Attorneys for plaintiffs and defendants must be aware of claims by health insurers, automobile medical payments insurers, workers compensation insurers, federal, state and county governmental agencies, employers, employer-sponsored health plans and union health and welfare funds based on subrogation, derivation, or assignment in all personal injury actions. The vast majority of all personal injury cases involve such claims. Every effort must be made to resolve these claims in conjunction with the principal plaintiff’s claim. If they are ignored, they may come back to haunt the parties and attorneys, both as a liability and potential ethical rules infraction. See Southern Council of Industrial Workers v. Ford, 83 F.3d 966 (8th Cir. 1996)(district court should fashion a remedy either under federal common law or state law for attorney’s failure to honor ERISA plan’s subrogation right, but attorney was not a plan fiduciary under ERISA law); Hotel Employees & Restaurant Employees Int’l Union Welfare Fund v. Gentner, 50 F.3d 719 (9th Cir. 1995)(attorney is liable for distributing settlement proceeds to a client without reimbursing an ERISA fund).
This outline will attempt to boil the most frequently litigated issues down to a workable set of fundamental rules, with known exceptions, by highlighting the main cases. There are many black letter rules, but they are often swallowed by their multiple exceptions. This area of the law is in a constant state of flux, and is ripe for new developments. Simply put, there are no right answers to many of the questions which arise. Due diligence and imagination are required, but still may not be sufficient to prevail.
II. THE COLLATERAL SOURCE RULE.
A tort feasor’s liability for the plaintiff’s damages shall not be reduced by the amount of benefits received by a victim from any other sources. Voge v. Anderson, 181 Wis.2d 726, 512 N.W.2d 749 (1994)(waiver of subrogation by UIM carrier did not inure to benefit of tort feasor as an offset to liability for damages). This is a rule of damages as well as a rule of evidence. The result of the rule is that a tort victim sometimes has a multiple recovery of some item of damages, such as medical expenses and lost earnings. Lambert v. Wrensch, 135 Wis.2d 105, 399 N.W.2d 369 (1987); Rixmann v. Somerset Public Schools, 83 Wis.2d 571, 266 N.W.2d 326 (1978); Thoreson v. Milwaukee & Suburban Transport Corp., 56 Wis.2d 231, 201 N.W.2d 745 (1972); McLaughlin v. Chicago, Milwaukee, St. P. & P. R. Co., 31 Wis.2d 378, 143 N.W.2d 32 (1966); Anderson v. Garber, 160 Wis.2d 389, 466 N.W.2d 221 (Ct.App.1991); American Standard Ins. Co. of Wis. v. Cleveland, 124 Wis.2d 258, 369 N.W.2d 168 (Ct.App.1985).
III. SUBROGATION THEORY.
The collateral source rule is of no benefit to a tort victim if there exists a subrogation right possessed by a person who paid part of the victim’s losses. The subrogation lien prevents the victim from making a double recovery. The party who holds the subrogation claim stands in the shoes of the victim in seeking reimbursement from the tort feasor. Lambert v. Wrensch, 135 Wis.2d 105, 399 N.W.2d 369 (1987); Group Health Co-op v. Hartland Cicero Mutual Ins. Co., 164 Wis.2d 632, 476 N.W.2d 302 (Ct.App.1991). Federal or state statutes, contracts, or common law create subrogation rights.
IV. STATUTORY SUBROGATION.
42 U.S.C. 1395y(b)(2) provides:
In general. Payment under this title may not be made, except as provided in subparagraph (B), with respect to any item or service to the extent that—
(ii) payment has been made or can reasonably be expected to be made promptly (as determined in accordance with regulations) under a workmen’s compensation law or plan of the United States or a State or under an automobile or liability insurance policy or plan (including a self-insured plan) or under no fault insurance.
(B) Conditional payment. (i) Primary plans. Any payment under this title with respect to any item or service to which subparagraph (A) applies shall be conditioned on reimbursement to the appropriate Trust Fund established by this title when notice or other information is received that payment for such item or service has been or could be made under such subparagraph.
(ii) Action by United States. In order to recover payment under this title for such an item or service, the United States may bring an action against any entity which is required or responsible under this subsection to pay with respect to such item or service . . . .
(iii) The United States shall be subrogated (to the extent of payment made under this title for such an item or service) to any right under this subsection of an individual or any other entity to payment with respect to such item or service under a primary plan.
Medicare Part A allows recovery of amounts paid to hospitals and nursing homes. Medicare Part B allows recovery of amounts paid to doctors. The Health Care Financing Administration is the real party in interest, although Donna Shalala, as administrator for the Department of Health and Social Services, should be named as the plaintiff in Wisconsin, and the United States Attorneys offices for the Eastern and Western District Courts will accept process.
Medicare regulations are found in 42 C.F.R. 411.20 et. seq.
42 C.F.R. 411.24 provides:
If a Medicare conditional payment is made, the following rules apply:
(b) Right to initiate recovery. HCFA may initiate recovery as soon as it learns that payment has been made or could be made under workers’ compensation, any liability or no-fault insurance, or an employer group health plan.
(c) Amount of recovery. HCFA may recover an amount equal to the Medicare payment or the amount payable by the third party, which ever is less.
(d) Methods of recovery. HCFA may recover by direct collection or by offset against any monies HCFA owes the entity responsible for refunding the conditional payment.
(e) Recovery from third parties. HCFA has a direct right of action to recover from any entity responsible for making primary payment. This includes an employer, an insurance carrier, plan, or program, and a third party administrator.
(g) Recovery from parties that receive third party payments. HCFA has a right of action to recover its payments from any entity, including a beneficiary, provider supplier, physician, attorney, State agency or private insurer that has received a third party payment [emphasis added].
The federal government is authorized by regulations to sue any attorney who knowingly disregards a Medicare right of reimbursement. 42 C.F.R. 411.24. There is a regulatory formula for reducing the lien, which basically discounts the Medicare lien by the same portion of the gross recovery as the plaintiff’s recovery is reduced by attorney’s fees and disbursements. 42 C.F.R. 411.37. E.g., if fees and disbursements are 35% of the gross recovery, Medicare will accept 65% of its lien.
B. Federal Medical Care Recovery Act:
See Allen v. United States, 668 F. Supp. 1242 (W.D. Wis. 1987). The federal statute, 42 U.S.C. 2651(a) provides:
In any case in which the United States is authorized or required by law to furnish hospital, medical, surgical, or dental care and treatment (including prostheses and medical appliances) to a person who is injured or suffers a disease, after the effective date of this Act, under circumstances creating a tort liability upon some third person (other than or in addition to the United States and except employers of seamen treated under the provisions of section 322 of the Act of July 1, 1944 (58 Stat. 696), as amended (42 U.S.C. 249) to pay damages therefore, the United States shall have a right to recover from said third person the reasonable value of the care and treatment so furnished or to be furnished and shall, as to this right be subrogated to any right or claim that the injured or diseased person, his guardian, personal representative, estate, dependents, or survivors has against such third person to the extent of the reasonable value of the care and treatment so furnished or to be furnished . . .
C. Employee Retirement Income Security Act:
a.k.a. ERISA: 29 U.S.C. 1001 et seq. ERISA is the most dreaded and inflexible statute for claims attorneys. See discussion below.
D. Medicaid and Medical Assistance:
Perkins v. Utnehmer, 122 Wis.2d 497, 361 N.W.2d 739 (Ct.App.1984); Waukesha County v. Johnson, 107 Wis.2d 155, 320 N.W.2d 155 (Ct.App.1982). Sec. 49.89 Wis. Stats., formerly sec. 49.65 provides:
(2) Subrogation. The department of health and family services, the department of industry, labor and job development, a county or an elected tribal governing body that provides any public assistance under this chapter or under s .253.05 as a result of the occurrence of an injury, sickness or death that creates a claim or cause of action, whether in tort or contract, on the part of a public assistance recipient or beneficiary or the estate of a recipient or beneficiary against a 3rd party, including an insurer, is subrogated to the rights of the recipient, beneficiary or estate and may make a claim or maintain an action or intervene in a claim or action by the recipient, beneficiary or estate against the 3rd party.
(5) Recovery; how computed. Reasonable costs of collection including attorney fees shall be deducted first. The amount of assistance granted as a result of the occurrence of the injury, sickness or death shall be deducted next, and the remainder shall be paid to the public assistance recipient or other party entitled to payment.
E. Automobile Medical Expense, Uninsured and Underinsured Motorist Coverage:
Sec. 632.32(4)(a)-(b) Wis. Stats., creates a statutory right of subrogation for medical expenses, uninsured and underinsured motorist payments.
F. Worker’s Compensation Third Party Claims:
5 U.S.C. 8131-32 (federal employees); Sec. 102.29 Wis. Stats. (Wisconsin public and private employees). The formula provides that costs of collection (attorneys’ fees and costs are deducted first; out of the balance remaining, the first one third goes to the injured employee; out of the balance remaining, the worker’s compensation insurer may recover its payments; if there is a balance remaining, it goes to the employee or is used as a cushion against future worker’s compensation liability.
G. Crime Victims Compensation Act:
Hamed v. Milwaukee County, 108 Wis.2d 257, 321 N.W.2d 199 (1982); Bruner v. Kops, 105 Wis.2d 614, 314 N.W.2d 892 (Ct. App.1981). Sec. 949.15 Wis. Stats. creates a statutory right of subrogation in the department of workforce development against a person responsible for the injury or death of a crime victim who receives a compensation award.
V. CONVENTIONAL (CONTRACTUAL) SUBROGATION.
The vast majority of group health insurance policies and plans, such as Blue Cross & Blue Shield, Wisconsin Physicians Service, Wausau Insurance and Prudential Insurance have express subrogation clauses, which give the insurer a right to sue either the tort feasor or the insured victim for reimbursement of any amounts paid for medical expenses in the event that the victim makes a recovery from the tort feasor. Associated Hospital Services v. Milwaukee Automobile Mut. Ins. Co., 33 Wis.2d 170, 147 N.W.2d 225 (1967). Policies and plans that do not provide express subrogation rights may create an implied right of subrogation, as construed by the courts. Cunningham v. Metropolitan Life Ins. Co., 121 Wis.2d 437, 360 N.W.2d 33 (1985).
VI. COMMON LAW (EQUITABLE) SUBROGATION – THE INDEMNITY VERSUS INVESTMENT CONTRACT DILEMMA.
Sometimes a group health insurance contract does not expressly provide for subrogation. If it is deemed to be an indemnity contract, rather than an investment contract, subrogation rights will be recognized under the common law doctrine of equitable subrogation. If it is deemed to be an investment contract, then subrogation rights will not be recognized. It is extremely difficult to determine whether the contract is one of indemnity or investment. Traditionally, property insurance has been considered indemnity insurance, while accident and life insurance have been considered investment insurance. Health and disability insurance could be either. Cunningham v. Metropolitan Life Ins. Co., 121 Wis.2d 437, 360 N.W.2d 33 (1985); Horace Mann Ins. Co. v. Wauwatosa Board of Education, 88 Wis.2d 385, 276 N.W.2d 761 (1979); Heifetz v. Johnson, 61 Wis.2d 111, 211 N.W.2d 834 (1973); Patitucci v. Gerhardt, 206 Wis. 358, 240 N.W. 385 (1932); Gatzweiler v. Milwaukee Electric Ry. & Light Co., 136 Wis. 34, 116 N.W. 638 (1908).
VII. THE MAKE-WHOLE DOCTRINE.
A. In General:
Whenever a tort victim is not made whole by recovery of all elements of damages from the tort feasor or the liability insurance proceeds, any contractual and common law subrogated parties are not entitled to reimbursement. Ives v. Coopertools, 208 Wis.2d 55, 559 N.W.2d 571 (1997); Sorge v. National Car Rental System, 182 Wis.2d 52, 512 N.W.2d 505 (1994)(contributory negligence may be taken into account to determine whether the plaintiff has been made whole; and if the net damages are collectible from the tortfeasor, then subrogation is permitted, but subrogee stands in subrogor’s shoes, and takes a pro tanto discount for contributory negligence); Schulte v. Frazin, 176 Wis.2d 622, 500 N.W.2d 305 (1993)(when victim settles with tort feasor without resolving subrogation claim, but indemnifies the tort feasor, and it is determined at a Rimes hearing between the victim and the subrogated party that the victim has not been made whole, the subrogated party is not entitled to reimbursement); Rimes v. State Farm Mut. Auto. Ins. Co., 106 Wis.2d 263, 316 N.W.2d 348 (1982)(automobile medical payments carrier not entitled to recoup its payments from liability insurer of tort feasor because insured had settled claim with liability insurers without being made whole); Garrity v. Rural Mut. Ins. Co., 77 Wis.2d 537, 253 N.W.2d 512 (1977)(first party fire insurer not entitled to recoup its payments from minimum limits liability policy it had sold to tort feasor because farmer whose barn had burned down had uninsured damages exceeding liability limits).
B. The Latest Twist: What is the meaning of Ives v. Coopertools?
In this case, the plaintiff became paralyzed when he fell out of a tree stand. He sued a component parts manufacturer of the tree stand, and named his employer’s non-ERISA insured health plan as a party. The parties stipulated that the damages were 1.5 million dollars. The health plan had paid $132,292 in benefits. Because of the risk of a jury finding the plaintiff more than 50% contributorily negligent, and other trial strategies, including difficulty of proof, corporate successor liability, and the possible absence of negligence by any party, the plaintiff settled with the tort feasor for $261,250. After a Rimes hearing, the Oneida County Circuit Court held that the plaintiff had not been made whole, and therefore the health plan was not entitled to subrogation. The Court of Appeals vacated the order and remanded for a specific finding of the plaintiff’s contributory negligence, holding that the plan should share in the recovery pro-rata with the plaintiff. Ives v. Coopertools, 197 Wis.2d 937, 541 N.W.2d 247 (Ct.App.1995). The Court of Appeals felt that an insured is made whole whenever he recovers his total damages discounted by his percentage of contributory negligence, even if that percentage is greater than 50%. The Supreme Court, in a decision with a unanimous vote on the outcome but a 3-3 vote on the reasoning, reversed and reinstated the order of the Circuit Court, holding that subrogation would not be permitted simply because the plaintiff had not been made whole. Ives v. Coopertools, Div. of Cooper Industries, Inc., 208 Wis.2d 55, 559 N.W.2d 571 (1997). Because of the split vote on rationale, neither of the concurring opinions is a majority opinion, or carries any precedential weight. If the Geske opinion is to be followed, then Sorge v. National Car Rental System, Inc., 182 Wis.2d 52, 512 N.W.2d 505 (1994) is disavowed, and the plaintiff can be considered not to have been made whole any time that contributory negligence reduces his recovery, no matter how slightly! If the Steinmetz opinion is to be followed, then Sorge is still good law, and the plaintiff is deemed to have been made whole, so that subrogation is permitted, if the plaintiff’s total damages discounted by contributory negligence are collectible from the tort feasor.
VIII. THE MAKE-WHOLE DOCTRINE DOES NOT APPLY TO MOST STATUTORY SUBROGATION
A. ERISA PREEMPTION.
1. In General:
Uninsured, self-funded group health plans maintained by multistate employers are governed by ERISA, and are not subject to the state statutes or common law rules on subrogation, such as the make-whole doctrine. The seminal case is F.M.C. Corporation v. Holliday, 498 U.S. 52, 111 S.Ct. 403, 112 L.Ed.2d 356 (1990). An ERISA self-funded plan beneficiary was seriously injured in a motor vehicle accident. The plan paid over $200,000 of the medical expenses. The victim recovered the liability limits of $50,000 from the tortfeasor. In the plan’s suit for reimbursement, the United States Supreme Court held that a Pennsylvania statute which barred subrogation by group health plans against the proceeds of automobile liability insurance settlements was preempted by ERISA, 29 U.S.C. 1001 et seq. The plan was allowed to recoup its payments.
The Holliday case has been followed many times. It stands for the proposition that under circumstances where ERISA applies, any conflicting state statutory or common law rules are preempted. See also Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 105 S.Ct. 2380, 85 L.Ed.2d 728 (1985), in which the United States Supreme Court held that uninsured employee benefit plans are exempt from state regulations and are governed exclusively by applicable federal law.
In McGinnis v. Provident Life & Accid. Life Co., 21 F.3d 586 (4th Cir. 1994), the court held that ERISA preempts the operation of North Carolina’s wrongful death statute limiting an estate’s liability for medical expenses to $1,500, thereby allowing a health plan to recover full reimbursement of medical expenses paid for the tort victim against the proceeds of his estate’s recovery from a drunk driver and the victim’s underinsured motorist carrier. In Electro-Mechanical Corp. v. Ogan, 9 F.3d 445 (6th Cir. 1993), the court held that an ERISA plan preempts a Tennessee statute barring recovery from health care providers in a malpractice case of medical expenses covered by a group health plan, thereby allowing the plan to subrogate against victim’s total recovery of settlement proceeds.
Wisconsin appellate cases have consistently held that ERISA preempts Wisconsin’s subrogation law and allows recovery by a self-funded health plan without proving that the injured person has been made whole. Newport News Shipbuilding Co. v. T.H.E. Ins. Co., 187 Wis.2d 363, 523 N.W.2d 270 (Ct. App. 1994); Petro v. D.W.G. Corp., 148 Wis.2d 725, 436 N.W.2d 875 (Ct. App. 1989).
2. Is There A Self-Funded Plan ?
The first inquiry is whether the plan is truly uninsured and self-funded. Correspondence with the plan trustees or administrator, and discovery of the plan documents, not just a summary plan description or booklet, must be undertaken in full in order to verify uninsured and self-funded status. Plan language must be reviewed. Some ERISA plans contain make-whole provisions, or provide that state law controls questions of interpretation, or are silent with respect to discretion to interpret the plan.
Plans covering employees of governmental units or their instrumentalities are not governed by ERISA, but whether a particular plan is or is not private can be hotly disputed. See Shannon v. Shannon, 965 F.2d 542 (7th Cir. 1992)(plan covering employees of West Allis Memorial Hospital, a non-profit, corporate lessee and operator of city-owned hospital facility, held governed by ERISA).
Primary insurance coverage will take the plan out of ERISA, and make it subject to state law. However, the federal preemption rule applies to those plans which only have so called “stop-loss” insurance as a major medical umbrella. See Ramsey County Medical Center, Inc. v. Breault, 189 Wis.269, 525 N.W.2d 321 (Ct. App. 1994)(self-funded plan entitled to first dollar subrogation even though stop-loss insurance coverage existed for catastrophic losses payable by the plan above a prescribed annual limit).
3. Discretion to Interpret Plan:
Many plans do not address the situation where a beneficiary has a tort claim which cannot be fully compensated from the tort feasor’s liability insurance, and there is a conflict between the plan’s right of subrogation or reimbursement and the beneficiary as they compete for limited tort settlement proceeds. Most modern plans give the fiduciary discretion to interpret the plan. Under such circumstances, the plan is often interpreted to give the plan first dollar priority in the settlement proceeds, without regard to whether the beneficiary was made whole, and sometimes without regard to the beneficiary’s contributory negligence. The attorneys for both sides of the tort dispute should review the plan language case as soon as possible. The actual plan documents, and not merely the beneficiary’s handbook or pamphlet, should be obtained and scrutinized. From the perspective of claimant’s counsel, certain plan language may dictate that the case not be accepted at all. From the perspective of defense counsel, a close review may determine who gets a large portion, if not all the money.
Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 109 S.Ct. 948, 103 L.Ed.2d 80 (1989), is the seminal case holding that a deferential standard of review is appropriate in cases where the plan fiduciaries have discretionary authority to determine eligibility for benefits or to construe the terms of the plan. In such cases, the court will only review the designation of priorities by plan fiduciaries under an abuse of discretion standard.
Land v. Chicago Truck Drivers, Helpers And Warehouse Workers Union Health and Welfare Fund, 35 F.3d 509 (7th Cir. 1994) held that ERISA did not unconstitutionally delegate to private welfare-benefit plans authority to preempt state law in providing for first dollar recovery of subrogation claims in contravention of make-whole rule.
The correctness of factual findings by a plan fiduciary in denying benefits is limited to a review by the court of whether the findings were arbitrary and capricious, so long as interpretation of plan language is not in dispute. Siska v. Travelers, 161 Wis.2d 14, 467 N.W.2d 174 (Ct. App. 1991).
4. Abuse of Discretion:
Often claimants ask their lawyers if their ERISA plan will have to continue to pay medical expenses after the settlement and reimbursement. The easy answer has traditionally been in the affirmative. There is some support for that position. In Davis v. NEPCO Employees Mut. Benefit Ass’n, 51 F.3d 752 (7th Cir. 1995), the court held that if an ERISA plan participant and the plan separately provide a release to a tort feasor in exchange for a settlement, without explicitly allocating any portion of the settlement for future medical expenses, the plan must continue to pay such expenses after the settlement. However, this case is notice to counsel that the plan may do the unexpected and deny future benefits at some point. It is not difficult to envision an aggressive plan fiduciary interpreting the plan to deny coverage for future medical expenses related to the original injury. That eventuality occurred in the case below.
In Harris Trust And Savings Bank v. Provident Life & Accid. Ins. Co., 57 F.3d 608 (7th Cir. 1995), an ERISA plan paid over $400,000 in medical expenses for a quadriplegic beneficiary, and was reimbursed when the beneficiary settled a tort case for $7,000,000. A successor plan which contained an exclusion for expenses arising out of acts of third parties continued to pay over $290,000 of additional medical expenses for several more years until it learned of the settlement, and then sought to recover amounts paid and to deny additional benefits. The Seventh Circuit Court of Appeals let stand the plan fiduciary’s interpretation that the plan was entitled to reimbursement either under federal common law of restitution or unjust enrichment.
In Cutting v. Jerome Foods, Inc., 993 F.2d 1293 (7th Cir. 1993), cert. denied, 510 U.S. 916, 114 S.Ct. 308, 126 L.Ed.2d 255 (1993) the Seventh Circuit Court of Appeals held that where an ERISA plan granted an employer discretion to interpret it, ERISA preempted the common law of subrogation and barred the court from creating federal common law in line with Rimes.
Our state courts take a similar view of ERISA. In Newport News Shipbuilding Co. v. T.H.E. Insurance Co., 187 Wis.2d 363, 523 N.W.2d 270 (Ct. App.1994), the court held that an ERISA plan vested discretion in the trustees to interpret the plan, and since the plan was interpreted as granting first dollar priority in a subrogation claim, the state make-whole rule was trumped. See also Siska v. Travelers, 161 Wis.2d 14, 467 N.W.174 (Ct. App.1991), cert. denied, 502 U.S. 847 (1991)(ERISA plan giving authority to plan administrator to construe plan provisions is reviewable only by an arbitrary and capricious standard).
Court review is de novo in the event that the plan does not give the trustees or administrator discretion to interpret the plan language. Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 109 S.Ct. 948, 103 L.Ed.2d 80 (1989); Fuller v. CBT Corp., 905 F.2d 1055 (7th Cir. 1990).
5. Default Application of Common Law Rules:
If the plan does not contain rules of priority for subrogation or reimbursement, and the fiduciary neither has the expressed nor implied right to interpret the plan, the parties must litigate whether a federal common law or state common law rule should be adopted by default to resolve the issue.
Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987), suggested that federal courts may create federal common law where an ERISA plan is silent on the designation of priorities.
In Sunbeam-Oster Co. v. Whitehurst, 102 F.3d 1368 (5th Cir. 1996) the court said that it had serious doubts whether it would ever approve or adopt the make-whole rule as the third circuit’s default rule for the priority of recovery in reimbursement or subrogation between an ERISA plan and its participant or beneficiary. Accord, Serembus on Behalf of UIU v. Mathwig, 817 F. Supp 1414 (E.D. Wis. 1992), holding that Wisconsin’s make-whole subrogation rule would not be adopted as federal common law for self-funded employee plans subject to ERISA.
However, see Sanders v. Scheideler, 816 F.Supp. 1338 (W.D. Wis. 1993), aff’d by unpublished order, 25 F.3rd 1053 (7th Cir. 1994), holding that where a self-funded plan failed to assign priority rules to third party proceeds of settlement, the common law make-whole doctrine would be applied. Accord, Schultz v. NEPCO Employees Mut. Benefit Ass’n, Inc., 190 Wis.2d 742, 528 N.W.2d 441 (Ct.App. 1994)(federal common law make-whole rule applies to ERISA plan which fails to set forth priority rules for third party settlements or to provide fiduciaries with discretion to construe the plan); Cagle v. Bruner, 112 F.3d 1510 (11th Cir. 1997)(make-whole rule applies where ERISA plan does not expressly disavow it); Barnes v. Independent Automobile Dealers Ass’n of Cal. Health & Benefit Plan, 64 F.3d 1389 (9th Cir. 1994)(make-whole rule should be applied as the default federal common law rule in the absence of ERISA plan language defining priority rules).
B. Other Statutory Preemption of Make-Whole Doctrine:
1. Medical Assistance:
Coplein v. DHSS, 119 Wis.2d 52, 349 N.W.2d 92 (Ct.App.1984)(make-whole doctrine does not apply to bar Medicaid lien); Waukesha County v. Johnson, 107 Wis.2d 155, 320 N.W.2d 1 (Ct.App.1982)(reimbursement formula set forth in sec. 49.65 Wis. Stats. permitted county to be reimbursed for medical assistance payments from the proceeds of automobile accident settlement despite the fact that the recipients had not been fully compensated).
2. Workers Compensation Preemption:
Martinez v. Ashland Oil, 132 Wis.2d 11, 390 N.W.2d 72 (Ct. App. 1986)(make-whole doctrine does not apply to bar worker’s compensation lien pursuant to sec. 102.29 Wis. Stats.).
3. State Employees’ Health Plans:
A contrary result was reached in Leonard v. Dusek, 184 Wis.2d 267, 516 N.W.2d 453 (Ct. App.1994), holding that Wisconsin’s insurance subrogation law permitting a subrogated insurer to be reimbursed only if the insured has been made whole does apply to the Wisconsin state employee self-funded health plan governed by chapter 40, Wis. Stats.
IX. SUBROGATION AGAINST THE PROCEEDS OF UNINSURED AND UNDERINSURED MOTORISTINSURANCE.
The language of the contract will control whether a health insurer may subrogate against a UM or UIM carrier. In Employers Health Ins. Co. v. General Cas. Co. 161 Wis.2d 937, 469 N.2d 172 (1991) the supreme court held that language in a health insurance policy providing for subrogation against any “responsible third party” was insufficient to allow subrogation against the proceeds of a UM policy, because the UM carrier was not an insurer of the tort feasor. However, soon thereafter the court of appeals decided Dailey v. Secura Ins., 164 Wis.2d 14, 467 N.W.2d 299 (Ct. App. 1991), holding that language in a health insurance policy providing for subrogation against “any party who may be liable” was broad enough to include a UM carrier. Accord, Wendy’s International, Inc., v. Karsko, 94 F.3d 1010 (6th Cir. 1996)(ERISA plan providing that it must be reimbursed if beneficiary “recovers monies from a third party . . . on account of such injury” can reasonably be construed, under arbitrary and capricious standard, to permit subrogation against UM policy).
A subrogated health insurer may be considered an “injured party” under the terms of an underinsured motorist policy, so that the lien must be enforced. Gurney v. Heritage Mutual Ins. Co., 183 Wis.2d 270, 515 N.W.2d 526 (Ct. App.1994). The court of appeals has held that language in an uninsured motorist endorsement which attempts to exclude claims by a subrogated health insurer violates the public policy of the mandatory UM coverage statute, sec. 632.32(4)(a) Wis. Stats. (1991-92). WEA Insurance Corp. v. Freiheit, 190 Wis.2d 111, 527 N.W.2d 363 (Ct. App.1994). However, even though underinsured motorist coverage is not required by statute, the language in an underinsured motorist endorsement which attempts to exclude claims by a subrogated health insurer may be ineffective to bar subrogation, if the health insurance contract prohibits the insured from impairing the health insurer’s subrogation rights. Kulekowskis v. Bankers Life and Cas. Co., 563 N.W.2d 533 (Ct.App.1997);Demmer v. American Family Mut. Ins. Co., 200 Wis.2d 94, 546 N.W.2d 169 (Ct. App.1996).
A worker’s compensation insurer may not seek subrogation under sec. 102.29 Wis. Stats., against an uninsured motorist carrier. Berna-Mork v. Jones, 165 Wis.2d 661, 478 N.W.2d 301 (Ct. App.1991), but a reducing clause in an uninsured motorist policy is now valid, pursuant to the 1995 amendments to sec. 632.32(5) Wis. Stats., changing the law of Niemann v. Badger Mut. Ins. Co., 143 Wis.2d 73, 420 N.W.2d 378 (Ct. App.1988).
X. A SUBROGATED PARTY HAS A CLAIM INDEPENDENT FROM THAT OF THE TORT VICTIM.
A subrogated party may sue the tort feasor or victim directly, whether or not the victim brings suit against the tort feasor, and its claim cannot be discharged without its consent. Muchow v. Goding, 198 Wis.2d 609, 544 N.W.2d 218 (Ct.App.1990); Blue Cross & Blue Shield United of Wisconsin v. Fireman’s Fund, 140 Wis.2d 544, 411 N.W.2d 133 (1987)(subrogated insurer allowed to sue tort feasor after victim had already settled case with tortfeasor), overruled in part by Schulte v. Frazin, 176 Wis.2d 622, 500 N.W.2d 305 (1993); Mutual Service Cas. Co. v. American Family Ins. Co., 140 Wis.2d 555, 410 N.W.2d 582 (1987)(tortfeasor’s insurer could not walk away from case by sending one check payable to victim and subrogated insurer, without getting all parties to agree to division and obtaining a release by all); Valley Forge Ins. Co. v. Home Mut. Ins. Co. 133 Wis.2d 364, 396 N.W.2d 348 (Ct.App.1986)(property damage claim by first party carrier against tort feasor-anomalous holding that make-whole rule barred recovery because victim had uncompensated personal injury damages).
XI. BURDEN OF PROOF.
The party seeking subrogation must allege and prove the basis for the claim, but if the injured plaintiff fails to do so and the tort feasor seeks to deny recovery for amounts subject to a lien, the defendant has the burden of proof to show that a party is subrogated. Jindra v. Diederich Flooring, 181 Wis.2d 579, 511 N.W.2d 855 (1994); Lambert v. Wrensch, 139 Wis.2d 105, 399 N.W.2d 369 (1987); Cunningham v. Metropolitan Life Ins. Co., 121 Wis.2d 437, 360 N.W.2d 33 (1985); Rixmann v. Somerset Public Schools, 83 Wis.2d 571, 266 N.W.2d 326 (1978); Karl v. Employers Ins. of Wausau, 78 Wis.2d 284, 254 N.W.2d 255 (1978); Gordon v. Wisconsin Health Org. Ins. Corp., 181 Wis.2d 515, 510 N.W.2d 832 (Ct.App. 1993)(party seeking subrogation must plead in complaint the basis for its right to subrogation); Leonard v. Dusek, 184 Wis.2d 267, 516 N.W.2d 453 (Ct. App.1984)(right to a Rimes hearing is waived if not requested by either party).
A subrogated party may lose its rights if it is named as a party and declines to exercise one of the following options: to participate in the prosecution of the action, to agree to have its interest represented by the party who caused the joinder, or to move for dismissal. Buchanan v. General Casualty Co., 191 Wis.2d 1, 528 N.W.2d 457 (Ct.App.1995)(subrogated insurer waives claim if it unilaterally ignores pretrial orders to participate or fails to obtain leave not to participate); Sampson v. Logue, 184 Wis.2d 20, 515 N.W.2d 917 (Ct.App.1994)(subrogated party may be liable for costs if it elects to be bound by the judgment and principal plaintiff loses); Radloff v. General Cas. Co., 147 Wis.2d 14, 432 N.W.2d 597 (Ct.App.1988)(subrogated insurer lost its claim by failing to exercise one of the three options in sec. 803.03(2)(b), Stats.- to participate, to agree to have its interest represent by the party who caused joinder, or to move for dismissal). The proper procedure by a subrogated party to follow is to file pleadings asserting its interest, obtain admissions to requests to admit the reasonableness and necessity of its payments, and participate in the litigation to the extent required by the trial court. Ryan v. Sigmund, 191 Wis.2d. 178, 528 N.W.2d 43 (Ct.App.1995). In the event that the injured victim and the tort feasor settle, the subrogated party should request a Rimes hearing to establish whether the victim was made whole. Ives v. Coopertools, Div. of Cooper Industries, Inc., 208 Wis.2d 55, 559 N.W.2d 571 (1997); Schulte v. Frazin, 176 Wis.2d 622, 500 N.W.2d 305 (1993).
XII. STATUTE OF LIMITATIONS.
The statute of limitations is tolled for all parts of the entire claim when the principal claim is filed, and all derivative claims relate back, but joinder of the party possessing a claim based on subrogation, derivation or assignment is required. Sec. 803.01 and 803.03 Wis. Stats.; Anderson v. Garber, 160 Wis.2d 389, 466 N.W.2d 221 (Ct.App.1991); Bruner v. Kops, 105 Wis.2d 614, 314 N.W.2d 892 (Ct.App.1981). The confusing discussion of statute of limitations issues in Lambert v. Wrensch 135 Wis.2d 105, 399 N.W.2d 369 (1987) and Heifetz v. Johnson, 61 Wis.2d 111, 211 N.W.2d 834 ((1973) may be irreconcilable with holdings of the court of appeals, but seems to be ignored in most cases.
The pendency of an action by an insured does not toll the statute of limitations for any unjoined, independent subrogated claim arising out of the same occurrence. Aetna Cas. & Surety Co. v. Owen, 191 Wis.2d 745, 530 N.W.2d 51 (Ct.App.1995)(fire insurer’s action against tort feasor filed beyond the expiration of the statute of limitations held barred, despite insured’s prior action for damages not covered by policy, because insured settled claim before insurer commenced its action).
XIII. ATTORNEY’S FEES AND COSTS.
Even when the subrogated party does not request that counsel for the principal plaintiff also represent its interests, counsel may attempt to seek fees and disbursements from the subrogated party. Attorney’s fees and costs usually cannot be collected from the subrogated party, unless agreed upon in advance or the “fund doctrine” applies. . State Farm Mut. Auto. Ins. Co. v. Geline, 48 Wis.2d 290, 179 N.W.2d 815 (1970)(fund doctrine requires “res” earned exclusively by victim’s attorney, notice to subrogee of action and fee claim, and no joinder or participation). See also sec. 803.03(2)(b) Stats.
In the event that the subrogated party requests counsel for the victim to represent its interests, counsel should beware of the possibility of a conflict of interest. If there is any question about the victim’s ability to be made whole by the amount of the tort feasor’s insurance coverage, dual representation should be declined. There is by definition a conflict of interest in such situations, because the parties must take opposing positions on the make-whole issue, and there will either have to be a negotiated agreement or a Rimes hearing.
There may also be a conflict of interest for counsel to represent a tort victim and an ERISA plan in most cases. The ERISA plan may not be subject to defenses such as contributory negligence.
Attorney’s fees are not considered in determining whether a party has been made whole. Oakley v. Wisconsin Fireman’s Fund, 162 Wis.2d 821, 470 N.W.2d 882 (1991)(attorney’s fees not an element of damages).
The Illinois Supreme Court recently allowed the offset of a tort victim’s attorney’s fees and costs against an ERISA plan trustee’s request for medical expense subrogation out of a tort recovery in Scholtens v. Schneider, 173 Ill.2d 375, 671 N.E.2d 375 (1996). The court held that ERISA does not preempt application of the common fund doctrine.
The Seventh Circuit Court of Appeals followed Scholtens in Blackburn v. Sundstrand Corp., 115 F.3d 493, (7th Cir. 1997), holding that since the Illinois common fund doctrine arises out of state law, it is not preempted by ERISA, and that the federal district court had no subject matter jurisdiction to bar the tort victim’s attorney from assessing a pro-rata share of his fees against the health plan’s subrogation claim.
There is some other federal authority in accord, such as Provident Life & Accident Ins. Co. v. Waller, 906 F.2d 985 (4th Cir. 1990), cert. denied, 498 U.S. 982, 111 S.Ct. 512, 112 L.E.2d 524 (1990)(reimbursement of plan member’s attorney’s fees is required under theory of unjust enrichment to other plan beneficiaries) and Serembus v. Mathwig, 817 F. Supp. 1414 (E.D. Wis. 1992).
However, the majority of the federal cases are contrary. See Bollman Hat Company v. Root, 112 F.3d 113 (3rd Cir.1997) (ERISA plan need not contribute to the legal expenses of a plan participant’s recovery against a third party); Ryan v. Federal Express Corp., 78 F.3d 123 (3rd Cir. 1996)(ERISA plan participant whose third party recovery is subject to subrogation by the plan may not withhold attorney’s fees where the plan unambiguously requires full reimbursement); Land v. Chicago Truck Drivers, Helpers And Warehouse Union Health & Welfare Fund, 25 F.3d 509 (7thCir. 1994)(dicta); Cutting v. Jerome Foods, Inc., 993 F.2d 1293 (7th Cir. 1993), cert. denied, 510 U.S. 916, 114 S.Ct. 308, 126 L.Ed.2d 225 (1993)(federal common law rule preventing full reimbursement would not be adopted where the clear language of ERISA plan requires full reimbursement without deduction for attorney’s fees).