For a general introduction, see "Collateral Source Reductions under CPLR 4545"

Blame it on word processors, or the innate conservatism of the legal profession, which hates to get rid of language that's been used for years; as often as a personal injury plaintiff is alleged to be sick, sore, lame and disabled, the complaint will also contain a claim for medical expenses. But if, as is most often the case, the plaintiff's health insurance has already paid this sum, suing for medical expenses is no longer such a good idea; there is no way the plaintiff can recover for these already-reimbursed expenses at trial, with exceptions that are usually of little help; and if the case settles before a verdict there is a real possibility of the lawyer's worst fear, "buying a lawsuit." The situation at trial is relatively simple. CPLR 4545 (c), effective in 1986, provides that "[i]n any action brought to recover damages for personal injury, injury to property or wrongful death, where the plaintiff seeks to recover for the cost of medical care, dental care, custodial care or rehabilitation services, loss of earnings or other economic loss", proof of collateral source payments "such as insurance (except for life insurance), social security (except those benefits provided under title XVIII of the social security act), workers' compensation or employee benefit programs (except such collateral sources entitled by law to liens against any recovery of the plaintiff)" will be admissible, and the court is required to reduce the award by the amount already reimbursed. As a small concession to plaintiffs, the cost of the premiums for whatever policy has paid these sums is added back in to the award.

Thus, in a reversal of the common law collateral source rule, defendants can now prove that plaintiffs were reimbursed for medical expenses, and plaintiffs will then recover nothing on this head of damages except the cost of their health insurance premiums. If the case is settled before trial, though, CPLR 4545 does not apply. The result will turn the nature of the settlement. Plaintiffs' awards are not reduced for collateral source payments; but if some of the settlement money is allocated for medical expenses the insurance company has a right to claim it.

A substantial number of health insurance policies provide for a contractual lien on the recovery of medical expenses already paid by the insurer. Even if the contract does not specifically state that the insurer has a lien--and such provisions are strictly construed--the insurer can usually proceed under a contractual right of reimbursement (see, Teichman v Community Hosp. of West Suffolk, 87 NY2d 514, 520).

But the insurer cannot force its insured to protect the insurer's rights. All the Appellate Divisions that have considered the issue have now held that plaintiffs are free to settle cases on any terms they wish, allocating all of the damages to pain and suffering, for example, so that there are no medical damages to be recovered. The most recent case on point is the Fourth Department's Independent Health Association v Grabenstatter (254 AD2d 722, lv den 93 NY2d 804). What is more, the Third Department had earlier held that "the failure to allocate a portion of the settlement to medical expenses" would not vitiate the agreement, and insurers could not intervene in the hopes of negotiating an arrangement that compensated them for the benefits they had paid (Berry v Lazaro, 250 AD2d 63, 68).

The trial court in Berry had allowed the insurers to intervene because the judge saw no other way for their interests to be protected. The Appellate Division reversed. The plaintiffs had received over $3,000,000 in medical expenses so far, and the Court found that there was "adequate evidence *** that the liability coverage of the remaining defendants is substantially less than the total provable damages" (250 AD2d, at 68). With such a disparity the insurer and the insured could only be at cross-purposes; every dollar the insurer could recover would further diminish the insureds' already partial compensation. Given this conflict, the insureds' rights came first.

The Second Department has agreed with this reasoning (McGuire v Long Island Jewish-Hillside Medical Center, 237 AD2d 417), having earlier noted in Humbach v Goldstein (229 AD2d 64) that the insurer has a lien only on sums "specifically identified as amounts paid for health care services or benefits attributable to the plaintiff's injuries" (229 AD2d at 69). So has the First Department, which cited both Berry and Humbach with approval in denying an insurance company's application to intervene (Halloran v Doni's 47 West 44th St. Rest. Corp., 255 AD2d 206).

What if the settlement agreement is silent on the allocation? That is the worst scenario from the plaintiffs' point of view, because, following the Court of Appeals' ruling in Teichman, the insurer then has a right to intervene "to establish its right to recoup covered medical payments, if any, made to plaintiffs by defendants as part of the settlement" (87 NY2d 514, 519). Having negotiated a settlement over some period of time, the plaintiff now has to negotiate or even try aspects of the case with its own insurer.

In a majority of cases, then, it would obviously be unwise to throw in the usual claim for medical expenses. At the very least, there ought to be no settlement that does not clearly articulate the heads of damages that are being compensated for. Plaintiffs have no duty to bargain for their insurers' benefit, and have nothing to gain by doing so. But what about the insurer's rights? The company has paid the plaintiff for medical expenses caused by the defendant's negligence, and cannot recover anything from its insured--assuming that the plaintiff has settled for pain and suffering only, or has prevailed at trial, and thus was not compensated a second time for those expenses. These are classic subrogation situations, where the insurer, having paid its insured for damages caused by a third party (the defendant), stands in its client's shoes, seeking to recoup its payments. Can the insurer go on to recover from the defendant? The effect of CPLR 4545 on these subrogation claims is unclear, and on this subject the Departments are split.

The Fourth Department appears to stand alone. In Kelly v Seager (163 AD2d 877), a fire damage case, that court held that CPLR 4545 did not apply to subrogation actions. Since it was intended to eliminate double recovery by the insured, the Court reasoned, its purposes are not served by applying it to subrogation claims. Clearly, the insurance company would not get a windfall from a subrogation claim; without the right to pursue the actual tortfeasor the insurer would itself be harmed by the tortfeasor's actions.

One might protest that this is exactly what one pays insurance premiums for, and this thinking may underlie the very different approach taken by the Second and Third Departments. In Humbach v Goldstein the Second Department cited the basic rule that rights under subrogation can be no greater than the compensated person's rights. Under CPLR 4545 the plaintiff cannot recover for the sums she or he received from the insurer. It follows, the Court reasoned, that the insurer cannot recover those payments either. Thus, no matter what the plaintiff receives at trial, the insurer is barred from going after the tortfeasor.

This might seem like an unfair result, but the Second Department took issue with the upstate Court's characterization of the Legislative intent behind CPLR 4545. The Court noted that this section had evolved from one that applied only to medical malpractice cases, part of a malpractice reform plan. It found that the Legislature intended "not only to prevent double recovery of plaintiffs, but also to keep down the liability insurance costs of policyholders" (229 AD2d, at 68). This intent is very clearly stated in the accompanying memoranda (see citations, loc. cit., and 1981 McKinney's Session Laws of NY, at 2577).

Even though, as the Court of Appeals has said, "CPLR 4545 was intended to eliminate double recoveries, not to provide defendants and their insurers with an 'undeserved windfall'" (Bryant v New York City Health & Hosps. Corp., 93 NY2d 592, 607), it is hard to see how the paying party's liability could be limited in any way other than that chosen by the Second Department. If that provision does nothing more than take the right to recover medical expenses away from plaintiffs and hand it to insurance companies, it would obviously have no effect on the cost of liability insurance; the defendant's exposure would be the same as before. If anything, the multiplication of parties would make the process even more time-consuming and costly.

The Third Department, in the Berry case, did not reach the point decided by the Humbach Court, but a footnote in the decision (250 AD2d, at 69 n 6) cites Humbach approvingly. The First has not yet spoken, and the Fourth Department has never been presented with facts directly on point. Kelly dealt with a fire loss, and if the very different climate of a personal injury case it may well be found distinguishable; the analysis of the intent of the Legislature in Humbach is persuasive, and may carry the day. If so, it will provide another lesson besides the danger of relying on old pleading templates and old pleading habits: that tort reform can sometimes begin as a battle between insurance companies and tort lawyers and end as one between two insurers. No solution is as simple as it seems.

Written contents are © 2001 Andrew V. Siracuse. Design © 1997 Michael Steinberg.