkansas law went too far, and held that ADHS could not lay claim to more than the portion of her recovery that represented medical expenses.110 In reaching its conclusion, the Court rejected ADHS’s position that 42 USC § 1396a(a)(25)(B)’s requirement that states seek reimbursement for medical assistance to the extent of such legal liability meant that the entirety of a recipient’s settlement is fair game. Instead, the Court concluded that the statutory language referred to “the legal liability of third parties ... to pay for [medical] care and services available under the plan.”111

109 Ahlborn at 272.110 Ahlborn at 279-280.111 Ahlborn at 280.


The Court then noted that the tortfeasor in Ahlborn had accepted liability for only one-sixth of the overall damages and that ADHS had stipulated that only $35,581.47 of that sum represented compensation for medical expenses. The Court stated, “Under the circumstances, the relevant ‘liability’ extends no further than that amount.”112 In a footnote, the Court added: “The effect of the stipulation is the same as if a trial judge had found that Ahlborn’s damages amounted to $3,040,708.12 (of which $215,645.30 were for medical expenses), but because of her contributory negligence, she could only recover one-sixth of those damages.”113

In response to ADHS’s concern that settlements would be manipulated without a rule of full reimbursement, the Court stated: “The issue is not, of course, squarely presented here; ADHS has stipulated that only $35,581.47 of Ahlborn’s settlement proceeds properly are designated as payments for medical costs. Even in the absence of such a post-settlement agreement, though, the risk that parties to a tort suit will allocate away the State’s interest can be avoided either by obtaining the State’s advance agreement to an allocation or, if necessary, by submitting the matter to a court for decision.”114

In reaching its conclusion, the Supreme Court also held that the Arkansas statutory scheme “squarely conflicts with the anti-lien provision of federal Medicaid laws.”115 The federal anti-lien statute provides that “No lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his 112 Id. at 280-281.113 Id. at 281, fn. 10.114 Id. at 288.115 Id. at 280.

behalf under the State plan …”116 The court noted that, under the plain language of the statute, even though “the State can require an assignment of the right … to receive payments for medical care … that does not mean that the State can force an assignment of, or place a lien on, any other portion of Ahlborn’s property.”

The Washington Supreme Court Decision in Wilson

The Ahlborn ruling is the same conclusion reached by Justice Alexander concerning the Washington statutes relied upon by the Department in his dissent in Wilson v. State,117 a case considered by the Washington State Supreme Court before the U.S. Supreme Court decided Ahlborn.

As explained by Justice Alexander:

In my view, RCW 43.20B.060(2) and RCW 74.09.180 both directly conflict with 42 U.S.C. § 1396p (1994). I reach that conclusion because these statutes purport to allow the State to impose its lien on a Medicaid recipient’s entire recovery from a third party. Because of this direct conflict with a federal statute, the state statutes are preempted. Berger v. Personal Prods., Inc., 115 Wn.2d 267, 270, 797 P.2d 1148 (1990)…

…I part company with the majority’s conclusion that the State’s lien affixes to the Medicaid recipient’s recovery beyond that which represents reimbursement for medical expenses.118

116 42 U.S.C. § 1396p(a)(1).117 142 Wn.2d 40, 10 P.3d 1061 (2000).118 Wilson at 52-53 (Alexander, J. dissenting).


Justice Alexander then observed that, although the State may attach a lien to the portion of the recipient’s recovery that represents recovery of sums that it has paid for medical expenses, the Washington statutes go beyond what the State is authorized to charge because they allow the State to place a lien upon “any recovery” by the recipient:

42 U.S.C. § 1396p(a)(1) (1994) provides, in pertinent part, that “[n]o lien may be imposed against the property of any individual prior to his death on account of medical assistance paid or to be paid on his behalf under the State plan[.]” On the surface, this federal statute would appear to prevent a state from imposing a lien on any portion of a Medicaid recipient’s third party recovery. The statute must, however, be considered in light of 42 U.S.C. § 1396a(a)(25)(H) (Supp.1998), which requires states to promulgate statutes under which “the State is considered to have acquired the rights of such individual to payment by any other party for such health care items or services[.] ” (Emphasis added.) Account must also be taken of 42 U.S.C. § 1396k (1994), which requires states to obtain an assignment of rights to recovery of payment for medical expenses from a third party as a condition of eligibility for medical assistance. When this statutory scheme is considered in its entirety, it is apparent that a state is vested with authority to require Medicaid recipients to assign to the State their right to obtain payments from another party for health care items or services. That coupled with the legislative declaration in RCW 74.09.185 that “the state is considered to have

acquired the rights ... to payment by any other party for ... health care,” leads to a conclusion that the Medicaid recipient does not acquire a proprietary interest in that portion of his or her recovery representing payment for health care items or services. It is clear, therefore, that the State is free to attach its lien to the portion of the recipient’s recovery that represents recovery of sums that the State has paid for medical expenses. RCW 74.09.180 and RCW 43.20B.060(2), however, go beyond what the State is authorized to do in that they purport to allow the Department to place a lien upon “any recovery” by the recipient. This as the trial court properly observed conflicts with the federal statutory scheme.119

Relying on Flanigan v. Department of Labor & Indus.,120 Justice Alexander further emphasized that the State should not be allowed to “share in damages for which it has provided no compensation” because such a result would be “absurd and fundamentally unjust.”121

A Case Study – Pattison

I sued the Department of Social and Health Services for its misapplication and misinterpretation of Ahlborn. Despite what I consider to be a rather straight-forward analysis requiring proportionality and equity in Ahlborn and the inapplicability of the Washington statute, the Department was still trying to recover based on old arguments and preempted statutes. I filed a Declaratory Judgment action

119 Wilson at 53-54 (Alexander, J., dissenting).120 123 Wn.2d 418, 869 P.2d 14 (1994).121 Wilson at 55 (Alexander, J., dissenting), quoting Flanigan at 426.


in Pattison v. Washington State Department of Social and Health Services,122 in response to the Department’s filing of a lien on my client’s entire tort recovery.

Mr. Pattison was forced to settle his case for a fraction of the actual value of the damages that he sustained. In Wilson v. State,123 the Washington Supreme Court emphasized that “it is up to the ‘lien holder who is charged with monitoring and dispensing Medicaid resources to agree to compromise the lien if, in its estimation, justice, fairness and equity dictate such a decision.’”124 Contrary to the mandate of Wilson, the Department was placing its own interests ahead of those of Mr. Pattison in imposing a lien for the entire amount of Medicaid payments made on Mr. Pattison’s behalf. I sent the following interrogatories to the Department and received the following responses in the case.

INTERROGATORY NO. 12 [13] [14]. Please describe what factors are used to invoke justice [fairness] [equity] into the determination of any compromise of a subrogation claim or lien of Defendant.

ANSWER: Objection, argumentative and assumes facts not in evidence. Also, this interrogatory is vague, ambiguous, and overbroad (e.g., as to the terms “factors used to invoke justice” and “any compromise”). Without waiving these objections, DSHS resolves subrogation and lien claims with a large variety of fact scenarios and cannot provide all the factors considered in each of the thousands of cases resolved. DSHS believes it

122 King County Case No. 08-2-34790-7.123 142 Wn.2d 40, 10 P.3d 1061 (2000).124 Wilson at 51, quoting Link v. Town of Smithtown, 670 N.Y.S.2d at 696.

is complying with federal and state laws that govern the manner in which DSHS resolves subrogation and lien claims. In applying these third party recovery laws, justice [fairness] [equity] is invoked through reimbursement to DSHS, the payer of last resort. At the same time, DSHS justly contributes proportional attorney fees for the injured party’s attorney when required by statute, and does not recover from portions of a settlement that are allocated for damages other than past medical expenses. DSHS wants to cooperate with this discovery, and if this broad and undefined interrogatory is narrowed to a particular case, such as the present case, and “invoke justice” is defined, the Department can provide a more specific answer.125

Wilson mandates that the Department compromise its lien if dictated by considerations of justice, fairness and equity. Just as the Department did not get the message of Ahlborn, it apparently did not get the message of Wilson either. Instead of setting forth factors showing that it considered justice, fairness and equity in imposing its lien in the case, the Department smugly claimed that the words “justice”, “fairness” and “equity” are all argumentative, vague, ambiguous and overbroad.

In Ahlborn, the U.S. Supreme Court set forth a formula for determining just, fair and equitable Medicaid liens, and rejected the Department’s approach:

There is no question that the State can require an assignment of the right, or chose in action, to receive

125 Defendant’s Response to Plaintiff’s First Set of Interrogatories.


payments for medical care. So much is expressly provided for by §§ 1396a(a)(25) and 1396k(a). And we assume, as do the parties, that the State can also demand as a condition of Medicaid eligibility that the recipient “assign” in advance any payments that may constitute reimbursement for medical costs. To the extent that the forced assignment is expressly authorized by the terms of §§ 1396a(a)(25) and 1396k(a), it is an exception to the anti-lien provision. See Washington State Dept. of Social and Health Servs. v. Guardianship Estate of Keffeler, 537 U.S. 371, 383-385, n. 7, 123 S.Ct. 1017, 154 L.Ed.2d 972 (2003). But that does not mean that the State can force an assignment of, or place a lien on, any other portion of Ahlborn’s property. As explained above, the exception carved out by §§ 1396a(a)(25) and 1396k(a) is limited to payments for medical care. Beyond that, the anti-lien provision applies.126

By trying to eviscerate the clear requirements of Ahlborn, the Department was unjustly seeking to impose its lien on other portions of Mr. Pattison’s property. Enforcing the lien in the manner sought by the Department would have unfairly and unjustly deprived Mr. Pattison of settlement amounts that he received for other elements of damages caused by his injury, including damages for his future medical care, lost wages, lost earning capacity, value of family services, other expenses, pain and suffering, disability, disfigurement and loss of enjoyment of life. Enforcement of the DSHS position would have created a fundamentally unjust result and would

126 Ahlborn at 284-285.

have violated the principles of fairness and equity laid out by the U.S. Supreme Court in Ahlborn.

The Department relented despite literally going backwards by increasing its demand during pre-filing negotiations. After I filed a Motion for Summary Judgment, it agreed to accept our initial offer. You must be vigilant in these matters.

Provide Enough Evidence to Support Your Defense of a Subrogation Claim

I have found most medical health care plans in Washington receptive to claims that my client has not been made whole if I provide sufficient evidence of that fact. While I am willing to promptly pay subrogation claims when we have obtained a full recovery for our clients, conversely, we have obtained waivers totaling many millions of dollars from medical health care plans who have been shown that we obtained less than a full damage recovery for our clients. You cannot simply make unsupported claims that your client has not been made whole. You must, like any other legal claim, present your evidence. I usually write a comprehensive letter explaining the basis for our claim and include many of the following documents.

1. Copy of the defendant’s answer pointing out the affirmative defenses;

2. Transcripts of key depositions showing the strength of defenses you faced;

3. Copies of expert reports showing the extent of the damages, all of which you could not recover;


4. Key pleadings or court orders affecting the value of your case;

5. Your demand letter showing your full assessment of the case;

6. The mediation letter by the defense showing the arguments you faced;

7. Key medical records or IME reports showing pre-existing conditions, post-accident injuries and other medical causation issues;

8. Final settlement documents with language demonstrating that there was not a full recovery;

9. A letter from the mediator stating that you accepted less than a full recovery and why you had to do so.

Always offer to open your entire file to review by the subrogation carrier. Be transparent. Very seldom will they take advantage of your offer. But they are entitled to a full disclosure of all the facts.

If you cannot agree on the reimbursement figures for DSHS, you can bring a motion for an allocation.127 Because the Department is asserting the claim, it should bear the burden of proof for that claim.

127 WAC 388-501-0100(6)(d).

EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA)

No area of subrogation has been abused more by insurers than the recent developments in ERISA subrogation. ERISA subrogation has become a formidable obstacle to settlement and client satisfaction.

The Federal ERISA Statute

ERISA health insurance plans are a creature of federal law, the Employee Retirement Income Security Act of 1974. Federal pre-emption arguments have often been used to overcome general equitable principles grounded in traditional subrogation law.128 While the federal ERISA law does not contain any provisions relating to subrogation, its broad pre-emption of state law – including subrogation principles – has been used as a sword for Plans to enforce oppressive subrogation provisions in health insurance contracts. It has become standard practice for such Plans to provide for first dollar subrogation provisions, exclusions of the Made Whole Doctrine, no considerations of comparative negligence, legal obligations on plaintiff counsel, refusal to participate in paying proportionate shares of attorney fees and costs, etc. There is a revolt developing against this tidal wave of overreaching, and I predict it will bring future changes in this area of the law.

Section 502(a)(3) of the Act is the civil enforcement mechanism available to ERISA fiduciaries seeking to recover benefits paid under an ERISA Plan. Codified at 29 U.S.C. 128 Am. Council of Life Insurers v. Ross, 558 F.3d 600 (6th Cir. 2009).


§ 1132(a)(3), it authorizes the pursuit of a civil action by an ERISA fiduciary to enjoin any act which violates the terms of a Plan, or to “obtain other appropriate equitable relief” to enforce a Plan’s provisions. Thus, the availability of relief to a Plan turns on the proper characterization of the Plan’s action as lying in law or in equity.

Knudson Limited ERISA Subrogation Claims

The Supreme Court’s decision in Great-West Life & Annuity Insurance Co. v. Knudson,129 explained that § 502(a)(3) does not authorize all types of relief that a court of equity might award; it only authorizes those remedies “that were typically available in equity.”130 In that dispute, the settlement funds received from the tortfeasor did not enter into Knudson’s possession, but instead were placed in a Special Needs Trust to provide for her ongoing medical care.131 The Court denied the relief sought by the fiduciary, concluding that it was not claiming “particular funds that, in good conscience, belong to [it],”132 but instead was seeking “to impose personal liability on [the Knudsons] for a contractual obligation to pay money-relief that was not typically available in equity.”133

After Knudson, various courts of appeals differed on its application. In Qualchoice, Inc. v. Rowland,134 and Westaff (USA) Inc. v. Arce,135 the courts held that a Plan fiduciary’s assertion of a subrogation right to reimbursement from a 129 534 U.S. 204, 122 S.Ct. 708, 151 L.Ed.2d 635 (2002).130 Knudson at 210. (quoting Mertens, 508 U.S. at 256).131 Id. at 207-08.132 Knudson at 214.133 Id. at 210.134 367 F.3d 638 (6th Cir. 2004).135 298 F.3d 1164 (9th Cir. 2002).

Plan beneficiary who has received payments from a third party is legal in nature, regardless of whether the beneficiary possesses that recovery in an identifiable fund.136

In Westaff, the Ninth Circuit acknowledged that the funds at issue, which were placed in an escrow account in the beneficiary’s name pending a determination of their ownership, were “specifically identifiable.”137 Nevertheless, the court held that the funds were a “legitimate personal injury settlement to which the beneficiary is entitled” and that the fiduciary’s action was “one for money damages” falling outside the jurisdictional grant of § 502(a)(3).138

Similarly, in Qualchoice, the Sixth Circuit concluded that a Plan fiduciary’s action for reimbursement was legal in nature, even though the beneficiary possessed the funds recovered from a third party in an identifiable fund.139

The Fifth, Seventh and Tenth Circuits ruled the other way. The Tenth Circuit, in Administrative Committee of the Wal-Mart Associates Health & Welfare Plan v. Willard,140 concluded that a plan fiduciary may maintain an action for equitable relief if the plan is seeking to recover funds that are specifically identifiable, belong in good conscience to the fiduciary, and are within the possession and control of the beneficiary. In Willard, an ERISA fiduciary sought to enforce a subrogation clause against a beneficiary through imposition of a constructive trust on settlement funds

136 See Qualchoice at 650; Westaff at 1167.137 Westaff at 1167.138 Id.139 Qualchoice at 649.140 393 F.3d 1119, 1122 (10th Cir. 2004)


received from a tortfeasor.141 The district court allowed the fiduciary to intervene and required that the beneficiary deposit a portion of the settlement proceeds equivalent to the medical expenses into the court registry.142 On appeal, the Tenth Circuit agreed that the fiduciary’s effort to secure imposition of an equitable lien fell within the ambit of § 502(a)(3).143

The Fifth and Seventh Circuits followed a similar approach for assessing whether an ERISA plan fiduciary may maintain an action for equitable relief.144 In both Bombardier and Varco, the beneficiaries’ attorneys had accepted payment from the tortfeasors on behalf of their clients, and placed the funds into accounts over which the beneficiaries had constructive possession. In those proceedings, the courts held that the fiduciaries were seeking “equitable relief” under § 502(a)(3).

ERISA Plans Believe Sereboff Has Authorized Subrogation Claims

All of this paved the way for the United States Supreme Court to accept certiorari in Sereboff v. Mid Atlantic Medical Services, Inc.145 The court found for the Plan, stating:

… The ‘Acts of Third Parties’ provision in the Sereboffs’ plan specifically identified a particular fund, distinct

141 Id. at 1120.142 Id. at 1120-21.143 See id. at 1125.144 See Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot &

Wansbrough, 354 F.3d 348 (5th Cir. 2003), and Admin. Comm. of the Wal-Mart Stores, Inc. Associates’ Health & Welfare Plan v. Varco, 338 F.3d 680 (7th Cir. 2003).

145 547 U.S. 356, 126 S.Ct. 1869, 164 L.Ed 612 (2006).

from the Sereboffs’ general assets—‘[a]ll recoveries from a third party (whether by lawsuit, settlement, or otherwise)’— and a particular share of that fund to which Mid Atlantic was entitled—‘that portion of the total recovery which is due [Mid Atlantic] for benefits paid.’ Like Street and Alexander in Barnes, therefore, Mid Atlantic could rely on a ‘familiar rul[e] of equity’ to collect for the medical bills it had paid on the Sereboffs’ behalf. This rule allowed them to “follow” a portion of the recovery ‘into the [Sereboffs’] hands’ ‘as soon as [the settlement fund] was identified,’ and impose on that portion a constructive trust or equitable lien. (citations omitted.)146

With the green light from Sereboff, the ERISA Plans around the country went on an orgy of redrafting plan language and enforcing subrogation claims. Plan Administrators became emboldened by the decision. They also began suing personal injury lawyers if they refused to meet subrogation demands. As mentioned earlier, in the oral argument in the Sereboff case before the United States Supreme Court, it was estimated that this was a billion dollar a year enterprise.

Equitable Defenses to ERISA Subrogation

But what of all the unanswered questions from Sereboff? What is the scope and measure of an ERISA plan’s right to reimbursement from an injured Plan beneficiary? If ERISA subrogation is based in equity, what about the application of equitable defenses? The Sereboff court specifically declined

146 Sereboff at 364.


to consider whether the action was “appropriate” in light of principles like the Made Whole Doctrine because the issue had not been raised in the court below.147

ERISA Section 502(a)(3)’s statutory definition requires that a court apply traditional principles of equity when fashioning relief. Both in Sereboff and in prior cases, the U.S. Supreme Court has instructed that, when construing and applying Section 502(a)(3), a court should apply principles of equity that existed in the days of the “divided bench.”148 In so doing, the Court has further instructed that courts should “consult” standard treatises on equity, “such as Dobbs, Palmer, Corbin, and the Restatements.”149

All the authoritative treatises cited in Sereboff and Knudson dictate that a Plan’s remedy is controlled by principles of unjust enrichment. Has the tort victim been unjustly enriched by recovering from both the tortfeasor and the contracted for medical payments insurer? Dobbs explained that both constructive trust and equitable lien remedies “are invoked for the same reasons, to prevent unjust enrichment.”150 Palmer is no less clear.151

Under equitable principles of unjust enrichment, a Plan is entitled to recover, at most, that portion of a beneficiary’s underlying settlement that is specifically allocable to those medical expenses that it paid, minus a proportional share

147 Sereboff at 369, fn 2.148 Sereboff at 363.149 Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204, 217 (2002); see also

Sereboff at 368.150 1 D. Dobbs, Law of Remedies § 4.3(3), at 602 (emphasis added).151 1 G. Palmer, Law of Restitution § 1.3, at 16-20 (explaining that these remedies are

“aimed at preventing unjust enrichment”).

of the costs and attorney fees incurred in recovering those expenses from third parties. This approach achieves an equal balance between a Plan and its beneficiary, whereby each party (1) recovers a proportion of the underlying settlement that corresponds to their claims, and (2) contributes proportionally to the costs of obtaining that recovery.

It is well understood in subrogation claims that when an insured recovers a lump sum from a third-party tortfeasor, the insured’s “unjust” gain, and the corresponding measure of an insurer’s maximum award, is limited by the amount the insured has “double recovered.”152 Moreover, it is a bedrock principle that, in the context of an insurer’s effort to recover from an insured, a “double recovery” has only occurred where an insured has recovered twice for the same loss.153

Thus, when determining the amount of an insured’s unjust enrichment, the critical question is how much of the underlying tort recovery is allocable to medical expenses. As one court explained, in order for there to be double recovery and unjust enrichment, the underlying settlement must “include recovery . . . for [the insureds’] health care expenses.”154

152 See 46A C.J.S. Insurance § 1993 (“Subrogation prevents . . . unjust enrichment to the insured that would result from double recovery.”); Robert E. Keeton & Alan I. Widiss, Insurance Law § 3.10(7) (1988) (“Recognition and enforcement of a right to subrogation for health insurers is primarily premised on precluding duplicative recoveries.”); see also Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1117-18 (9th Cir. 2010).

153 See, e.g., 16 Couch on Ins. § 222:8 (“[S]ubrogation has the objective of preventing the insured from recovering twice for one harm.”).

154 U.S. Healthcare, Inc. v. O ’Brien, 868 F. Supp. 607, 613-14 (S.D.N.Y. 1994); see also Maher & Pathak, Understanding Tort Subrogation, 40 Loy. U. Chi. L.J. at 58 n.32 (explaining that a double recovery occurs “where the insured receives a tort recovery for medical damages while also collecting insurance for those damages”).


Palmer is also unequivocal on this point: he teaches that an insurer has a “right . . . to recover medical expense from the tortfeasor to the extent that the insurer has paid such expense.” (emphasis added).155 And in a case where an “insured has recovered from the tortfeasor for such expense, . . . this is the extent of the lien.”156

Applying these principles of unjust enrichment, the measure of the beneficiary’s unjust enrichment, and, in turn, the Plan’s maximum entitlement to an award, hinges upon the amount of the beneficiary’s settlement that is properly allocable to past medical expenses, for it is this amount that represents the beneficiary’s recovery in tort for compensation the beneficiary received from an ERISA plan.

This approach is consistent with the trend in the field. One need only look to the U.S. Supreme Court’s decision in Arkansas Dept of Health & Human Services v. Ahlborn,157 discussed above regarding Medicaid subrogation. This is also the approach adopted by the Washington Supreme Court in Tobin v. Department of Labor & Industries,158 discussed above regarding Labor & Industries subrogation.

ERISA Plans Rely On Any Plan Language They Wish to Draft

To the Plans, the issue is simply the sanctity of plan language. Clear and unambiguous Plan language has to be

155 4 G. Palmer, Law of Restitution § 23.18(d), at 470.156 Id. at 470; id. at 474 (“[T]he insurer’s claim should be limited to the net amount

recovered by the insured for medical expense.”).157 547 U.S. 268, 126 S.Ct. 1752, 164 L.Ed.2d 459 (2006).158 165 Wn.2d 1016, 199 P.3d 411 (2009).

enforced. Their argument is that “ERISA does not create any substantive entitlement to employer-provided health benefits or any other kind of welfare benefits.”159 As a result, “Employers or other plan sponsors are generally free under ERISA, at any time and for any reason to adopt, modify, or terminate welfare plans.”160

ERISA contains a variety of procedural and technical requirements, the primary purpose of which is the establishment and sanctity of the written plan document. First, 29 U. S. C. § 1102(a) provides that “every employee benefit plan shall be established and maintained pursuant to a written instrument.” Then, 29 U.S.C. § 1102(b) instructs that such written instrument must “specify the basis on which payments are made to and from the plan.” The Supreme Court in Curtiss-Wright acknowledged the primacy of the written plan document and its fundamental place in ERISA. Based on this they claim they can do whatever they want. And it is true that these harsh provisions have often been upheld by the courts.

A Case Study – Rose

I lead a team of lawyers for Public Justice in challenging the current trend in ERISA law at the printing of this publication. In CGI Technologies and Solutions, Inc. vs. Rose, et al.,161 we are advocating that ERISA subrogation rights should be limited by doctrines of equity, and that a proportionality formula 159 Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995).160 Id. See also Black & Decker Disability Plan v. Nord, 538 U.S. 822, 833 (2003)

(“Employers have large leeway to design disability and other welfare plans as they see fit.”).

161 2:10-cv-00298-RSM (U.S. District Court, Western District of Washington at Seattle).


should be adopted along the lines of the arguments set forth above. While we were successful in having the claim against the lawyers dismissed, the District Court on January 18, 2011, granted the Plan a summary judgment against our client. We are off to the 9th Circuit in an attempt to make this right.

Defenses to ERISA Subrogation Claims

There are various arguments that can be made to limit or defeat a Plan’s claim for subrogation. You need to carefully analyze whether any of these arguments apply to your case.

First relates to the Plan language itself. The Plan must provide for subrogation and set its terms. If there is no subrogation provided for, it is not allowed. So read the Plan carefully. In the Ninth Circuit, the Made Whole Rule is the default rule.162 Thus, Plan language must disavow the rule, or you can take advantage of that equitable doctrine. Plan language must say that its right of subrogation is out of a specifically identifiable fund. If it does not, its claim may fail.163

Second, Plans covering federal, state or local government employees are exempt.164 Church Plans are exempt.165 Thus, if your client has a Plan as a government or church employee, ERISA does not apply, and whatever subrogation rights the Plan might have are now covered by state law. This often applies to hospital employees of government or church-owned hospitals.

162 Barnes v. Independent Auto Dealers Ass’n of Cal. Health & Welfare Benefit Plan, 64 F.3d 1389 (9th Cir. 1995).

163 Popowski v. Passott, 461 F.3d 1367 (11th Cir. 2006).164 See 29 U.S.C. § 1003.165 Id.

Third, the medical bills must be paid out of the general assets of the Plan for a Plan to qualify as an ERISA plan. In other words, the Plan must be self-funded. The bills cannot be paid by a health insurance company.

Plans that are insured are subject to indirect State insurance regulations insofar as State laws “purporting to regulate insurance apply to the plans’ insurers and the insurers’ insurance contracts.”166 Thus, when the Plan pays the bills with insurance it buys, there is no pre-emption, and the Made Whole Rule would apply in Washington.

Be careful when analyzing this information, especially from the IRS 5500 form. The Plan can, and often does, contract with an insurance company to administer the Plan. This does not mean it is not self-funded.167 The fact that the Plan obtains accidental death and dismembership, life insurance or long term disability insurance does not take it out of the self-funded category.168 Stop-loss insurance also does not take the Plan out of being self-funded according to many decisions, including Bill Gray Enter. v. Gourley,169 unless you can show that the stop-loss insurance was used to pay some of the bills.

Fourth, is whether the Plan can sue the lawyer and enforce an equitable lien against the contingency fee collected by the lawyer. In Longaberger Co. v. Kolt,170 the Sixth Circuit ruled

166 FMC Corp. v. Holliday, 498 U.S. 52, 111 S.Ct. 403 (1990).167 Administrative Committee of Wal-Mart Associates’ Health and Welfare Plan v.

Willard, 302 F.Supp.2d 1267 (D. Kan. 2004).168 United Food & Commercial Workers & Employers Arizona Health & Welfare Trust v.

Pacyga, 801 F.2d 1157, 1162 (9th Cir. 1986).169 248 F.3d 206 (3d Cir. 2001).170 586 F.3d 459 (6th Cir. 2009)


that the ERISA Plan could bring such a claim. But the Ninth Circuit has ruled against the Plans.171

Fifth is the issue of the obligation of the Plans to pay their proportionate share of attorney fees and costs in collecting their subrogation. For Plans to base their subrogation claims on statutory language that allows “appropriate equitable relief” and then to allow them to abrogate the common fund doctrine with unconscionable Plan language is absurd.

Federal judges have expressed concern about the inequitable results reached in cases where the plan is fully reimbursed and is not required to pay any of the attorney’s fees or costs incurred in obtaining the recovery. Rather than enforcing plan terms simply for the sake of enforcement, courts should interpret ‘appropriate’ as a meaningful limitation on the ‘equitable relief’ authorized by [§ 1132(a)(3)]. Interpreting ‘appropriate equitable relief’ as relief consistent with the common fund doctrine prevents unjust enrichment on the part of the plan; otherwise plans may free-ride on the efforts of the attorney. Such interpretation is also warranted based on the equitable principle of quantum meruit, allowing a person to recover the reasonable value of the services rendered to the plan.172

171 See A.C. Houston Lumber Co. v. Berg, No. 10-15170, 2010 WL 5439786 (9th Cir. 2010) (relying on Hotel Employees & Restaurant Employees International Union Welfare Fund v. Gertner, 50 F.2d 719 (9th Cir. 1995)).

172 E. Farish Percy, Applying the Common Fund Doctrine to an ERISA-Governed Employee Benefit Plan’s Claim for Subrogation or Reimbursement, 61 Fla. l. Rev. 55 (Jan. 2009).

Your Right to Secure All Relevant Plan Documents

ERISA grants a plan beneficiary/participant the right to require the Plan Administrator to provide certain specified documents by making a written request. This right is granted by 29 U.S.C. 1024(b)(4), which provides as follows:

The administrator shall, upon written request of any participant or beneficiary, furnish a copy of the latest updated summary, plan description, and the latest annual report, any terminal report, the bargaining agreement, trust agreement, contract, or other instruments under which the plan is established or operated.

A Plan Administrator’s failure to provide this information within 30 days results in a cause of action in favor of the beneficiary/participant against the Administrator for the recovery of a penalty of up to $110 per day for each day of noncompliance.173 The statute sets the amount at $100 per day, but a federal regulation,174 effective August 1999, authorizes up to $110 per day.

Hefty penalties have been imposed in recent cases against Plan Administrators who have chosen the path of noncompliance. On Oct. 22, 2009, the Central District of Illinois Federal Court entered an order in Leister v. Dovetail, Inc., No. 05-2115, imposing penalties against the ERISA Plan Administrator in the amount of $377,600 for 3,776 days of non-compliance. This calculation applied to three separate requests for documents made by the beneficiary/participant.

173 29 U.S.C. 1132(c)(1)(B).174 29 CFR § 2575.502c-1.


In Huss v. IBM Medical and Dental Plan,175 the court assessed the maximum statutory penalty against a Plan Administrator for failure to deliver requested documents. This court recognized that it had discretion to assess less than the maximum but was unfavorably impressed with the bad faith conduct of the Plan Administrator who was apparently trying to hide a prior version of the Summary Plan Description (SPD). The Huss court stated, “Defendants affirmatively misrepresented to Plaintiff that 2004 SPDs were not available to send (four versions of the 2004 SPD were issued, documents (2), (3), (4), and (5) respectively). This constitutes both bad faith and intentional conduct. Furthermore, as stated previously, all of these documents reflect amendments made to the SPD between 2004 and 2006 and were therefore material to Plaintiff’s evaluation of her rights. Finally, a 104-day delay is undeniably egregious. Because of Defendants’ bad faith, the materiality of these documents, the unreasonable delay in providing these documents to Plaintiff, and the number of documents involved in this request, I assign the maximum penalty of $110 per diem amounting to a total penalty of $11,440.00.”

The statute specifically authorizes the request to be made by the participant or beneficiary. While usually the attorneys make these requests, it is better practice to have the request signed by your client. Further, there is a distinction between the “Plan Administrator” and the “Claims Administrator.” There is no obligation on the Claims Administrator to provide requested documentation. This obligation is on the Plan Administrator. Your contact will probably be with the 175 No. 07 C 7028, (N.Dis.Ill. Nov. 4, 2009).

Claims Administrator, so be sure you make your request to the proper authority. In fact, you may be dealing with yet another entity. You may be dealing with the “Subrogation Specialist” who is one further step removed, and who is acting as a bill collector.176

Practice Tip No. 16

When you first get involved in a personal injury case and you find out that your client is having his or her medical expenses paid by an ERISA plan, take the following steps:

1. Write the Plan Administrator informing it of your representation and ask for all documents relating to the billings received and the payments made. You can obtain the name and address of the Plan Administrator at www.freeerisa.com.

2. Obtain the Plan documents that were in effect when the medical bills were paid. Read the Plan documents carefully. Do not take the word of the Plan Administrator that the Plan is entitled to a full recovery. For instance, does the Plan allow subrogation from a UIM policy?

3. Obtain the Summary Plan Description (SPD) and the formal plan documents. The SPD is the roadmap to the lien’s validity and vulnerability to defenses. Make sure the two documents are the same. If they conflict, the court may apply

176 See Roger M. Baron, Service of a “Proper Request” Upon the Plan Adminstrator: A Key Step in Defending Against ERISA Reimbursement Claims, Journal of the Kansas Association for Justice, Vol. 33, No. 4, March 2010.


the provision that is more favorable to the participant.177 Ambiguities will also be construed in favor of the participant.178

4. Obtain the Amendments to the Plan documents for the relevant periods of time. Case law has rejected Plan’s efforts to retroactively apply amended provisions.179

5. Obtain the copies of the Summary of Material Modifications (SMM) statements for the relevant periods of time. These will allow you to pinpoint the timing of amendments to the SPD.

6. Obtain the 5500 filings of the Plan by going to www.dol.wa.gov and inputting the name of the Plan or go to www.freeerisa.com and search by the employer’s name. It can also be requested from the Plan Administrator under 29 U.S.C. § 1024 (b)(4). These forms will give you important information relating to what, if any, insurance is owned by the plan.

7. Obtain copies of all insurance policies owned by the Plan. These may take the form of health insurance contracts, re-insurance, co-insurance, excess insurance, stop-gap insurance, stop-loss insurance, umbrella insurance or some other

177 Bergt v. Retirement Plan for Pilots Employed by MarkAir, Inc.293 F.3d 1139 (9th Cir. 2002).

178 Barnes v. Independent Auto Dealers Ass’n of Cal. Health & Welfare Benefit Plan, 64 F. 3d 1389, 1393 (9th Cir. 1995).

179 ACS/PRIMAX v. Polan, 2008 WL 5213093 (W.D. Pa. 12/12/08); Sheet Metal Workers Local 27 Health & Welfare Fund v. Beenick, 2008 WL 5156663 (D.C. NJ 12/9/08).

such name. This should include any commercial insurance that may have been purchased by the Plan and is being used in whole or in part to pay the medical bills of your client. A Plan Administrator is required to produce all insurance contracts under which the Plan was established or is operated.180

8. Ask for an explanation of how any formula works for what portion of the medical bills are paid by the commercial insurer.

9. If an insurance company is administering the Plan, request a copy of the Administrative Service Contract between the employer and the insurer. Review this contract for evidence of the fact that the Plan is not self-funded.

10. Remind the Plan that it stands in a fiduciary position as to all participants and beneficiaries of the Plan, including your client. Remind the Plan that it needs to appropriately consider at all times, the needs and interests of your client in order to fulfill those fiduciary duties.

Practice Tip No. 17

Knutson is still good law. It was not overturned by Sereboff. So always consider placing settlement funds outside the reach of the Plan. In Knutson it was a Special Needs Trust. In Mills v. London Grave Township,181 the

180 CFR § 2520.102-3.181 2007 WL 2085365 (E.D. Pa. July 19, 2007).


funds were placed in a trust for a minor. Similar vehicles may be available for planting the funds outside the reach of the Plan.

Practice Tip No. 18

Despite all of these potential ideas for defeating an ERISA lien, most Plans have sophisticated counsel who have drafted or updated subrogation rights that avoid the pitfalls. Thus, your best option may be to negotiate. An attitude of cooperation may be helpful. Lay out the facts and problems with your case. Discuss the impacts of a less than full recovery. Get an agreement up front that the Plan will pay its proportionate share of attorney fees and costs. After all, if you won’t agree to pursue the case, the Plan will be forced to hire and pay counsel to pursue the claim.

Practice Tip No. 19

You must be informed about the consequences of undertaking a case if a large ERISA claim has the capability of wiping out your third-party recovery. Above all, keep your client informed of the possible outcomes to encourage realistic expectations. If most of any realistic recovery is going to go to the ERISA Plan, even if they do pay proportionate shares of attorney fees and costs, your client may not have sufficient incentive to pursue the case in the first place. And if they do not pay proportionate shares of attorney fees and costs, you may not have sufficient incentives to pursue the case.

ETHICAL CONSIDERATIONS

Insurers holding claims of subrogation, whether meritorious or not, sometimes cite RPC 1.15A(g) in order to create leverage for their claim. The Rule reads:

If a lawyer possesses property in which two or more persons (one of which may be the lawyer) claim interests, the lawyer must maintain the property in trust until the dispute is resolved. The lawyer must promptly distribute all undisputed portions of the property. The lawyer must take reasonable action to resolve the dispute, including when appropriate, interpleading the disputed funds.

The reach of this rule is subject to debate. For instance, Comment #4 to the Rule says:

The inclusion of ethical obligations to third persons in the handling of trust funds and property is not intended to expand or otherwise affect existing law regarding a Washington lawyer’s liability to third parties other than clients. See, e.g., Trask v. Butler, 123 Wn.2d 835, 872 P.2d 1080 (1994), Hetzel v. Parks, 93 Wn.App. 929, 971 P.2d 115 (1999).

To make matters more confusing, Comment #9 to the Rule says:

Under paragraph (g), the extent of the efforts that a lawyer is obligated to take to resolve a dispute depend upon the amount in dispute, the availability of methods


for alternative dispute resolution, and the likelihood of informal resolution.

We know that it is a violation of RPC 1.8(e) for a lawyer to sign a hold harmless agreement to pay subrogation claims as a condition of settlement.182 We know that the only person who can bring a lawsuit for attorney malpractice is the attorney’s client.183 The area is indeed murky.

The Washington State Bar issued Advisory Opinion 2166 in 2007. The fact pattern is complicated, but basically involved an insurer taking inconsistent positions on the amounts of the subrogation claim. Despite substantial evidence that the most current subrogation demand was excessive the opinion states: “Regrettably, there is no ‘bona fide’ or ‘reasonable basis’ modifier for the term ‘dispute. Under the facts … RPC 1.15A(g) requires the attorney to keep the money in the trust account until the dispute is resolved, by agreement with the insurance company or through interpleader.”

I once had a case where Blue Cross claimed a right of reimbursement from my client’s recovery. I disputed the claim, but held the money they demanded in trust pending a resolution of the issue. Ultimately, they sued my client. In its trial brief, counsel for Blue Cross made the argument that I was acknowledging the validity of its claim by holding the disputed funds in my trust account. I immediately called counsel for Blue Cross and demanded that he withdraw that pleading, and that argument, or I would never hold disputed funds in a Blue Cross subrogation claim in trust again. He

182 WSBA Informal Opinion #1736 (1997).183 Bohn v. Cody, 119 Wn.2d 357, 832 P.2d 71 (1992).

refused. I won that trial despite that frivolous argument, and true to my word, I have never held disputed funds involving a Blue Cross subrogation claim in my trust account since. I release the funds to my client to hold.

With the exception of Blue Cross, it has always been our practice to hold any disputed subrogation amounts in an interest bearing trust account pending resolution of the dispute. However, as discussed above, it is certainly legitimate to place the funds where an ERISA claim can be defeated, if that is appropriate.184

When pursuing subrogation claims the insurer will often ask for a copy of your fee agreement to confirm the amount of the contingency fee. This is a reasonable request, and the agreement should be provided. The fee agreement is not generally considered to be a “confidence” as defined by the RPCs.185 In addition, the lawyer must disclose to the insurer any “side agreement” with the client that modifies the terms of the contract concerning the payment of fees, since the contract with the client controls the fees paid by the insurer.186 I have read of one case where a lawyer was disciplined by the Washington State Bar Association for attempting to enforce a higher contingency fee agreement on the insurer in order to benefit his client. In the October 2007 Washington State Bar New, a lawyer was disciplined for failure to “promptly procure resolution of a client’s medical provider claim in a personal injury matter.”187

184 See Knutsen, supra.185 WSBA Advisory Opinion 1888 (1999).186 Id.187 Vol. 61, No. 10 Washington State Bar New, p. 53 (2007).


Another important area of ethical consideration is what, if any, fees are to be charged for handling subrogation issues? Does your contingency fee agreement for pursuing a tort claim include the work on subrogation issues? I have always believed it my duty in handling a tort claim to also handle subrogation issues. My job is to make a full and fair recovery for my client. That is the money put into my client’s pocket. That takes me back to the opening two paragraphs of this booklet. I think my job is to do the subrogation work that will affect my client’s bottom line recovery.

Admittedly, the subrogation field is much different today than it was when I started 42 years ago. The issues have become so complicated that specialists abound to deal with some subrogation issues. For instance, I have hired experts to create an MSA for Medicare, although I have dealt with CMS myself. I have passed the costs of these experts on to my client. I have hired legal experts to create trusts to protect my client’s funds, and have also passed those costs onto my client.

Whatever your practice, it is best to spell these issues out in your retainer agreement. To the extent possible deal with these issues up front in order to avoid a misunderstanding with your client later.

CONCLUSION

Certainly one lesson we learn from this review is that the impact of subrogation is very fact specific. But it is also dependent on the fortuity of the type of medical coverage involved. So now the suggested solution to the question I posed at the beginning of this booklet.

Assume that Penny Plaintiff is in an automobile crash and suffers a fractured hip. Her medical bills are $25,000 because of the surgery that is necessary to pin the fracture. Terry Tortfeasor negligently caused the automobile crash and is insured by Indifferent Insurer. His liability limits are $100,000. A jury determines that Penny’s total damages are $200,000, $25,000 of which is for the medical bills, $15,000 for wage loss, $10,000 for family services, and $150,000 for pain and suffering, disability, disfigurement and loss of enjoyment of life. Terry has no substantial assets to pay the excess damages above Indifferent’s liability insurance limits. Penny has no UIM coverage. She collects only $100,000 on her claim. She pays her attorney $33,333 in fees, and $6,667 in reimbursement for costs, leaving her with $60,000 for her $200,000 claim. Now she faces subrogation claims clamoring at the gates.

If Penny is insured by Band Aid Health Insurance or has PIP coverage of $25,000 with Gladys Knight Insurance, who paid the $25,000 in medical bills, under Washington law Penny has not been made whole and she owes no subrogation claim to either Band Aid or Gladys Knight. She gets to keep her $60,000.


If Penny is insured by an ERISA Plan through her job, which has disavowed the Made Whole Rule and has Plan language that refuses to contribute to attorney fees and costs, the Plan will insist it be reimbursed the full $25,000 and Penny will be left with $35,000 for her $200,000 claim. You are then in for a fight to try to keep her recovery.

If Penny is injured on the job and Labor and Industries paid the $25,000 in medical bills, under Tobin the subrogation lien would only be calculated against the $25,000 medical bill recovery. After the reduction for attorney fees and costs and the 25% to Penny, the net subrogation is $11,250. Penny gets to keep $48,750.

If Penny is on DSHS Medicaid which paid the $25,000 in medical bills, under Ahlborn, she only recovered 50% of her damages, so DSHS will take half of its subrogated interest, less a one third attorney fee and a contribution toward costs for a net subrogation interest of $7,500. Penny gets to keep $52,500.

If Penny is a senior citizen on Medicare, which paid the $25,000 in medical bills, absent an unlikely showing of a hardship case, Medicare will be reimbursed the full amount of its payments less its proportionate share of attorney fees and costs for a net subrogation interest of $15,000. Penny gets to keep $45,000.

$0, $25,000, $11,250, $7,500 and $15,000. Five different subrogation interests arising out of the same automobile crash dependent on the fortuity of which entity is paying the medical bills. This inconsistency is spread over the

fundamental principle that subrogation is supposed to be an equitable doctrine designed to do justice and prevent an unjust enrichment to Penny. Instead we have a patchwork quilt of inconsistencies that confuses the busy trial lawyer and completely confounds Penny Plaintiff. To even suggest under any of these scenarios that Penny is being unjustly enriched is absurd.

I personally believe that the Made Whole Rule is the only fair rule, and should be adopted everywhere. But I am not King of the world, and my prospects of attaining that position don’t look good, so this will not happen. I do predict, however, that someday, in a far off galaxy, equity and justice will prevail and we will have a consistent approach to subrogation, along the lines of Ahlborn. Until then, keep up the good fight on behalf of your clients against the claimed subrogation interests of the dark side.

Subrogation is an area of the law I have enjoyed. I hope this booklet is helpful to you in weaving through this morass. Good luck to you.


POST SCRIPT

I have not attempted to cover all of the variations of subrogation claims made on personal injury recoveries out there. First, I don’t know all of them. Secondly, it would unduly lengthen this booklet. However, I will simply mention a few to give some examples and hopefully point you in the right direction.

Law Enforcement and Firefighters

Law enforcement officers and firefighters can sue their employers for negligence. The LEOFF statute was amended in 1971 incorporating a “right to sue” provision.188 But the suit is for the “excess of damages over the amount received” under the LEOFF act.189 Thus, a set-off is allowed. I believe the amount of the set-off is a legal question to be decided by the courts; others believe it is a jury question.190

Indian Health Services

The Indian Health Service has a subrogation right pursuant to 25 U.S.C. § 1682. But, the mere grant of that right does not abrogate common law equitable defenses absent clearly expressed legislative intent.191 Thus, the Made Whole Rule of Thiringer in Washington and Barnes in the Ninth Circuit would apply.

188 RCW 41.26.281.189 Id.190 See Gillis v. City of Walla Walla, 94 Wn.2d 193, 616 P.2d 625 (1980); Locke v. City of

Seattle, 162 Wn.2d 474, 172 P.3d 705 (2007); Hansen v. City of Everett, 93 Wn.App. 921, 971 P.2d 111 (1999); and, Lascheid v. City of Kennewick, 137 Wn.App. 633, 154 P.3d 307 (2007).

191 Houle v. School Dist. of Ashland, 267 Wis.2d 708, 671 N.W.2d 395 (2003).

Federal Medical Care Recovery Act

The Federal Medical Care Recovery Act,192 allows the federal government to seek subrogation rights when it has provided medical care to military personnel, veterans and their dependents.193 The government can file its own independent third-party action if no action is commenced within six months by the injured person. With no statutory authority for the payment of attorney fees, one court has held that the common fund doctrine does not apply.194 The Act does not reach UIM benefits.195

192 42 U.S.C. § 2651.193 See 38 U.S.C § 629(a)(1).194 United States v. Nation, 299 F.Supp. 266 (N.D. Okla. 1969).195 Government Employees Ins. Co. v. Andujar, 773 F.Supp. 282 (D. kan. 1991).


SUPPLEMENT TO BOOKLET

Medicare Update

On May 5, 2011, the United States District Court in Arizona entered an Order in Haro v. Sebelius1 enjoining Medicare from demanding payment of past medical expense reimbursement claims with threats of commencing collection action before there is a resolution of any appeal or waiver request. Further, the court enjoined Medicare from demanding that attorneys withhold liability settlement proceeds from their clients pending payment of disputed reimbursement claims.

The first issue was the result of the Medicare collection practices and procedures. Those procedures required that subrogation claims of Medicare be paid within 60 days of the Demand or interest of 11.375% would begin to accrue and collection action could be initiated. This was despite the fact that an appeal was brought disputing the subrogation claim or a request for waiver was being made. The court found that this practice “unnecessarily chills a beneficiary’s right to seek a waiver or to dispute the reimbursement claim and reaches beyond the fiscal objectives and policies behind the 60-day reimbursement provision.”2

This does not mean that no action need be taken nor no payment need be made. The court stated, “[t]he MSP provision that interest will accrue from the notice of the settlement3 upon the final determination of a disputed

1 CV 09-134 TVC DCB.2 Order, p. 16.3 42 U.S.C. § 1395y(b)(2)(B)(ii).

claim4 is strong incentive for beneficiaries to pay what they owe Medicare prior to expiration of the 60-day time period, leaving only the disputed portion of the claim unpaid.”5 Thus, it is anticipated that the prudent practitioner will see that the undisputed portion of the subrogation claim is paid.

The second issue simply followed the first. Having found collection activities were precluded against beneficiaries pending resolution of appeals or waiver requests, the same was true against attorneys. But this left the issue of whether Medicare could preclude attorneys from disbursing the liability recovery proceeds to their clients and whether Medicare can recover the reimbursement claim directly from the attorney.

The court found that the applicable regulations imposed the liability on the third party liability payer, not on the attorney, if the beneficiary did not pay. The court specifically recognized the ethical problems facing attorneys where the client was disputing the Medicare claim while Medicare was threatening the attorney with personal liability. “It violates the rule of diligence and is not in a client’s best interest, especially an elderly and disabled client with a low income, for an attorney to pay an incorrectly calculated reimbursement claim.”6

While this is comfort to the practitioner that there is not personal liability, the language that Medicare can look to the third-party liability payer to make the payment will create

4 45 C.F.R. § 30.18(h)(1).5 Order, p. 16.6 Order, p. 21.


STRITMATTER KESSLER WHELAN COLUCCIO

www.stritmatter.com www.FightSubro.com

Hoquiam Office413 8th Street

Hoquiam, WA 98550Tel: (800) 540-7364Fax: (360) 532-8032

Seattle Office200 Second Avenue West

Seattle, WA 98119Tel: (206) 448-1777Fax: (206) 728-2131

another firestorm from insurers and defense lawyers. They will increase their demands for protection from such claims.

In response to the Haro decision, Medicare has (as of this date) suspended the issuance of the Rights and Responsibilities (RAR) and Demand letters. They say this suspension is temporary to allow review and revision of their letters and procedures.

Ethical Considerations Update

At page 11, I reference a law firm in Seattle filing bar complaints against personal injury lawyers who do not comply with subrogation requests. On May 18, 2011, the WSBA Office of Disciplinary Counsel dismissed such a grievance, citing the fact that the primary duty of the lawyer is to his client. Despite the complainant’s citation of RPC 1.15A(g), the WSBA referenced G.C. Hazard, W.W. Hodes, P.R. Jarvis, The Law of Lawyering (3rd ed.) Vol 1 at Sec. 19.6, and S. Stevens, “The ‘Pushmi-Pullyu’ Resolving Third-Party Claims to Client Funds,” 60 Oregon State Bar Bulletin 25 (September 2000) articles in support of the fact that a subrogation claim is a general creditor claim, and not a perfected security interest or a “matured” legal or equitable claim. This will hopefully put an end to this abusive subrogation tactic.

STRITMATTER KESSLER WHELAN COLUCCIO104

STRITMATTER KESSLER WHELAN COLUCCIO

www.stritmatter.com www.FightSubro.com

Hoquiam Office413 8th Street

Hoquiam, WA 98550Tel: (800) 540-7364Fax: (360) 532-8032

Seattle Office200 Second Avenue West

Seattle, WA 98119Tel: (206) 448-1777Fax: (206) 728-2131

Copyright 2010, Stritmatter Kessler Whelan Coluccio. All Rights Reserved.

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