Dallas Bar Association

Ring in 2014 with a New Subrogation World Order

by Ben K. DuBose and Thad D. Spalding

 

For 92 years, Texas law embraced the Made Whole Doctrine which provided that an insurer was not entitled to be repaid until the injured plaintiff was made whole by recovering at least the full amount of their loss. The doctrine was grounded in principles of equity. If a loss had to go unrecovered, Texas courts routinely held, it was better borne by the insurer.

After nearly a century, however, the Texas Supreme Court in 2007 effectively ended the Made Whole Doctrine in Fortis Benefits v. Cantu. The Fortis court held that the Made Whole Doctrine does not apply where an insurance policy itself provides for a clear and specific right of subrogation. Viewing health insurance policies as negotiated contracts, the court found that contract-based subrogation rights could not be invalidated by equitable considerations.

In the wake of Fortis, Texas plaintiffs frequently faced the prospect of a personal injury recovery being swallowed up by an insurance carrier’s contractual subrogation interest. This made resolution of both the underlying tort claims, as well as subrogation claims difficult for all parties, particularly where the party responsible for an injury was financially unable to make the plaintiff whole.

So, this year, citing concerns over “very aggressive” carriers recovering benefits paid “without contributing to the injured parties legal fees or expenses,” and inequities arising from responsible parties without “adequate assets or insurance to make the injured party whole,” the Texas Legislature passed HB 1869 to address the issues created by Fortis. HB 1869 creates Chapter 140 of the Civil Practice and Remedies Code, which expressly limits contractual subrogation rights and in the process attempts to balance the carrier’s right to reimbursement with the injured party’s recovery, while also making the carrier contribute to the fees and costs incurred in obtaining that recovery.

The most prominent part of the new law is that which defines the carrier’s right to recovery as the lesser of: (1) half of the injured party’s “gross recovery;” or (2) the “total cost of benefits paid, provided, or assumed by the” carrier. If the injured party is represented by counsel, then “procurement costs” and attorney’s fees must also be deducted from the carrier’s recovery.

“Procurement costs” are not defined, but should be construed rather broadly; certainly, more inclusive that just “court costs” or “litigation expenses.” The statute elsewhere seems to agree with this interpretation, requiring that the carrier pay its “pro rata share of expenses incurred in connection with the recovery.”

“Attorney’s fees” are more specifically addressed. If the carrier is not “actively represented” by counsel, the carrier must pay a fee to the injured party’s attorney as set out in a fee agreement with the injured party’s counsel. If no fee agreement, then the carrier must still pay “a reasonable fee … not to exceed one-third of the payor’s recovery.”

Interestingly, the statute seems to encourage a fee agreement between the carrier and the injury party’s attorney. Absent an agreement, the statute only requires that the court award “a reasonable fee,” but in no event one that exceeds one-third of the recovery. In other words, the statute sets an upper limit on the fee to be paid, but no minimum. The “reasonable fee” could therefore be one-third, or it could be less. But, if set by agreement, this fee uncertainty may be avoided.

A fee agreement may also be helpful in the event the carrier has its own counsel. If the carrier is “actively represented” by counsel, then the fee payable out of the carrier’s recovery is to be apportioned between the carrier’s and injured party’s counsel. The court is charged by statute to apportion fees, and—in doing so—is directed simply to consider “the benefit accruing to the payor as a result of each attorney’s service.” A fee agreement that defines, ahead of time and contractually, how the fee is to be apportioned could avoid any need for a court to apportion fees upon recovery.

A few other provisions of the new statute are also worth noting. First, if a declaratory judgment is brought, presumably to determine the amounts a party is entitled to recover under the statute, a court cannot award costs or attorney’s fees to any party. Also, the statute is expressly not applicable to workers’ compensation, Medicare, Medicaid, state child health plans, and ERISA plans. And, finally, the new statute will apply only “to a contractual right of subrogation in a cause of action that accrues on or after” January 1, 2014. Happy New Year!

 

Ben K. DuBose is an attorney at DuBose Law Firm, PLLC and can be reached at bdubose@duboselawfirm.com. Thad D. Spalding is an attorney at Kelly, Durham & Pittard, LLP and can be reached at tspalding@texasappeals.com.

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