California Law on Medical Pay Reimbursement

I just got a letter from Farmer's Insurance Medical Pay benefits department, our San Diego car accident lawyer explains regarding one of my client's injury cases where I am asking for a "full waiver" of those benefits under the "make whole" and "common fund doctrine."  In the letter, Farmers is now quoting a recent California Superior Court case in order to justify no full wavier of the medical pay benefits paid out to my client their insured.
This recent California Supreme Court decision is called: 21st Century Insurance Co. v. Superior Court (Quintana), S154790 (Aug. 24, 2009), and it "supposedly" clarifies the rules governing an insurer’s (insurance company) right to reimbursement for payments to its insured, after the insured obtains a recovery from the responsible third party.

Reimbursement Rights 

The Court held that while the insured has the right to be “made whole” before the insurer can assert its reimbursement rights, the made whole rule only applies to the insured’s non-covered damages, not his attorney’s fees. While the decision is favorable to insurers, it only applies to auto insurers seeking to recover small payments made pursuant to the standard “med-pay” coverage in their policies. 
See id. at n. 1. By circumscribing its holding so narrowly, the Court may be signaling that, in other contexts, it would reach a different holding.
The laws in California can be confusing, but the following is a good road map to know this: “When an insurance company pays out a claim on a first-party insurance policy to its insured, the insurance company is subrogated to the rights of its insured against any tortfeasor who is liable to the insured for the insured’s damages.”  Progressive West Ins. Co. v. Sup. Ct., 135 Cal. App. 4th 263, 272 (2005). 

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[4][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.  

However, this blog article concentrates on the 21st Century, where the insured (Quintana) was injured in a car accident. Pursuant to the no-fault “med-pay” coverage provision in Quintana’s auto insurance policy, 21st Century paid her the full $1,000 policy benefit. Quintana then instituted a personal injury action against the responsible third party as she was able to do so and was successful in that pursuit. In that action, she incurred attorney’s fees and costs of $2,106.50, and she ultimately settled her personal injury claim for $6,000. 
Quintana acknowledged that the $6,000 payment fully compensated her for her total damages (both insured and uninsured). Then, 21st Century insurance company sought reimbursement of its $1,000 med-pay payment out of Quintana’s settlement recovery. Quintana argued that 21st Century was not entitled to any such reimbursement, because she had not been made whole—after deducting the $2,106.50 in legal fees and costs, her $7,000 total gross recovery ($6,000 from the third-party tortfeasor, $1,000 from 21st Century) did not fully compensate Quintana for the $6,000 in damages that she sustained from the auto accident.  21st Century did acknowledge that its reimbursement claim should be reduced, in consideration of the legal expenses incurred by the insured.
However, 21st Century further argued that any such off-set was governed by the “common fund doctrine” which basically says “one who expends attorneys’ fees in winning a suit that creates a fund from which others derive benefits, may require those passive beneficiaries to bear a fair share of litigation costs.” Quinn v. State of Cal., 15 Cal. 3d 162, 167 (1975). 
Under the common fund rule/doctrine, a party who benefits from another party’s efforts to obtain a legal recovery must be a pro-rata share of the litigation costs. Thus, under 21st Century’s view, it was entitled to reimbursement in the amount of $600—the $1,000 med-pay benefit, less its pro rata share of Quintana’s litigation costs ($400).

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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. 

Mark Blane
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San Diego Personal Injury Lawyer | California Car Accident Attorney
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oscar pazos 03/21/2013 04:23 PM
This is a great advice for my problem regarding medical payment reimbursement. Thanks
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Kristine Tritten 11/12/2014 06:32 PM
Running into this same scenario with Nationwide. Did not know the back story on it - thank you for the insightful article.
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jan 10/29/2015 02:17 AM
I'm running into my insurance co will not discus how much med pay has been paid, and will only speak to my attorney, my attorney is not disclosing the final medpay or health insurance reimbursement that will come from my settlement after i sign off on a waiver, so i could end up in the hole.
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Marty 06/21/2016 08:38 PM
This is great information. I have a more complex question. If a person settles a civil claim, however they believe the insurance company was partially at fault can the same insurance company still seek reimbursement? Patient was injured by a doctor in the insurance companies medical provider network and also by implantable devices not FDA approved that the insurance company approved for surgery?
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Carol 07/25/2016 03:01 AM
My carrier is Nationwide. I was in an accident (100% not my fault). I have $5,000 in medpay. They agreed to pay my medical bills up to $5,000 after I sent them a medical release. I did that. Now they are saying they aren't going to pay but need me to sign a release from Mercury (insurer for the other party) so they can have Mercury pay the bills. I am in California. Don't they have to pay my bills first up to $5,000 without a release from Mercury?
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Jon A. Lafferty 01/21/2017 08:29 AM
Thank you for your article. I found this useful. Jon A. Lafferty,swimming accident attorney"
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Conrad 06/06/2017 10:29 AM
What if any Company's still exist with coverage in California that do not seek reimbursement for Med Pay ? ... I remember Some Company's used to not seek reimbursement , are their any left ? I have discovered in the State of Nevada they do not seek reimbursement if you use your Med Pay Great Blog you wrote thanks
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David Achord 01/11/2018 01:25 PM
Great article, Mark!
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Thuy 02/14/2018 12:27 PM
This was a great article. Have you run into the situation where you settle for $0 but did receive med pay from defendant's carrier and a lien holder is trying to get a part of that med pay? Do you know if they are entitled to it? Or can they only get to non-med pay funds?
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armando r. venegas 05/09/2020 08:34 PM
I pose this legal fact pattern for your legal responses: I have yet to uncover any legal points and authorities for the following argument that I am making to the attorney representing my client's insurer. There is a small print, hidden type, exemption in the auto policy; if the insured has an alcohol related accident the insurer will reduce the third party property damage coverage to the state minimum which is $5,000.00. Additionally the insurer uses said exemption in taking away the personal collision coverage, reduce it to zero. (It is assuming fault). My client was not notified of the unusual exemption and now seeks coverage for his car repair bills, which was totaled. I have discuss this argument to the attorney for the insurer, one that there is misrepresentation and two that they are in violation of the state financial responsibility law. That law does not require the coverage or purchase of collision coverage nor does it require the purchase of medical payments coverage as part of the financial responsibility law. Hence I have argued, but I need legal points and authorities, that collision coverage is optional, personal to the insured just as medical payments coverage is personal and optional. As such, it is agreed that med pay is a "no fault" tort scheme and that is why it is always paid regardless if the insured was involved in an alcohol related accident. (Or at fault). The med pay is paid fault or fault. The same reasoning should apply to personal collision coverage and it must be paid regardless of the unlawful exemption reducing it to zero in the event of a alcohol related accident.
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