GEICO Insurance Co. v. Bernheim, 2013 VT 77
You know those commercials insurance companies put out—the we’re-on-your-side-and-we’re-always-there-for-you types of ads? I’m going to guess those are ruined for the defendants in this case.
Subrogation is an interesting and sometimes complicated concept. It’s basically the idea that when an insurance company pays their insured and someone else is at fault, the insurance company has a right to collect from the at-fault person. Because the right to recover flows from the insured, the insured has an obligation not to settle away the insurer’s right to recover; consequently, if the insured does settle away the insurer’s rights, then the insured is responsible for paying back the money the insurer paid the insured in the first place under an implied trust.
This case is an illustration in how this concept can work—or not work, depending on your perspective.
The facts are straightforward. Defendants are husband and wife. Wife was involved in an auto accident. Their insurer, GEICO, paid wife’s medical bills under the policy up to the policy limit of $10,000. That payment was pursuant to a subrogation clause, and GEICO notified the other insurer, Liberty Mutual. Defendants then settled with Liberty Mutual, including GEICO’s liens (whatever they might be), for $30,000, but did not pay GEICO.
So GEICO sent a demand letter to defendants and later filed suit against them. For whatever reason, Liberty Mutual avoided being brought into the proceedings—GEICO apparently didn’t try real hard to bring Liberty Mutual in—and the statute of limitations ran against Liberty Mutual. Of note: GEICO asserted in its initial pleadings that Liberty Mutual didn’t know about GEICO’s lien, but during discovery, it came out that Liberty Mutual indeed had been notified of GEICO’s lien.
Both parties shot for summary judgment, but GEICO won the draw. The trial court granted GEICO’s motion based on breach of contract and the “trustee theory” of settlement proceeds, which means that when two (or more) parties are entitled to settlement proceeds, the party that receives the proceeds holds the other party’s portion in trust.
Defendants were ordered to pay GEICO the $10k, offset by their costs, and they appealed.
When the SCOV reviews a summary judgment decision, there’s no deference and the SCOV uses the same standard as the trial court: if there’s no issue of genuine material fact, then the SCOV asks whether either party is entitled to judgment as a matter of law.
Defendants make nine claims for reversal, which the SCOV divides into two general categories: “those that relate to whether GEICO can recover from defendants, and those that relate to the amount that GEICO can recover from defendants.”
The defendants’ first set of arguments is essentially that GEICO should have sued Liberty Mutual, and not them. The SCOV notes that GEICO indeed could have sued Liberty Mutual, but it was not required to do so. Because defendants were paid by GEICO and then paid by Liberty Mutual an amount that included GEICO’s liens, then the defendants should have held GEICO’s portion in trust. Otherwise, defendants could get, at least theoretically, a double recovery. Accordingly, the SCOV holds that suing the other insurer is not a prerequisite for suing the insured—even though GEICO would have had a cause of action against Liberty Mutual because Liberty Mutual had notice of GEICO’s lien before it settled with defendants, GEICO wasn’t required to sue Liberty Mutual before or instead of suing the defendants. The SCOV affirms the trial court’s trustee theory, which is “well established in insurance law.”
The SCOV notes that the statute of limitations running against Liberty Mutual has no bearing on GEICO’s ability to collect from defendants—the claims are not mutually exclusive.
The defendants’ argument regarding laches (waiting too long to bring a case, even if the statute of limitations hasn’t run) doesn’t get far at all. The SCOV reasons that there has to be prejudice and concludes that the defendants haven’t shown the requisite prejudice.
The defendants’ next argument is essentially that because GEICO initially proceeded on a breach-of-contract theory, when notice to Liberty Mutual was discovered, that meant that GEICO’s case against defendants was done. Not so, says the SCOV again noting the applicability of the trustee theory and GEICO’s ability to plead alternative grounds for relief.
The defendants’ next argument is closely related. Defendants claim that GEICO waived its subrogation rights when it hid notice to Liberty Mutual from them and the trial court. The SCOV notes that this is not really a waiver argument—more an argument for sanctions—and the SCOV declines to find a waiver when none really has been shown.
The SCOV holds, therefore, that GEICO’s claim against the defendants is viable.
But the SCOV departs from the trial court on the amount that GEICO can recover. Defendants’ argument in this regard is that GEICO has to show what portion of the settlement went toward medical payments. This raises a question of first impression for the SCOV, which the SCOV articulates as such: “[W]hen an insured settles with a tortfeasor and holds that recovery in trust for his or her insurer, but the settlement does not clarify what portion of the settlement is dedicated to the injury for which the insurer already compensated the insured, how is the reimbursement from the insured to the insurer to be calculated?”
The SCOV recognizes three general approaches to this question. The first approach says that the insurer gets the entire amount it paid out because the insured violated the insurer’s subrogation rights by settling. The second approach allows the insurer to recover only if the insured has been made whole or the insurer provides proof of what portion of the settlement went toward the already-recovered-for injury. The final approach “prorates the settlement recovery between insurer and insured based on the settlement as a percentage of the value of the verdict.”
The SCOV notes that it has in the past adopted some of the logic of the second approach, referring to a 2005 worker’s compensation case. The SCOV reasons that, to be fair, a prohibited “double recovery” only happens when an insured recovers in excess of compensatory damages for the same injury. The SCOV therefore remands to the trial court to determine the full amount of defendants’ compensatory damages including all medical expenses and holds: “To the extent that the settlement amount falls short of defendants’ full compensatory damages, including all of the medical expenses, GEICO’s reimbursement must also be cut back proportionally. To the extent that the court concludes that GEICO is entitled to less than the $10,000 it paid, the court must recalculate GEICO’s share of defendants’ costs for reaching the settlement with Liberty Mutual.”
So folks, remember that if you’re injured, someone else is at fault, and your insurer pays you, that money comes with strings very much attached. As for the attorneys reading this, make sure you take care of the liens when you settle a case—at least at that point you can negotiate and not have your client potentially on the hook for the whole amount. That’s never good.