California Law on Medical Pay Reimbursement
Virtually all first-party (and most third-party) insurance policies contain a subrogation or reimbursement provision. When the insurer pays a claim, these provisions entitle the insurer carrier to recoup its payments from a responsible third party. In cases involving property damage claims, the insurer may pay the insured’s claim and proceed directly against the third-party tortfeasor.
Alternatively, if the insured has brought an action against the responsible third party (for example, to recover uninsured losses), the insurer may intervene in that lawsuit. See Hodge v. Kirkpatrick, 130 Cal. App. 4th 540, 551 (2005). However, personal injury claims are non-assignable in California. Therefore, an insurer may not recover a bodily injury or medical insurance payment directly from the tortfeasor. Rather, the insurer must wait for the insured to obtain a recovery from the responsible third party, then request reimbursement out of that recovery. See Progressive West, 135 Cal. App. 4th at 272.
The "Made Whole" Rule
In either of the contexts laid out above, California recognizes the common law “made whole” rule:
- The general made whole rule is that an insurer that pays a portion of the debt owed to the insured is not entitled to subrogation for that portion of the debt until the debt is fully discharged.
In other words, the entire debt, not only part of the debt, must be paid first. Until the creditor has been made whole for its loss, the subrogee may not enforce its claim based on its rights of subrogation.
You have to be mindful of this as the attorney as the insurance companies that seek subrogation on your client's settlement recovery sometimes, or oftentimes, forget this rule, or ignore it. Another case, Sapiano v. Williamsburg, 28 Cal. App. 4th 533, 536 (1994), quoting 2 Cal. Ins. Law & Prac. (1988 rev.) § 35.11[b], held an insurer may not obtain a subrogation recovery before its insured is fully compensated for both insured and uninsured losses. Id.; see also Progressive West, 135 Cal. App. 4th at 274.
Med-Pay in California Is No-Fault Coverage
The interesting point here is that the California Supreme Court agreed with 21st Century argument. However, the rationale underlying its decision is tied to the unique nature of med-pay coverage language in most, if not all, auto insurance policies.
First, as previously mentioned above, personal injury claims are non-assignable under California law (except workers compensation medical liens can "intervene" on an already-filed personal injury lawsuit), a med-pay insurer cannot proceed "on its own behalf" against the third-party tortfeasor that caused medical damages in the first place, nor can it intervene in the insured’s personal injury lawsuit (only a California work comp medical lien has the power to do this under California law). Therefore, the Court reasoned, the insurer cannot voluntarily elect to bear its own litigation costs in order to seek reimbursement.
The second interesting fact from this holding, med-pay insurance is a no-fault coverage which “pays the insured’s reasonable and necessary medical expenses incurred due to an accident up to a relatively low dollar limit, in exchange for relatively low premiums.” As such, the med-pay insurers “have no financial incentive to participate [in litigation against the third-party tortfeasor], given the likelihood that the attorney fees would exceed the amount of reimbursement sought.”
The California Supreme Court further reasoned that, because the insurer’s maximum potential would rarely exceed a few thousand dollars, “plaintiffs’ attorneys may not want insurers to intervene in lawsuits, as the insurers’ litigation goals of reimbursement may conflict with the plaintiffs’ interest in recovery for losses beyond the low med-pay amount.”
The California Supreme Court also rejected an argument which the Southern District of California, considering the same issue, had found persuasive: “If either the policyholder or the [insurer] must to some extent go unpaid because the policyholder has recovered less than her total loss, the loss should be borne by the insurer for that is the risk the insured has paid it to assume.”
Chong v. State Farm Mut. Auto. Ins. Co., 428 F.Supp.2d 1136, 1145 (S.D. Cal. 2006), internal quotes and citation omitted. The Court again pointed to the unique nature of med-pay coverage—low premiums, in exchange for a small policy benefit—to avoid application of this principle: Although this reasoning may hold true in certain insurance situations, in the context of med-pay insurance the insured has not contracted for the insurer to assume any risk beyond the insured’s medical payments.
Quintana’s lower premiums provide her only with medical payments in the event of an accident. …Quintana has not paid 21st Century to assume the risk of paying attorney fees for uninsured losses on her behalf which makes this court holding very interesting to me in terms of where it will go and how insurance companies will use it to their advantage in negotiating their medical pay reimbursement interests.
What's Not Covered Under Medical Pay in California
It is clear the California Supreme Court was not willing to extend its reasoning to any other type of insurer subrogation claim beyond the medical pay example. Indeed, a footnote in Justice Werdergar’s concurring opinion pointedly notes: “I address only the circumstances (as here) of an insurer that is, for public policy reasons, precluded from independently proceeding against the tortfeasor under subrogation, and not whether an insurer who could so proceed, but instead voluntarily elects to await reimbursement, should be placed in the same position under reimbursement as well as under subrogation.”
For most California policyholders, it, therefore, remains an open question whether the “made-whole” rule applies to their total out-of-pocket losses, including both uninsured damages and litigation costs. By circumscribing its 21st Century decision so narrowly, the Court may be signaling that, in other contexts, the insured’s right to be “made whole” includes its right to recover litigation costs. This, of course, is how I am looking at this case right now.
Remember, I just received a letter from Farmers Medical Pay quoting this new case holding as ammunition in their arguments to not reduce to a certain level in my negotiations with them. Certainly, if there are other arguments that exist that help your injury client when an insurance company is quoting this new holding from the California Supreme Court, you should certainly use them.
In my example, I am arguing that the issue with my medical pay reduction request has nothing to do with my attorney fees and costs, but everything to do with the amount of medical bills still owed, and not covered under medical pay. Only time will tell what will happen with this new holding and much the insurance companies will try and use it. Right now, I have only encountered this new case with Farmers Medical Pay.