Medical Payment Liens

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Reimburement of medical payment liens is causing much confusion. This article summarizes repayment obligations to first party carriers who make medical payments under casualty contracts.

First party carriers’ medical repayment obligations under casualty contracts

I am seeing much confusion and frustration these days in the area of reimbursement of medical payment “liens.” [1]

It need not be all that complicated, but current law is confusing. This article summarizes repayment obligations to first party carriers who make medical payments under casualty contracts.

The issue arises when a plaintiff pursues a personal injury case in which the plaintiff’s own insurer paid medical bills. While the language varies by contract, insurance policies require repayment of medical monies advanced if the plaintiff collects from the tortfeasor or his third party insurer.

The question that arises is whether the plaintiff is entitled to a reduction in the repayment obligation proportionate to the plaintiff’s recovery costs, i.e. attorney fees and related expenses.

The short answer to the question is, generally, yes.

The plaintiff is entitled by law to deduct a pro rata share of legal fees and costs from the total medical payment amount paid by the first party insurance company. In York v. Van Hall, 704 A.2d 366 (Me. 1997), the Law Court adopted the common fund doctrine, which states that when a fund is created to which more than one party is entitled, each party must pay a share of the expenses incurred in creating that fund, including legal expenses. Otherwise, according to the Law Court, “it is grossly inequitable to expect an insured … in the process of protecting his own interest to protect those of the insurance company as well and still pay counsel for his labors out of his own pocket….” Id.

[1] The word “lien” is in quotation marks because the term, though commonly used in this context, is inaccurate. The word lien implies a property right that does not exist in the medical payment context. “Claimed contractual right to repayment,” while technically more accurate, is a mouthful, explaining why “lien,” though incorrect, is used.

Requirements of 24-M.R.S.A. § 2910-A and the effect of the Law Court in Van Hall

To apply the common fund doctrine, plaintiff counsel should be careful that the first party “lien” holder has notice of the plaintiff’s recovery effort. While the safest route is direct, formal notice, it may not be necessary. In Van Hall the Law Court held that the first party insurer’s knowledge of the plaintiff’s intent to seek tortfeasor recovery was sufficient. Despite Van Hall, some insurers still refuse to accept proportionate reduction, citing statutory authority.

24-A M.R.S.A. § 2910-A prohibits casualty insurers from claiming subrogation rights arising out of third party tortfeasor liability unless the superintendent of insurance approves the policy language and the insured gives prior written approval. In addition, the statute provides for “subtraction to account for the pro rata share of the insured’s attorney fees in obtaining the recovery from another source.” Several insurers in Maine, initially at least, failed to grasp the latter language, which implicitly adopts the common fund doctrine.

Since the Law Court in Van Hall made explicit what the Legislature had implied in 24-A M.R.S.A. § 2910-A, some insurers have shifted focus to an exception included in the statute. Section 2910-A’s exception states: “Nothing in this section prevents an insurer from exercising its subrogation rights directly against any person legally liable for the insured’s injury. In the event that the insurer pursues its subrogation rights directly against such a person, the insurer’s subrogation right is not subject to any subtraction to account for attorney’s fees and the insurer is entitled to full recovery.” (emphasis added) “Full recovery” is undefined.

Few carriers meet the explicit exception requirements. Historically, insurers filed an intercompany arbitration notice, send a notice to plaintiff’s counsel stating that it has done so and is not “relying on the insured to collect on its behalf” or similar language to the same effect, and then sit back and expect full payment.

This reliance on contractual intercompany arbitration may have sufficed pre-Van Hall and § 2910-A, but it will no longer. The statutory exception is limited on its face to those situations in which the insurer has taken action directly against the tortfeasor. 2910-A’s exception speaks in terms of an action “directly against a person,” requiring plaintiff’s insurer to bring suit against the tortfeasor in order to recover 100% of its “lien.” The Law Court’s holding back in 1979 in Wescott v. Allstate, 397 A.2d 156, that a “person” does not include an insurance company or other organization remains good law, so notifying or even pursuing the third party carrier in court will not preserve 100% repayment.

The first party insurer must sue the tortfeasor, and anything else – intercompany arbitration, lawsuits against the third party carrier, threatening “lien” letters to plaintiff’s counsel or even the plaintiff herself – is insufficient.

Why would the first party insurer bother to sue the tortfeasor?

This begs the question of why would a first party insurer would bother to do this. The typical medical payment limit in Maine is $5000, and the actual medical payments expenditures from this are far less. And, of course, the first party carrier is undisputedly entitled to repayment of all but the proportionate share of recovery costs. If, for example, the medical payment expenditures on a insured’s behalf total $3000 and the cost of recovery is one-third, the first party insurer will automatically get $2000 back. It would seem to make poor business sense for a first party insurance carrier to pay for its own lawsuit to recover a maximum of $1000, but perhaps the motivations for doing so go beyond business practicality.

In summary, then, the wise practice for plaintiff’s counsel is to be sure that the plaintiff’s medical payment insurer is on notice of the plaintiff’s pursuit of recovery from the tortfeasor. It would be wise to explicitly tell the medical payment carrier that you intend to collect the insurer’s medical payments and reimburse them to the insurer, minus pro-rated fees and expenses.

Under Van Hall, this suffices for purposes of notice to create the common fund. Under § 2910-A, the first party insurer has to recognize its obligation to pay proportionately for common fund recovery. For the first party carrier for whom paying its proportionate recovery costs is anathematic, it will have to retain counsel and file suit against the tortfeasor directly.

Some questions persist – what happens, for example, if the first party insurer’s lawsuit against the tortfeasor is filed coincidentally with the plaintiff’s suit for tort damages? Should the lawsuits be joined? What if both suits pend simultaneously, and one reaches verdict (or voluntary settlement for that matter) first? Our clients will be best served when we as lawyers can give specific answers with confidence in this area. In the meantime, gear up for the inevitability of increased litigation over very modest dollars.