Illinois has finally joined the majority of jurisdictions1 adopting an equitably modified version of the “make whole” doctrine for subrogation claims. The “Make-Whole” or “Made Whole” Doctrine” is an equitable principle that a third party insurance company claimant will not receive any of the proceeds from the settlement or adjudication of a claim, except to the extent that the settlement funds exceed the amount necessary to fully compensate the insured for the loss suffered.2 Only after the injured party has been fully compensated for all the loss does the third party claimant receive payment from the settlement or judgment.
“Under the “make whole” rule of contract interpretation, absent an agreement to the contrary, an insured who has settled with a third party tortfeasor is liable to an insurer-subrogee, which has discharged its obligation to pay benefits in full, only for the excess received from the wrongdoer and the insurer over the actual loss after deducting costs and expenses. See 16 Mark S. Rhodes, Couch on Insurance Law, § 61:64 at pp. 145-47 (2d rev. ed.1983)”3
Many courts, however, have allowed this default rule to be overridden by “a boilerplate subrogation clause.”4 Illinois courts have refused to follow this doctrine in the face of clear provisions in insurance policies that the insurer is to be paid first. Gibson v. Country Mutual Insurance Co., 193 Ill.App.3d 87, 139 Ill.Dec. 700, 549 N.E.2d 23 (1990). Thus, Gibson declined to follow the made-whole doctrine that has been adopted by other jurisdictions.5
Illinois common law provides that when an insurance contract gives the insurer the right to subrogate to the extent of its payment, the contract will be enforced as written, and the insurer will receive full subrogation, even if the insured’s losses exceed the amount it recovers from the tortfeasor and the insurer, and the insured is thus not made whole.6
Illinois common law on this subject has been criticized in that by subrogation a third party is merely standing in the shoes of the injured person and where the third party is an insurer it has agreed to assume the risk of non-recovery, and has been paid for this by way of premiums.7
In this last legislative session the Illinois legislature modified this harsh position taking an equitable middle road approach to reducing claims for subrogation or reimbursement for claims that arise out of the payment of medical expenses (med pay subro claims) or other benefits (think lost income and disability coverage) against claims for personal injury or death. Under this middle of the road approach the subrogation interest of the insurer is neither paid first nor is it paid last but it is reduced proportionately where the recovery is diminished by either (1) comparative fault and/or (2) uncollectibility of the full value of the claim due to limited liability insurance.
[T]he subrogation claim or other right of reimbursement claim shall be diminished in the same proportion as the personal injury or death estate claimant’s recovery is diminished. (770 ILCS 23/50(2) new).
The new statute provides that after reducing the claims for either comparative fault and/or limited liability insurance the party asserting the subrogation claim or other right of reimbursement shall pay their pro rata share of attorney fees and costs of collection codifying the “creation of the fund” doctrine.
The new law contains an effective date of January 1, 2013, but does not state on its face whether it applies only to cases that are filed after that date. Initially the case of Boyd v. Madison Mutual Insurance Co.8 would seem to answer this issue. Boyd held9 that the statute10 requiring the insurer of an underinsured motorist to advance to the insured an amount equal to offer made by the tortfeasor in order for insurer to preserve its subrogation rights could not be applied retroactively because it would deprive insurer of its vested contractual right of subrogation.
Boyd considered the retroactive application of a provision in the insurance code as opposed to the Code of Civil Procedure, and it was decided under the older vested rights analysis that is no longer applicable. The retroactive application of many provisions of the Code of Civil Procedure has been previously considered.11 The current analysis for such cases requires the court to “first determine if the legislature expressed its intent relative to retroactivity.12 If the legislature’s intent is clear, we must give effect to that intent unless constitutional principles otherwise prohibit the application.”13 Before Commonwealth Edison Co.14 courts followed the vested rights approach to retroactivity, under which legislative intent was largely ignored.15
Under Landgraf v. USI Film Products,16 the United States Supreme Court explained that the issue in determining retroactivity is how the substantive rights of the respective parties—either the defendant’s right to procedural protections or the plaintiff’s right to redress from the alleged wrongs--will be affected.17 Thus, the question is not whether defendants’ substantive right exists or is impacted. The question is whether the legislature’s act in changing those rights offends due process.18
In general, statutory amendments relating to substantive rights must be applied prospectively while amendments relating to procedures or remedies are applied retroactively.19 The prospective application of statutes is favored because the retroactive application of new laws is usually considered unfair and notice or warning of the rule should be given in advance.20 The presumption of prospective application is rebuttable, but only by the act itself, which either by express language or implication, clearly indicates that the legislature intended a retroactive application.21
The application of these principles as they respect subrogation claims or rights of reimbursement is difficult. Both subrogation claims and rights of reimbursement generally arise out of a contract22 that predates the payment of expenses (i.e., medical, disability, property damage, etc.). A distinction between whether a contract provides for “subrogation” as opposed to a “right of reimbursement”23 could be very important to any analysis, as a right of “reimbursement” does not arise until there is a fund to be reimbursed from.
Therefore, a very strong argument can be made that the right to funds recovered only vests and accrues to a subrogated party at the time that the funds are received. Certainly where the claim for funds is expressly based upon a “right of reimbursement,” as opposed to a right of “subrogation,” the right to reimbursement does not vest until the funds are actually recovered.
What Claims Does the Statute Apply To?
The statute expressly excludes from the statutory “make whole” provisions, liens arising under the Workers’ Compensation Act, the Workers’ Occupational Diseases Acts, health care liens (including but not limited to liens of long-term care facilities, physicians, and hospitals), claims made to recoup uninsured payments, or underinsured payments under the insurance code.
Does the law apply to ERISA and other claims based in federal law?
The statute might not apply to ERISA claims because those arise under federal law.27 However, it should also be noted that ERISA saves “any law of any State which regulates insurance, banking, or securities.” 29 U.S.C. § 1144(b)(2)(A).28 Where a state law “regulates insurance” within the meaning of § 514(b)(2)(A), and therefore is not pre-empted by § 514(a), the law applies to insurance contracts purchased for plans subject to ERISA.29 An ERISA “employee benefits plan” is not insurance and is therefore not subject to the savings clause.30 Therefore, the issue should turn on whether the plan is “self-insured” and therefore a benefit plan or if the plan is not self-insured.31
In Cutting v. Jerome Foods, Inc.,32 the Seventh Circuit held that where an ERISA plan did not specifically accept or reject the “make whole” doctrine and the administrator of the plan had discretionary authority to interpret language of the plan, the administrator could reasonably conclude that a subrogation clause which refers to “all claims” against a third party to the extent of “any and all payments made” did not incorporate the “make whole” doctrine. Id. at 1298.
The Eleventh Circuit33 and Ninth Circuit,34 on the other hand, have applied the “make whole” doctrine to ERISA claims. Now that Illinois has adopted a statute on this subject the issue will most certainly again be addressed by the Seventh Circuit.
It is also to be seen whether the Patient Protection and Affordable Care Act (PPACA)35 and the other related legislation36 will preempt state laws modifying subrogation clauses in private medical insurance contracts.37
How the Statute Works
Unless the parties can agree, the court in which the personal injury or death claim was brought shall determine the amount of comparative fault and the full value of the claim.
The statute does not indicate what type of evidence would be proper to present at a hearing regarding the value of the claim or the amount of contributory negligence, nor does it state whether the parties have a right to have a jury decide those issues. However, on this issue, guidance may be found in cases under the attorney’s lien act where it has been held that there is no right to a jury trial at a lien adjudication hearing.38
There are no cases discussing the right to a jury trial under the Health Care Lien Act. The Health Care Lien Act provision on adjudication of liens (770 ILCS 23/30) is part of these amendments. The amendment added a provision specifying the manner of service on lien claimants. The remaining portion of the section leaves the law unchanged and states: “the circuit court shall adjudicate the rights of all interested parties and enforce their liens.”
Given that such liens were unknown at common law,39 the language of the statute and the attorney lien decisions, it would seem that the right to a jury trial on these issues does not exist.
The lien adjudication provision (770 ILCS 23/30) now provides for the manner of service necessary to obtain jurisdiction over the potential lien claimant providing: “A petition filed under this Section may be served upon the interested adverse parties by personal service, substitute service, or registered or certified mail.” This amendment clarifies the practice, which heretofore required the personal service of a summons.40
The concept of the statute is to reduce the subrogation interests by the percentage of both comparative negligence and/or the under-insured status of the defendant. For example if the defendant had $100,000 of insurance coverage and the case settles for substantially less than the full coverage, say $60,000, the plaintiff could only seek a reduction in the subrogation claims by the percentage of the plaintiff’s fault causing the settlement to be $60,000 instead of its full value. This would not necessarily require proof of the “full value” if liability evidence is presented establishing that the plaintiff bore some responsibility for their injuries. Strange as it may seem, this puts the plaintiff in a position where he or she is trying to show that they were partially at fault in the incident causing their injuries.
If the case settles for the full policy limits of the defendant the plaintiff can seek a reduction in the subrogation interest by showing that his claim was worth more than the policy limits. In this situation using the same insurance policy coverage of $100,000 and a settlement of $100,000 the plaintiff could potentially show that her claim was worth $5,000,000 and therefore she received only 2% of the full value of the claim and therefore the subrogation interest should be reduced to 2% of its full value.
Under these facts it does not seem that the plaintiff would obtain additional benefit by asserting that the settlement amount also contemplated “comparative fault” unless the $5 million figure was already discounted for “comparative fault.” To do otherwise would be to engage in a “double counting”. The idea is that one is made whole, not more than whole.
Lacking a verdict in which (1) the liened amounts are separately itemized,41 and the full value of the claim and (2) any comparative fault adjudicated or (3) an agreement by the lien claimant and the injured plaintiff, an evidentiary hearing will be necessary.
Where the adjudication proceeding consists of a hearing de novo, a full presentation of all of the evidence could potentially be required. The amount that the subrogated insurer paid for the medical bills is usually less than the full value of those bills.42 Therefore, one of the issues in the “full value” of the claim is the actual value of the medical services.
One has to wonder how many lien claimants are prepared to hire life care planners, vocational experts, economists, etc., to challenge the full value of the claims, or reconstruction experts etc, safety engineers, etc. for comparative fault issues. Certainly the lien would have to be large for such an undertaking to be financially advisable.
Likewise, the lien claimants are unlikely to know the facts supporting liability or comparative fault. The statute does not define who carries the burden of establishing the comparative fault. As the plaintiff is the party seeking the benefit of reducing the proportionate share of the subrogation interest via “comparative fault” the general rules of proof would place the burden of persuasion and proof on the plaintiff.
If the burden of proving comparative fault is on the plaintiff, it places the plaintiff in a reversal of the roles they undertook to obtain the settlement. In a de novo hearing, the plaintiff would be trying to show that they were as much at fault as possible.
In Illinois actions where the statutory modified comparative fault rule43 applies, the most that should ever be attributed to “comparative fault” in a lien adjudication hearing is 50% because there would be no recovery if the plaintiff were more than 50% at fault.44 Certainly any negotiated expression of “comparative fault” in the settlement would only be binding on the plaintiff and not on lien claimants who were not part of that settlement fault apportionment process. Therefore it does not serve a settling plaintiff to define in advance the percentage of comparative fault in the settlement letters or the final agreement as that would set the upper limit of their fault. However, it would make sense to acknowledge that the settlement figure decided upon is a compromise contemplating the plaintiff’s comparative fault.
The same logic would apply to placing a “full value” on the claim. When a demand is presented to the at fault party it might be wise to include language expressing that the demand contemplates the plaintiff’s comparative fault without specifying the percentage.
Other things to consider
Another factor that may arise in the context of malpractice verdicts (not settlements) is the interplay between this new statute and the Civil Practice Act provision eliminating the collateral source rule (735 ILCS 5/2-1205). The companion statute intending to modify the collateral source doctrine in all other tort actions (735 ILCS 5/2-1205.1) will not come into play because it is unconstitutional.45
It is conceivable that a medical malpractice defendant could be successful in reducing a verdict based upon the provisions of 735 ILCS 5/2-1205 preventing the plaintiff from recovering “full value” of the claim and thereby reducing the interests of the subrogated parties to their subrogation claims. It will be interesting to watch the dynamic that will result pitting the insurance and medical industries against each other as this plays out in the courts.
In most ordinary cases with limited subrogation claims, it would be in the best interest of all parties to reach an agreement rather than to engage in full discovery and proceed to an evidentiary hearing to establish the “full value” of the claim and the plaintiff’s “comparative fault.”
Given the narrow scope of the statute excluding Workers Compensation, Occupational Diseases Acts, uninsured and underinsured auto coverage, and health care liens coupled with the view of the Seventh Circuit with respect to ERISA and the “make whole” doctrine,46 the application of this statute for the most part will be limited to automobile and premises medical payment coverage subrogation claims. In these cases the amount of the medical payments made is usually relatively small in contrast to the potential reduction making the costs of a full evidentiary hearing unattractive to all parties. There will be some cases to be sure where private health insurance will claim subrogation interests in the recovery and it is conceivable that the size of those claims will merit full-blown hearings.
Plaintiff’s attorneys and their clients will welcome this statutory change as an advancement of justice in tort recoveries for injured persons. For years plaintiffs’ attorneys have found it very difficult to convince their clients to accept settlements where the bulk of the settlement is going back to insurance companies or other third parties. At least where the primary claims are for medical payments from insurers, this statute should assist in getting those cases resolved without the necessity of a trial against the at fault party.
Unfortunately the scope of the legislation does not reach health care provider liens, self-funded ERISA plans, or Medicare and Medicaid reimbursement claims. Those types of claims are likely to prevent fair and reasonable settlement of claims without some type of equitable reduction in their claims for reimbursement due to comparative fault or the judgment proof status of the at fault party.
The additional burden of potentially litigating these claims on a case that has already settled may require the plaintiff’s counsel to engage in additional work without additional compensation.47 It is yet to be seen how much additional burden if any will be placed upon the court system in conducting full evidentiary hearings to adjudicate these claims versus the number of suits that were previously forced to trial because the subrogation claims would not be subject to reduction for comparative fault or the fact that the defendant was underinsured. ■