Insurance and Injury Corner: Liens and subrogation rights in personal injury cases

Subrogation is the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured so that it may recover from the third party legally responsible for its loss. Lien rights are different (but similar in concept of recovery of losses or payments) and typically arise by statute. Liens attach to recoveries of injured parties if properly asserted.

In personal injury cases, injured persons sometimes have resources to turn to for immediate medical coverage and wage reimbursement. These sources of payment can have recoupment rights by way of liens or subrogation rights, which may complicate any resolution of the accompanying personal injury lawsuit. This article identifies potential sources of liens and subrogation rights for attorneys to be informed of when litigating such cases.

Health insurance benefits

New York General Obligations Law § 5-335 was enacted in 2009 to limit a health insurer’s right of recovery in any subsequent settlement of a personal injury or wrongful death action. It does not prevent recovery of such payments and later set-off or reimbursement if the matter goes to verdict. Notably, it has been held that this statute is not preempted by the Employee Retirement Income Security Act (ERISA) and ERISA plans lien rights on settlements has also been extinguished. See Wurtz v Rawlings Co., 761 F.3d 232 (2d Cir. 2014).

No-fault

Generally, payment of No-Fault benefits does not result in a recoverable lien. This is because Insurance Law §5104 prohibits the recovery of basic economic loss from a tortfeasor.  However, when a “covered person” sues a “non-covered person” she may recover basic economic loss and, accordingly, the no-fault carrier then has a lien against any recovery. A “covered person” is one with New York no-fault coverage. A “non-covered person” may include a municipality, out-of-state defendants, motorcyclists, products liability manufacturers and physicians who aggravate an injury through malpractice. However, to the extent that Social Security, Workers’ Compensation or New York state disability is paid in lieu of no-fault benefits, they constitute basic economic loss and are not a lien in any personal injury action. Ins. Law §5102(b)(2); Fox v Atlantic Mut. Ins. Co., 132 A.D.2d 17 (2d Dept. 1987)

Additional personal injury protection (APIP)

When APIP benefits are paid, the APIP carrier has contractual subrogation rights to recover the benefits it has paid. To do so, the insurer must commence a lawsuit as subrogee of its insured against the tortfeasor, not the tortfeasor’s carrier. Under certain circumstances, the settlement of a lawsuit by an APIP insured will extinguish and prejudice the claim of the APIP carrier, resulting in the APIP carrier not being responsible to pay benefits since such a settlement violates a policy condition. Weinberg v. Trans America Ins. Co., 62 N.Y.2d 379 (1984) (insurer may disclaim payment of APIP benefits where recovery is extinguished by insured’s release of all claims).

Uninsured/underinsured benefits

Under Condition 13 of Regulation 35-D, if uninsured or underinsured (SUM) benefits are paid, the plaintiff/insured’s insurance carrier has subrogation rights for those benefits which are later recovered. If an insured settles its primary action against the tortfeasor without preserving the SUM carrier’s subrogation rights, the SUM carrier may deny coverage and permanently stay any subsequent arbitration by the insured seeking SUM benefits. See Nationwide v. Tarsia, 265 A.D.2d 936 (4th Dept. 1999) (general release without notice to and insurer’s authorization to execute stays arbitration of insured seeking SUM benefits).

Medicaid

New York’s statutory scheme provides two basic options for recovery of Medicaid benefits paid: (1) recover directly in an action commenced against the recipient pursuant to Social Services Law §104(1); or (2) recover indirectly by enforcing a lien in the recipient’s personal injury action according to Social Services Law § 104-b(1). The statute of limitations for a direct recovery is six years. In re Bustamante, 256 A.D.2d 463 (2d Dept. 1998). The Department of Social Services (DSS) may also rely on Social Services Laws in asserting its lien rights as they provide for the assignment of all available third-party payments to DSS. If DSS is not notified of a personal injury recovery, it may later choose to close the recipient’s case (and cease benefits) for a period of time, or the recipient must surrender the payment recovered to have benefits continue. Hoke v. Ortiz, 83 N.Y.2d 323 (1994); see also, 18 N.Y.C.R.R. 352.29(h).

Medicare

Medicare has subrogation rights for services for which it has paid. 42 C.F.R §411.26. Pursuant to 42 USC §1395y(b)(2) and 42 C.F.R 411.37, there is roughly a one-third set-off for attorney’s fees. In addition, Medicare reduces its recovery to take account of the cost of procuring the settlement or verdict. 42 C.F.R §411.37.

If Medicare is required to bring suit to recover because of opposition by the recipient, it is entitled to recover the lower of the following: (1) total Medicare payments; or (2) the total judgment or settlement (minus procurement costs). 42 C.F.R §411.37(e). However, negotiating a lien may be possible and consideration should be given to the probability of proving the claim and other “pragmatic considerations.” 42 C.F.R §405.376(h). Counsel may also seek to deduct unrelated medical costs from any lien claimed. Of note, Medicare has contended that under 42 U.S.C §1395y(b)(2), 42 C.F.R §411.24 and United States v. Sosnowski, 822 F.Supp 570 (WD Wis 1993), it can freely choose to go after the lawyer or client to recover its payments. See also In re Dow Corning Corp., 250 B.R. 298 (E.D. Mich. 2000) (Medicare Secondary Payer Act provides government right to bring direct claim against liability insurer).

Workers’ compensation

Workers’ Compensation Law §29(1) provides that the payor of workers’ compensation benefits has an automatic lien against any third-party recovery. If the third-party recovery is greater than the compensation provided, the workers’ compensation carrier can suspend benefits until the compensation benefits exceed the recovery. In addition, the statute provides that the attorney’s fees expended in obtaining the third-party recovery “shall be equitably apportioned by the court between the employee and his dependents and the lienor.” WCL §29(1). The formula for calculating such a lien is commonly referred to as the “Kelly Rule” and can be found in Kelly v. State Ins. Fund., 60 N.Y.2d 131 (1983) and any calculations may also implicate the Court of Appeals holding in Burns v. Varriale, 9 N.Y.3d 207 (2007).

A plaintiff’s settlement of any third-party action requires the written consent of the workers’ compensation carrier and if consent cannot be obtained, the injured party may apply to the court for a compromise order. WCL §29(5). If a plaintiff fails to obtain consent, she may forfeit all future compensation benefits that may be due. See WCL §29(5); In re Consolazio, 272 A.D.2d 614 (2d Dept. 2000); Waters v. City of NY, 273 A.D.2d 786 (3d Dept. 2000).

Conclusion

Lawyers involved in personal injury litigation should actively seek information on recovery rights of third-party payors. This aids in preparing for settlement negotiations and any required notices and documentation, as well as preparing clients for other potential claims. In addition, counseling clients about these recovery rights should start at the outset of every litigation with knowledgeable counsel.

Laurie Vahey is an actively practicing litigation attorney and the Managing Partner of Vahey Getz LLP in Rochester, New York.  The firm concentrates its practice in litigation with special emphasis in the areas of insurance, personal injury, employment and business and commercial disputes.