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Published: 2008-03-26

Lien Reduction Statues: The Newest Subrogation Obstacle



Just about the time subrogating carriers are finally making leeway against anti-subrogation doctrines such as the "made whole doctrine", the "common fund doctrine", and other equitable attacks on carriers' rights of subrogation, a new obstacle has surfaced. A trend is developing across the country whereby states are enacting statutes knows as "lien reduction statutes".

These statutes, which are a result of efforts to increase insureds' recoveries in light of the tort reform efforts of the last two decades and are driven by decreased tort recoveries and increasing subrogation liens and interests. Judges, mediators, and lawyers for both plaintiffs and defendants have begun utilizing this new anti-subrogation vehicle, under which a lien is diminished or eliminated due to the contributory negligence on the part of the insured or claimant and/or the uncollectability of a judgment or recovery due to one of a number of factors.

One example of such a Lien Reduction Statute is Indiana Code s34-51-2-19, which reads as follows:

"If a subrogation claim or other lien or claim that arose out of the payment of medical expenses or other benefits exist in respect to a claim for personal injuries or death and the claimant's recoveries diminished: 1.) By comparative faults; or 2.) By reason of the uncollectability of the full value of the claim for personal injuries or death resulting from limited liability insurance for many other causes; the lien or claim shall be diminished in the same proportions as the claimant's recovery is diminished. The party holding the lien or claim shall bear a pro rata share of the claimant's attorney's fees and litigation expenses.

While there is very little case law interpreting the meaning and application of this statute and its effect on subrogation interests, you can be sure that defense counsel, plaintiff's counsel, and mediators are using it to brow beat subrogating carriers into relinquishing all or part of their subrogation interest. Assuming a worker's compensation lien in the amount of $100,000 or more, and a third party recovery of only $300,000, it is easy to see why there is a concerted effort to eliminate the worker's compensation carriers' lien. The Indiana Lien Reduction Statute, like many of its sisters' statutes around the country, is being interpreted as a license to reduce the carriers $100,000 lien in the above scenario based upon the comparative fault of the claimant. If the case is tried and the jury decides that the plaintiff is 40% at fault, it is argued that the lien should likewise be reduced by 40%. If the case settles and there is no finding by a judge or jury of comparative fault, the matter is submitted to the trial court for a determination of exactly what percentage of fault the plaintiff is to bear for the accident. The problem with this is that the matter has settled, the plaintiff's main interest would be to show himself as much as fault as possible, in order to reduce or eliminate the subrogation interest.

Even more complicated is the allegation that the subrogation interest should be reduced due to the "uncollectability of the full value of the claim".

Assume that, in the above scenario, the $300,000 recovery is a recovery of policy limits from the third party tortfeasor, despite the fact that the claim has a value of $1,000,000. Under this scenario, all parties will argue that your lien should be reduced by 70%, because the plaintiff's claim was reduced by 70%. Again, the trial court would be called upon to determine the actual value of the claim to decide how much the lien should be reduced. Unfortunately, there is not much Indiana case law or case law throughout the country, interpreting these relatively new statutes and their effect on subrogation interests.

Practitioners are attempting to argue that the "uncollectability of the full value of the claim" language also means that in addition to reduction of the claim for a comparative fault, the lien should be reduced further based on the fact that the plaintiff had to "settle for less" than he would have liked to, due to concerns not only for lack of insurance, but the contributory negligence of the plaintiff himself. While this is obviously an attempt to double the reduction a subrogation carrier should sustain, the language of the statute itself does not make it clear that this is not allowed. For the last several years, the statute has specifically accepted worker's compensation liens from its effect.

However, the Indiana statute was recently amended, and the original worker's compensation exception to the statute was either intentionally or inadvertently omitted from the statute, giving practitioners the opportunity to claim that it applies to worker's compensation liens.

When confronted with lien reduction statutes such as the one in Indiana, subrogation professionals must gather, conduct, and take a look at all of the relevant discovery in the underlying case relevant to contributory negligence and the total value of the claim, as these factors will bear directly on how much, if anything, is recovered by them out of their subrogated interest. In essence, the subrogation action becomes a "quasi defense" action, and the subrogated carrier is left to prove, either to the trial court or in a declaratory judgment action, that the claimant was not as contributorally negligent as the other parties are claiming. This is especially difficult when the claimant can walk into court and admit that he is negligent. Common sense must dictate and the subrogation carrier must argue to the court that the plaintiff's representation about his contributory fault at mediation or trial must be looked at, and not his position when attempting to reduce the subrogation lien.

If you have any questions about a particular state you are subrogating in whether they have a lien reduction statute, or if you are faced with the application for such a statute or similar legislation, please feel free to call Gary Wickert to determine applicability and whether it is being applied in the correct fashion. Depending on the state, it may be shown that the lien reduction statute is unconstitutional and inapplicable to workers' compensation or other types of coverage.