Daily Digest
Medical Malpractice: Legislation Limits Reimbursement to Health Insurers After Settlements
by Thomas A. Moore and Matthew Gaier
December 01, 2009
Last month the New York Legislature passed Governor's Program Bill #95, containing numerous provisions involving a broad array of subjects. Part F of the bill included several provisions that will affect medical malpractice and personal injury litigation. On Nov. 13, 2009, the governor signed that bill into law. In this month's column, we review the pertinent aspects of this new legislation.
The most significant item is contained in Sections 7 and 8 of Part F, which limits the ability of health insurers and other benefits providers to obtain reimbursement for their expenditures via malpractice, personal injury or wrongful death actions brought by or on behalf of their insureds. Over the past decade, attorneys representing parties in these types of cases are routinely served with notices by health insurers. These notices often purport to assert liens or rights of subrogation or reimbursement for expenses they incurred on behalf of the plaintiff as a result of the tortious conduct that is the subject of the litigation.
Health insurers seeking such recovery rely upon two decisions from the Court of Appeals-Teichman v. Community Hosp. of Western Suffolk, 87 N.Y.2d 514 (1996), and Fasso v. Doerr, 12 N.Y.3d 80 (2009)-the latter may have served as a catalyst for legislative action.
'Made Whole' Rule
Teichman involved a medical malpractice action brought on behalf of an infant plaintiff injured at birth. During the pendency of the lawsuit, the infant plaintiff's mother was notified by her health insurer that her plan provided for reimbursement in the event that she was repaid any medical expenses from another source. The insurer asserted that it maintained a lien, and requested that she sign a third-party reimbursement agreement. She did not respond. After the case settled, plaintiffs' counsel notified the insurer of the settlement and moved to vacate its claim.
The insurer cross-moved for permission to intervene and a declaration that it was entitled to the amount it expended plus all payments for future medical expenses. The insurer argued that it was entitled to either full reimbursement or a hearing to determine the amount of covered expenses included in the settlement. The Court of Appeals held that the plan's language did not give rise to a lien, but that the insurer should have been granted permission to intervene to enable it to establish its right to recoup any covered medical payments included in the settlement.
Subsequent to Teichman, health insurers began to assert similar claims in personal injury actions en masse. They also began moving to intervene in the actions. The First, Second, and Third Departments of the Appellate Division denied such intervention,1 while the Fourth Department permitted it.2 This was the status quo for a number of years, with litigants taking various approaches to dealing with these claims, including paying them in full, negotiating reductions, moving to vacate them or ignoring them altogether.
Earlier this year, however, the issue was brought to a head by the Court of Appeals' decision in Fasso. The injured plaintiff in that case alleged that she required a liver transplant as a result of the defendant's medical malpractice. While the action was pending, she underwent a second transplant at a cost of $780,000. That cost was borne by her health insurer, who subsequently intervened and asserted a claim of equitable subrogation against the defendant. The plaintiff moved to dismiss the insurer's claim on the ground that her damages exceeded the malpractice coverage, which would prevent her from being made whole. That motion was denied.
Shortly before trial, the health insurer indicated that it intended to rely on plaintiff's proof and that the only proof it would submit was of its own medical expenses. During the trial, the plaintiff and the defendant agreed to settle the case for $900,000, which was substantially less than the amount of the malpractice insurance. The settlement expressly provided that the health insurer's claim would be dismissed because the plaintiff was not made whole since the payment was less than her actual damages.
The insurer did not object to the monetary payment to be paid to the plaintiff, but contested the dismissal of its own claim and noted that the remaining liability coverage exceeded what it sought in subrogation. It also moved for a mistrial and sought to obtain its own witnesses and establish the defendant's liability. The trial court rejected the insurer's arguments and approved the settlement.
The Court of Appeals reversed. It found that the "'made whole' rule," upon which the plaintiff and the defendant relied, applies only where the amount the plaintiff receives is greater than the defendant's assets and the insurance coverage, and there is nothing left against which the insurer can execute its rights. That did not happen in Fasso. The Court further rejected the plaintiff's and defendant's argument that the insurer was bound by the terms of their settlement agreement because the insurer acquires only those rights that the insured possesses, finding that the right accrued upon the payment of the loss. "Once an insurer has paid a claim and the tortfeasor knows or should have known that a right to subrogation exists, the wrongdoer and the insured cannot agree to terminate the insurer's claim without its consent and such an agreement cannot be asserted as a defense to the insurer's cause of action."
Legislative Action
Cognizant of the problems presented by health insurers intervening in personal injury actions to recover their expenditures-including that the plaintiffs and their insurers have conflicting interests, "especially where the potential damages exceed the available sources of recovery"-the Court suggested that the Legislature may wish to address the issue.
Indeed, the potential ramifications of Fasso were far more onerous than the opinion recognized. By maintaining the right to recover should they not consent to settlements, health insurers were given considerable opportunity to thwart the will of the parties to settle unless they received the amount they demanded. Defendants have little incentive to settle cases if they remain potentially liable to third parties. If plaintiffs hold the defendants harmless for the claim, they take on the risk of having to pay a portion of the settlement to the insurer. In some instances, an insurer's claim could swallow most or even all of a settlement. This circumstance created an additional obstacle to settlements.
The Legislature remedied these problems in the recently passed Program Bill by amending the General Obligations Law to prohibit the rights of health insurers and other benefits providers to recover from the proceeds of settlements of personal injury, malpractice, and wrongful death actions. The newly created GOL §5-335(a), provides:
§5-335. Limitation of non statutory reimbursement and subrogation claims in personal injury and wrongful death actions.
(a) When a plaintiff settles with one or more defendants in an action for personal injuries, medical, dental, or podiatric malpractice, or wrongful death, it shall be conclusively presumed that the settlement does not include any compensation for the cost of health care services, loss of earnings or other economic loss to the extent those losses or expenses have been or are obligated to be paid or reimbursed by a benefit provider, except for those payments as to which there is a statutory right of reimbursement. By entering into any such settlement, a plaintiff shall not be deemed to have taken an action in derogation of any non statutory right of any benefit provider that paid or is obligated to pay those losses or expenses; nor shall a plaintiff's entry into such settlement constitute a violation of any contract between the plaintiff and such benefit provider.
Except where there is a statutory right of reimbursement, no party entering into such a settlement shall be subject to a subrogation claim or claim for reimbursement by a benefit provider and a benefit provider shall have no lien or right of subrogation or reimbursement against any such settling party, with respect to those losses or expenses that have been or are obligated to be paid or reimbursed by said benefit provider.
In an amended GOL § 5-101, the term "benefit provider" is defined as "any insurer, health maintenance organization, health benefit plan, preferred provider organization, employee benefit plan or other entity which provides for payment or reimbursement of health care expenses, health care services, disability payments, lost wage payments or any other benefits under a policy of insurance or contract with an individual or group."
The Legislature has thus provided a specific cure for the problems posed by health insurer claims to the settlement of personal injury actions. It is important to note that this statutory remedy applies only to settlements. Therefore, if recovery is had pursuant to a judgment, the insurer still retains any rights it had to subrogation or reimbursement. This should provide defendants an extra incentive to settle cases, particularly where health insurers have substantial claims.
Other Provisions
The other provisions of Part F of the Program Bill affecting malpractice and personal injury actions are less exciting. Section 1 amends CPLR 4545 to combine subdivisions (a), (b), and (c) into a single section. The most substantive impact of this change is that CPLR 4545(b), which applied only in actions by public employees against public employers, is repealed. That provision treated public employers differently than all other defendants in that it provided for collateral source offsets only for past damages, not future damages. See Iazzetti v. City of New York, 94 N.Y.2d 183 (1999).
The language of CPLR 4545 was also amended to remove specific references to statutorily recoverable items that do not qualify as collateral sources and replaced it with general language exempting "those payments as to which there is a statutory right of reimbursement." The language of the statute was further amended to expressly state that any collateral source deduction is to be made after the verdict, and that a plaintiff "may prove his or her losses and expenses at the trial irrespective of whether such sums will later have to be deducted from the plaintiff's recovery."
Concomitant to the elimination of CPLR 4545(b), the Program Bill also repealed CPLR 4111(e), which dealt only with actions against public employers, and merged it with subdivision (f) into a single subdivision (e). This provision governs itemized verdicts in all personal injury, property damage and wrongful death cases except those for medical, dental or podiatric malpractice, as to which CPLR 4111(d) applies. The bill retained this distinction because 4111(d) provides for significant differences in itemized verdicts to accommodate the 2003 revisions to structured judgments in malpractice actions under Article 50-A of the CPLR.
The Program Bill also corrects an omission from the 2003 amendments. While 4111(d) was adapted to require jury verdicts to be returned in a form consistent with the new system for structured judgments in malpractice actions, no such change was made to CPLR 4213 relative to bench trials. This left an anomaly for bench trials of malpractice actions. Section 6 of Part F of the Program Bill corrects this omission by amending CPLR 4213(b) to provide that in medical, dental or podiatric malpractice actions commenced on or after July 26, 2003, the court's decision shall be itemized in accordance with CPLR 4111(d), while all other actions shall be itemized in accordance with CPLR 4111(e).
Section 9 of Part F provides that it takes effect immediately, and applies to all actions commenced on or after the effective date, which would be Nov. 13, 2009, when it was signed by the governor. However, that section further provides that sections 4 through 8 also apply to any action commenced prior to that date where the trial had not commenced or the parties had not yet entered into a stipulation of settlement as of that date. Thus, the amendment repealing the limited application of CPLR 4545 to public employers applies only to actions commenced on or after Nov. 13, 2009, while all other provisions, including those prohibiting health insurer rights of recovery from settlements, apply to pending actions that have not been tried or settled by that date.
The protection afforded settlements against claims by health insurers should be lauded by those representing the interests of both plaintiffs and defendants in personal injury litigation. Indeed, this represents a rare instance in which the two sides have come together in supporting legislation, and we fully anticipate that both sides will reap the benefits.
Thomas A. Moore is senior partner and Matthew Gaier is a partner of Kramer, Dillof, Livingston & Moore.
Endnotes:
1. See Halloran v. Don's 47 West 44th Street Restaurant Corp., 255 A.D.2d 206 (1st Dept. 1998); Berry v. St. Peter's Hosp. of City of New York, 250 A.D.2d 63 (3d Dept. 1998), lv. dismissed, 92 N.Y.2d 1045 (1999); Humbach v. Goldstein, 229 A.D.2d 64 (2d Dept. 1997), app. dismissed, 91 N.Y.2d 921 (1998).
2. See Omiatek v. Marine Midland Bank, N.A., 9 A.D.3d 831 (4th Dept. 2004).