CURRENT ISSUES WITH LIENS AND SUBROGATION CLAIMS

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1 CURRENT ISSUES WITH LIENS AND SUBROGATION CLAIMS Franklin D. Patterson Patterson, Nuss & Seymour, P.C DTC Parkway, Suite 400 Greenwood Village, CO Phone (303) Fax (303)

2 FRANKLIN D. PATTERSON Frank Patterson, the senior partner at Patterson, Nuss & Seymour, is widely acknowledged as one of the premier trial lawyers in Colorado. He has tried more than 100 jury trials with great success. Mr. Patterson has been lead counsel in numerous high-profile appeals which created or changed Colorado Law. Besides serving in numerous legal organizations, he was elected to prestigious memberships in the American Board of Trial Advocates and the International Associate of Defense Counsel. A sought-after speaker, he makes presentations locally and internationally to lawyers, judges and insurance companies. With the American Board of Trial Advocates, he has met with leaders of the legal profession in Ireland, Portugal, Hong Kong, and New Zealand. In a survey by the Denver Business Journal he was voted Best in the Bar among Personal Injury Litigation/Defense attorneys in Colorado. For several years now he has been selected as a Colorado Super Lawyer. Frank has taught in nationally-recognized Masters in Trial Seminars, and at the National Institute of Trial Advocacy, educating lawyers in the art of trial work. He has also lectured on many occasions to insurance companies and lawyer organizations. He has worked with the Colorado Legislature on bills affecting the legal profession and insurance industry.

3 The demise of PIP after thirty years created a litigation landscape with which most practicing lawyers were unfamiliar. PIP allowed us to avoid most medical expense fights. We might dispute reasonableness or relatedness, but we didn t have to worry about reimbursing the insurer or the health carrier. Settlements did not need to account for the medical expenses. At trial, instruction 11:21 informed the jury that those benefits existed and plaintiff was not entitled to recover them in the suit. The return to a basic tort system now requires all of us, plaintiff and defense, to account for these expenses when we negotiate, settle, or try claims. The focus of this paper is on medical expense claims made by third parties. These third parties include health care providers, hospitals or medical facilities, health insurers, and med pay providers. The paper does not directly address the impact of the new med pay statute. There are three basic types of claims by third parties statutory, contractual, and common law. The first category includes lien rights or reimbursement protection for such parties as Medicare, Medicaid, hospitals, and workers compensation providers. The second category includes health insurers, med pay auto insurers, litigation financiers, and providers with a written agreement. The third category includes all providers or entities providing benefits or treatment without a specific written right to recover from claim proceeds. The existence of any lien or subrogation claim is important because the attorneys must resolve that claim when settling the related personal injury claims. The type of lien or subrogation claim to be resolved is important because of the varying levels of difficulty in resolving them. Chad Hemmat s handout categorizes the types of claims and the risks to attorneys for ignoring or refusing to honor the claims. These third parties have made settlement of bodily injury claims more difficult. First, they significantly reduce the net recovery of most injury claimants. Second, they make liability payments more expensive because they now must included reasonable medical expenses. And third, there has been significant friction between the third party claimants and the parties in the litigation or injury claim. Why the friction between the litigants and the third-party? In part the friction is a natural result of two parties having to split up a limited amount of funds. The injured person and the third-party claimant each wants to maximize his own recovery, which means minimizing or cutting into the other s recovery. Practicing bodily injury attorneys complain that a greater source of friction comes from perceived unreasonableness of the third-parties in their

4 reimbursement demands. This is where we encounter the legal doctrines of common fund and make-whole, and it is where we encounter the tactics proposed by Mr. Hemmat and other plaintiff attorneys to deal with recalcitrant third-parties. As I said at the CDLA conference, plaintiff and defense attorneys should first remember who they represent and what is in their client s best interest. Each attorney has an obligation to do the best job they can for their client, maximizing or minimizing recovery. Even more importantly, however, we have an obligation to resolve the claim. If at all possible we should resolve the claim without creating more litigation or without dragging our clients through protracted litigation. This means both sides need to be pro-active in dealing with third-party claims. We cannot wait until the last minute to deal with them. Too often we find ourselves at a settlement mediation without the participation or knowledge of the third-party. It is not just the plaintiff attorney s responsibility. Defense attorneys owe it to their clients and their insurers to make sure the third-party claim is in position to resolve at the settlement conference. Then, if the third-party becomes the obstacle, the parties can turn to the litigation tactics recommended by Mr. Hemmat. Common Fund and Make-Whole Doctrines What are the areas of dispute when dealing with these third parties? Typically, the fight is primarily over the amount of payment or reimbursement to the third party. It is no surprise they want the most they can get. Some of these third-parties demand full reimbursement regardless of whether that leaves anything for the injured party. As far as these third-party claimants are concerned, they have a statutory or contractual duty to first dollar reimbursement. They will argue that their claim is unaffected by such issues as comparative negligence, litigation risk, or collectability. Colorado has developed some law to address these. The Common Fund doctrine developed in response to third-party claimants who exerted no effort themselves to pursue recovery from a responsible tortfeasor, but then demanded payment once the injured person did so. It seems fundamentally unfair for one party, the injured person, to do all the work and take all the risk only to have their recovery depleted by the donothing party. The Common Fund doctrine in simple terms is if one party does the work to develop a fund that benefits both the injured person and the third-party reimbursement claimant, then the latter must bear a portion of the costs and attorney fees incurred to develop the fund. This is a proper subject for negotiation with the third-party. Take for example a health or med-pay insurer that has a contractual right to recover the benefits it paid to or for the injured person. The insurer will put the injured person, his attorney, and the tortfeasor on notice of its claim for reimbursement. If a settlement between the tortfeasor and injured party can be reached which reasonably compensates the injured person for his injuries, there should be enough to fully

5 reimburse the insurer. If the insurer has not retained counsel or undertaken significant recovery efforts of its own, then it should be willing to reduce its claim to account for some portion of the costs and attorney fees. Difficulties may arise if the insurer resists these reductions. There are times where the insurer has retained its own collection counsel or undertaken its own collection efforts to pursue its claim. It s impossible to outline all the possible permutations here, but suffice to say these are areas of negotiation. It is inevitable that you will be comparing the efforts by each side and how much each contributed to creation of the common fund. The Make-Whole doctrine arises when there are limited liability proceeds. This may be caused by insufficient insurance from the tortfeasor, or by legal issues like comparative fault which reduce recovery. The proceeds offered or paid are less than the amount of damages actually suffered by the injured party. That party and his attorney will argue that he should be allowed to keep all proceeds until he has been made whole for his losses. Only then should the third-party claimant be allowed to dip into the recovery. This is an area where the type of claim statutory, contractual or common law may be important. While Colorado has recognized the make-whole doctrine, there remains a question how it is to be applied to the various categories of claims. It is possible that different rules could apply to the different categories. Conceivably, statutory and contractual claims would have a better chance than simple common law claims. What happens when you can t get the third party to agree to either of these? Again, we assume that reasonable efforts at negotiating have been made. If resolution is simply impossible, then you may resort to the litigation tactics mentioned by Mr. Hemmat. These include naming the third party as an indispensable party, or filing a separate interpleader action. If we wait until the settlement conference to realize that resolution with the third party is impossible, it may be too late to add them in the litigation. If adding them as a party is still possible, how will that impact your client s case? Will there be any evidentiary concerns? Will this make the plaintiff more sympathetic, or will it make a higher damage award more likely? These are but a few of the considerations before adding a party. Some defense attorneys like the interpleader idea, mainly because the plaintiff lawyer does the work. If you can get a full release with indemnification protection for your client, then it might be a good idea to let plaintiff counsel go off and fight the third-party. But there are considerations here as well. Will the interpleader name your client as an interested person? Who will represent your client in that suit? Do you as the defense attorney have an obligation to protect the third-party s claim while settling the underlying suit? What if the third-party sues you first, alleging that you somehow failed to preserve its rights? There are no failsafe recommendations. As with all personal injury litigation the individual facts of each case will guide you in resolving the underlying claim along with any third-party claims. The following are a few ideas that may be of help in most cases.

6 Ideas for Handling Tort Claims with Third-Party Claims for Lien or Subrogation 1. Don t rely on plaintiff counsel to do all the work on lien or subrogation claims. 2. Find out if there is a third-party claim out there. Determine if you and/or the insurer have been formally put on notice of a claim. 3. Find out what kind of claim it is statutory, contractual, or common law. Figure out if it is valid or preserved properly 4. Determine if you can or should contact the third-party about the claim and its resolution. 5. Involve the third-party in settlement discussions early if possible. 6. Identify defenses to the claim. They might help you settle the case favorably for your client. 7. Determine whether there is any benefit to adding the third-party to your litigation. 8. Involve the third-party in the settlement conference. 9. Review your standard release forms to see if they protect you and your client from thirdparty claim litigation.