Chapter 4 - § 4.4 • SUBROGATION CLAIMS AND LIENS

• Jurisdiction: Colorado

§ 4.4 • SUBROGATION CLAIMS AND LIENS

§ 4.4.1—Subrogation Under the Former No-Fault Act

Under the former No-Fault Act, subrogation claims arose only infrequently. The No-Fault Act's general prohibition of subrogation claims was found in former C.R.S. § 10-4-713(1), which stated:

(1) Neither any person eligible for direct benefits described in section 10-4-706(1)(b) to (1)(e) . . . nor any insurer providing benefits described in section 10-4-706(1)(b) to (1)(e) . . . shall have any right to recover against an owner, user, or operator of a motor vehicle or against any person or organization legally responsible for the acts or omissions of such person in any action for damages . . . required to be paid under section 10-4-706(1)(b) to (1)(e) . . . .

The former No-Fault Act created a limited exception to the rule against subrogation. This exception, which was found in former § 10-4-713(2), generally only applied to cases where the occupants of a private passenger vehicle or a public school bus were injured in an accident involving a commercial vehicle. In such a case, the insurer of the private passenger vehicle or the school bus had a direct cause of action to recover the PIP benefits against the insurer of the commercial vehicle. Such subrogation claims were subject to mandatory inter-company arbitration pursuant to former C.R.S. § 10-4-717.

Under the former No-Fault Act, subrogation claims were rarely litigated, because, in most instances, the injured person's medical and rehabilitation expenses were paid entirely as PIP benefits by an automobile insurer, which had no right to subrogation pursuant to former § 10-4-713(1). Moreover, all subrogation claims permitted under former § 10-4-713(2) were subject to mandatory inter-company arbitration and would not be litigated in court. Thus, litigation over subrogation rights occurred under the No-Fault Act only in cases where an insurance company or other entity paid medical, rehabilitation, or wage loss benefits that exceeded the amounts payable as No-Fault benefits.

§ 4.4.2—Subrogation Under Current Law

When Colorado reverted to the tort system in 2003, everything initially changed because there were no longer any PIP benefits nor any statutory prohibitions against subrogation. When an insurer or governmental entity paid any medical, rehabilitation, or wage loss expenses, and a third party was responsible for causing the injury that necessitated such expenses, the insurer or governmental entity had a potential subrogation claim to recover all such expenses. However, as discussed below, two significant changes have occurred since Colorado's reversion to the tort system in 2003.

No Subrogation for Medical Payments

First, the General Assembly adopted C.R.S. § 10-4-635 governing medical payments coverage under motor vehicle insurance policies. Under § 10-4-635(1)(a), a motor vehicle insurance policy may not be issued in Colorado unless it includes medical payments coverage in the minimum amount of $5,000. As an exception to this requirement, pursuant to § 10-4-635(1)(b), a policy may be issued without medical payments coverage if the named insured rejects such coverage in writing.

In addition to making medical payments coverage mandatory, the General Assembly has also precluded subrogation claims by insurers that provide such benefits. C.R.S. § 10-4-635(3)(a) precludes all subrogation claims for medical payments and provides that insurers paying such benefits have no right of direct action against the alleged tortfeasor to recover benefits paid.

This statute at least partially abrogated established case law, which recognized that "[m]edical payments subrogation clauses in insurance contracts are generally enforceable" and that under "equitable subrogation, when an insurer has paid its insured for a loss caused by a third party, it may seek recovery from the third party." DeHerrera v. American Family Mutual Insurance Co., 219 P.3d 346, 350 (Colo. App. 2009).

Statutory Adoption of the "Make Whole" Doctrine

The second major change occurred in 2010, when the General Assembly adopted C.R.S. § 10-1-135, incorporating the "make whole" doctrine into Colorado law. The main provisions of this statute are briefly reviewed below. Before the adoption of this statute, the "make whole" doctrine was not part of Colorado law. In DeHerrera, the court of appeals noted that, except for a case decided under the former No-Fault Act, "DeHerrera has not cited any Colorado cases, nor have we found any, that hold that the insurer has no right to subrogation unless the insured was made whole by the underlying settlement." 219 P.2d at 352. The court found that "such a rule would not comport with the policy of encouraging the settlement of lawsuits." Id.

In enacting § 10-1-135, the General Assembly explicitly recognized that the "make whole" doctrine is the public policy of Colorado. See C.R.S. §§ 10-1-135(1)(a) through (f). For instance, § 10-1-135(1)(b) states: "Reimbursement or repayment of benefits should not be permitted when the injured party would not be fully compensated for his or her injuries and damages . . . ." This policy is implemented by § 10-1-135(3)(a), which provides as follows: "Reimbursement or subrogation pursuant to a provision in an insurance policy, contract, or benefit plan is permitted only if the injured party has first been fully compensated for all damages arising out of the claim. Any provision in a policy, contract, or benefit plan allowing or requiring reimbursement or subrogation in circumstances in which the injured party has not been fully compensated is void as against public policy."

Pursuant to § 10-1-135(3)(a)(II), this anti-subrogation rule does not apply amounts paid for property damage, nor does it apply to claims against at-fault third parties by insurance carriers for amounts paid as UM/UIM benefits.

The statute also includes a provision stating that the amount recoverable by the payer of benefits shall be reduced by its proportionate share of attorney fees incurred by or on behalf of the injured party. C.R.S. § 10-1-135(3)(c). Thus, the statute adopts the socalled "common fund" rule.

Pursuant to § 10-1-135(d)(I), if the injured party recovers less than the total amount available under any liability insurance policies or UM/UIM coverage, there is a rebuttable presumption that the injured party has been fully compensated, in which case subrogation may be permitted. On the other hand, if the injured party recovers the full amount available under such policies, there is a rebuttable presumption that the injured party has not been fully compensated.

The statute also contains provision governing how disputes over subrogation claims are to be resolved. Pursuant to § 10-1-135(4)(a)(II), if the injured party believes he or she has not been fully compensated and intends to enforce the anti-subrogation rule contained in § 10-1-135(3)(a), the injured party must notify the payer of benefits within 60 days of the receipt of each recovery. Under § 10-1-135(4)(a)(III), if the payer of benefits disputes the injured party's contention that he or she has not been fully compensated, then the dispute shall be resolved by arbitration. The payer of benefits must demand arbitration no later than 60 days after its receipt of the required notice from the injured party. If the arbitrator determines that the injured party's recover has not resulted in full compensation, then the payer of benefits has no right repayment, reimbursement, or subrogation.

Pursuant to C.R.S. § 10-1-135(6)(a)(I), a payer of benefits generally has no right to bring a direct action for subrogation or reimbursement against the at-fault party or against a UM/UIM carrier. However...