Chapter Nine

• Jurisdiction: New York

Chapter Nine

Subrogation

Laurie A. Vahey, Esq.

I. Introduction

Subrogation means to substitute one for another.¹⁰⁵⁷ In the context of insurance, subrogation is the principle by which an insurer, having paid losses of its insured, is placed in the position of its insured, so that it may recover reimbursement from a third party legally responsible for the loss. However, “the insurer can only recover if the insured could have recovered and its claim as subrogee is subject to whatever defenses the third party might have asserted against its insured.”¹⁰⁵⁸

An insurer may seek subrogation against only those funds and assets that remain after an insured has been compensated.¹⁰⁵⁹ If an insured accepts less than the available insurance coverage, then the “made whole” doctrine should not prevent the insurer’s claim.¹⁰⁶⁰

The principle has a dual objective: First, it prevents an insured from recovering twice for one harm—from the insurer and from a third person who caused the damage. Second, it requires the culpable party to reimburse the insurer for the payment the insurer has made to its insured.¹⁰⁶¹

The doctrine of subrogation is to be applied for the protection of those who are its natural beneficiaries—that is, insurers that have been compelled by contract to pay a loss caused by the negligence of another.¹⁰⁶²

II. Insurances Subject to Subrogation

An insurer’s right to subrogation arises in standard areas: automobile collision loss, fire loss and marine insurance loss. Fidelity insurers have been permitted to proceed as equitable subrogees where banks have negligently caused or contributed to a loss. Where an automobile insurer pays “Additional Personal Injury Protection” (APIP) benefits to its insured, the insurer is subrogated against the tortfeasor to the extent of the APIP benefits paid. In addition, a carrier that has paid no-fault benefits to a covered person may seek to recover those payments from a non-covered tortfeasor.¹⁰⁶³ The endorsement for supplementary uninsured motorists benefits gives a carrier a right of subrogation against a tortfeasor.¹⁰⁶⁴

Under New York law, subrogation rights for medical payments are limited. Specifically, N.Y. General Obligations Law § 5-335 (GOL) was added to provide that when a plaintiff settles with one or more defendants in an action for personal injuries, medical, dental, or podiatric malpractice, or wrongful death, it shall be conclusively presumed that the settlement does not include reimbursement for health expenses or economic losses to the extent a benefit provider reimbursed them, except for where there are statutory rights of reimbursement.¹⁰⁶⁵ Further, under the statute when a party enters into such a settlement it cannot be subject to a subrogation claim by a benefit provider and the subrogation and reimbursement rights of the benefit provider are extinguished.¹⁰⁶⁶

Employee Retirement Income Security Act of 1974 (ERISA) plans or other federally governed reimbursement rights are not bound by this New York statute. In Montanile v. Bd. of Trustees of the National Elevator Industry Health Benefit Plan, the United States Supreme Court ruled that an ERISA plan could not recover from a plan participant that received settlement proceeds unless the proceeds were separately identifiable.¹⁰⁶⁷ The attorney released the settlement proceeds of a personal injury action to the client/plan participant after the plan failed to timely object. The client claimed he spent the funds and the plan could not get a judgment against his general assets because it was only entitled to equitable relief under the laws governing ERISA plans. The Supreme Court agreed with the participant and remanded for further proceedings to determine if settlement proceeds were separately identifiable.

With respect to Medicare payments, the federal government has subrogation rights.¹⁰⁶⁸ It is considered a secondary payor program.¹⁰⁶⁹ Pursuant to the statute and regulations, there is roughly a one-third set-off for attorney’s fees.¹⁰⁷⁰

Subrogation rights may arise either through contract (conventional subrogation) or through equity (by operation of law). Subrogation provisions in insurance policies, however, are redundant, since the right to equitable subrogation is the legal result of an insurer’s payment to an insured for a loss and inures to the insurer without any formal assignment or express stipulation.¹⁰⁷¹ The rights of an insurer as equitable subrogee against a third party are derivative and limited to such rights as the insured would have had against such third party for its default or wrongdoing. Thus, an insurer can recover only if the insured could have recovered. An insurer’s claim as subrogee is subject to whatever defenses a third party might have asserted against the insured.¹⁰⁷²

III. Accrual of the Right of Subrogation

The rights of an insurer as equitable subrogee arise independently of any contract.¹⁰⁷³ Such subrogation rights accrue upon payment of a loss.¹⁰⁷⁴ At that point, an insurer who has paid its policy limits may proceed directly against the negligent third party to recoup the amount paid.¹⁰⁷⁵ This is so even though an insured’s losses are not fully covered by the proceeds of the policy.¹⁰⁷⁶ The insurer’s claims for amounts paid by it and the insured’s claim for uninsured losses are divisible and independent.¹⁰⁷⁷ Permitting an insurer to sue as equitable subrogee does not affect the insured’s right to sue for the amount of the loss remaining unreimbursed.¹⁰⁷⁸ In the alternative, an insurer may seek to intervene in its insured’s lawsuit against a tortfeasor or under CPLR 1012(a)(2) or 1013.¹⁰⁷⁹

IV. Medicare Set-Asides

Section 1862(b) of the Federal Social Security Act was enacted to strengthen Medicare’s ability to recover from what is referred to as “primary plans” and any entity that receives payment from a primary plan.¹⁰⁸⁰ Primary payors can be interpreted to include, but are not limited to, liability insurance carriers as well as no-fault and workers’ compensation carriers.¹⁰⁸¹ Further, in enforcing the statute, the government may contend that entities that receive payment from primary plans include beneficiaries and their attorneys.

The statute goes on to require reimbursement to Medicare by a primary plan or entity receiving monies from a primary plan within 60 days of its notice that a primary plan was responsible to pay.¹⁰⁸² If payment is not made within 60 days, interest can be charged.¹⁰⁸³

The U.S. Attorney’s Office is authorized to pursue recoveries from primary payors and entities pursuant to 42 U.S.C. § 1395y(b)(2)(B)(iii). In such an action, interest and double damages can be sought.¹⁰⁸⁴ The statute of limitations for claims involving liability carriers is six years from when the cause of action accrues—arguably the later of the date of payment or when Medicare learns of payment.¹⁰⁸⁵ However, the subrogation provisions of the statute provide for a three-year statute of limitations to recover from the entity responsible to pay, which is calculated from the date that the item or service was provided.¹⁰⁸⁶

The statutory framework also provides for a set-aside procedure concerning recoveries by injured Medicare recipients. In sum, the recipient (or a potential recipient within 30 months of a recovery) must notify Medicare of its claim and seek a recovery demand amount. Once there is a settlement, judgment or award, the recipient is advised to notify Medicare to see if there are additional charges to add to its recovery and then it will issue a recovery demand letter, which will include information on the beneficiary’s administrative appeal rights under 42 U.S.C. § 1395ff if there is a disagreement. Under 42 C.F.R. § 405.376, the beneficiary can request that Medicare’s claim be compromised.

Practically, the legislative enactments present difficulties for the practitioner. At the very least, getting a demand recovery amount from Medicare may delay possible resolution of a personal injury matter. Moreover, uncertainty as to an amount sought will plague both plaintiffs and defendants if there is no final closure at the time the original agreement is reached.

V. Statute of Limitations

The statute of limitations to bring a subrogation action is governed by the same statute of limitation that applies to an insured’s underlying claim against a tortfeasor.¹⁰⁸⁷ However, an insurer may circumvent the applicable statute of limitations under the relation back doctrine if the insured has commenced his or her own claim for damages.¹⁰⁸⁸

VI. Real Party in Interest

N.Y. Civil Practice Law and Rules 1004 provides that an insured, who has executed either a loan agreement or subrogation receipt for an insurer, may bring an action against a third party without joining the insurer as a party. The statute also allows a subrogated insurer to commence an action in the name of the insured against a third party. This constitutes a legislative exception to the real-party-in-interest doctrine and prevents disclosure of insurance coverage to a jury.¹⁰⁸⁹ There also is authority that, in the absence of a loan agreement or subrogation receipt, an insurer may commence the action in the insured’s name only where the insured has been fully paid.¹⁰⁹⁰ On the other hand, an insurer has the option of bringing a subrogation action in its own name once it has paid the entire amount of a loss.¹⁰⁹¹

VII. Release of Subrogation Rights

An insurer’s right to subrogation may be defeated where an insured expressly releases a third party from any liability for a loss.¹⁰⁹² A release executed by an insured in favor of a third party is not effective to defeat subrogation where it expressly exempts subrogation rights from its operation.¹⁰⁹³ Nor is a settlement between an insured and a tortfeasor effective as against the insurer, where the tortfeasor has knowledge of the insurer’s right of subrogation.¹⁰⁹⁴ Similarly, if the tortfeasor is aware or should be aware that a right of subrogation exists, the wrongdoer and insured...