Can an Injured Party and the Tortfeasor Agree to a Settlement That Extinguishes the Subrogation Rights of the Insurer?
March, 2009
The Court of Appeals of New York in Fasso v. Doerr 12 NY 3d 80, 903 N.E 2d 1167 (2009) has issued a decision stating that a subrogation claim may not be discontinued by the injured plaintiff and the tortfeasor defendant without the consent of the subrogee. The Court of Appeals reversed the prior ruling of the Appellate Division which dismissed the subrogee's claim based on the fact that the plaintiff (who had settled with the tortfeasor defendant) was not paid for the full amount of her damages, and remitted the case to Supreme Court, Erie County for further proceedings.
Plaintiff was treated by defendant Dr. Doerr in 1996. She developed complications that eventually necessitated a liver transplant. Plaintiff and her husband sued Dr. Doerr and the hospital where she was treated for medical malpractice (the hospital was eventually discontinued from the action following the granting of summary judgment). Dr. Doerr's medical malpractice policy was $2 million. Plaintiff underwent a second liver transplant in 2003. Her medical expenses, paid entirely by her health insurance carrier, Independent Health Association, Inc. (IHA) were approximately $780,000. In 2005, the insurance carrier moved under CPLR 1013 to intervene in the medical malpractice action in order to assert an equitable subrogation claim against Dr. Doerr for reimbursement of the payments made for plaintiff's medical care and treatment. Neither party opposed IHA's motion and the Court allowed the insurance carrier to become a party in the medical malpractice matter.
Subsequently, plaintiff moved for summary judgment to dismiss IHA's equitable subrogation complaint, contending that plaintiff's damages exceeded Dr. Doerr's policy, as such, she could not be "made whole" and IHA therefore could not expect to receive reimbursement for their costs from the Defendant. Plaintiff and Dr. Doerr agreed to settle shortly after the commencement of trial. Plaintiffs agreed to accept $900,000 and the subrogation claim was to be dismissed since Plaintiff was not "made whole" as she agreed to accept an amount that was less than her damages. IHA was not involved in settlement negotiations, had not agreed to the dismissal of the action against Dr. Doerr and did not oppose the settlement. IHA opposed the dismissal of its claim and moved for a mistrial. The Supreme Court denied IHA's request for a mistrial, approved the settlement and dismissed IHA's Complaint. The Appellate Division affirmed the decision which the Court of Appeals now reversed.
The doctrine of equitable subrogation provides that an insurer may seek recovery of money it paid for the losses of an insured that were caused by a wrongdoer. The rationale behind equitable subrogation is that a wrongdoer must reimburse the insurer for payments made on behalf of the injured party and that the injured party cannot recover for the same injury from both the wrongdoer and the insurer. However, the "made whole" rule states that the claim of the injured party takes precedence over the insurer's subrogation rights, and, as such, the insurer cannot share in the proceeds recovered by the insured from the wrongdoer if the recovery amount fails to fully compensate the insured for the losses claimed. The insured must be compensated and the insurer may then seek subrogation against the remaining funds.
The Court of Appeals held that the portion of the settlement agreement reached by the Plaintiffs and Dr. Doerr barring the equitable subrogation claim cannot be enforced. Id. As such, the Court held that the insurer may seek reimbursement of payments it made for Plaintiff's medical expenses (expenses incurred due to the negligence of Dr. Doerr) from Dr. Doerr. Id The Court further held that since Dr. Doerr's policy was in the amount of $2 million and the terms of the settlement dictated that Plaintiff was to receive $900,000, the remaining $1.1 million is a potential source of recovery for IHA. Id.
The Court of Appeals also held that the right to subrogation accrues upon payment of the loss by the insurer. Id. This, together with the fact that Dr. Doerr was aware or should have been aware that a right to subrogation existed, Dr. Doerr and Plaintiff could not agree to terminate IHA's claim without its consent and the settlement agreement could not be asserted as a defense to IHA's subrogation cause of action.
Learning Point:
In New York, where a health insurer has a cause of action for equitable subrogation in a case where a patient suffers injuries as a result of the wrongdoing of another and the health insurer pays for the medical treatment rendered to the injured party, the insurer's subrogation claim cannot be discontinued without its consent.
Back to New York CM Report of Recent Decisions (2009v1) 2009 Volume 1 Table of Contents
