If you get into an accident, you may require medical treatment long before you get money from the person that caused the accident. This treatment is often paid for by your insurance company.
Subrogation is a legal term that essentially means that your insurance company can recover the money it paid to you for your injury — but collect it from the party that caused your injury. In your personal injury lawsuit, the subrogation payment will come out of the compensatory damages the other party’s insurance company will pay.
Subrogation can apply to payments made by your insurance company to you related to:
To protect your right to the damages from your accident, the subrogation payments to your insurance company are limited by:
- Cal. Civ. Code 3040
- California’s “Made Whole” Doctrine
- The Common Fund Doctrine
In this article, our California personal injury attorneys will explain:
- 1. What is subrogation?
- 2. What are the elements of subrogation?
- 3. Limits of subrogation
- 4. What is the basis for a subrogation claim?
- 5. Can you waive your insurance company’s subrogation rights?
- 6. Areas where subrogation can apply
- 7. Limitations on the insurance company’s subrogation rights
- 8. Other concepts similar to subrogation
- 9. The Statute of limitations for subrogation
- 10. How will subrogation affect my total recovery?
In a personal injury claim, an accident victim files a lawsuit against the person that harmed her, to get money for her losses.
Oftentimes the accident victim will receive payments from her own insurance company or another provider before she recovers money from the person at fault. She may receive treatment from a hospital, medical treatment through her own health insurance, medical treatment through another insurance policy, lost wages through an insurance policy, or other benefits.
Whatever benefits the accident victim receives before the end of their lawsuit should be the responsibility of the person that caused the accident. Subrogation is a way for the companies that make these first payments eventually to be paid back by the person at fault.
Subrogation has been described as:
- the right of an insurance company to recover money from the person that caused the accident for the damages it paid to you. 1
- the insurance company’s right to be put in the position of the accident victim to pursue recovery from the person responsible for the accident. 2
- the substitution of the insurance company in place of the accident victim to whose rights they take over. By agreeing to pay money to the accident victim, the insurance company is given the right to take the place of the accident victim and get reimbursed by the person that caused the accident. 3
The right of subrogation for an insurance company:
- comes from the rights of the accident victim. The insurance company “stands in the shoes” of its accident victim and has the same rights as the person that caused the accident as the accident victim. The insurance company’s subrogation rights aren’t any greater than the accident victim’s rights.4
- aims to place the burden for a loss on the person responsible for it and by whom it should have been paid by and to relieve the insurance company from having to make the payments. 5
Under California law, the elements of an insurance company’s cause of action for subrogation are:
- (a) the insurance company suffered a loss for which the defendant is liable;
- (b) the claimed loss was one for which the insurance company was not primarily liable;
- (c) the insurance company has compensated the accident victim in whole or in part for the same loss for which the defendant is primarily responsible;
- (d) the insurance company has paid the claim of its policyholder to protect its own interest and not voluntarily;
- (e) the insurance company has an existing cause of action against the defendant which the accident victim could have asserted for its own benefit had it not been compensated for its loss by the insurance company;
- (f) the insurance company has paid money caused by the liability of the defendant;
- (g) justice requires that the loss be shifted from the insurance company to the defendant; and
- (h) the insurance company’s damages can be calculated, generally the amount paid to the accident victim.” 6
Mike is involved in an t-bone auto accident that is the fault of Sarah. Because of the accident he needs the following:
- treatment at a hospital emergency room billed at $6,000
- chiropractic care through his auto insurance policy that costs $2,000
- medical treatment through his private health insurance at a cost of $5,000
Mike has received treatment totaling $13,000. All these companies can be paid back from the money Mike obtains from Sarah. If Mike receives a settlement of $25,000, he can expect up to $13,000 to go toward reimbursement of these providers.
The insurance company has no subrogation rights against the person that paid for the insurance policy, meaning the insurance company can’t pay money to you and later ask you to pay it back. Subrogation only allows the insurance company to go after someone else.7 You bought the insurance to cover your loss. If the insurance company could get the money back from you, the insurance would be worthless.8
There is no subrogation right when the policyholder is at fault in an accident. The policyholder has no one to sue and recover money from because it was their fault. Since the insurance company steps into the shoes of the policyholder, they also have no one to pursue to get their money back.
There are three types of subrogation:
- Contractual subrogation comes from the contract between the policyholder and the insurance company. It is the narrowest type of subrogation because it applies to only the contract between you and the insurance company. See health insurance or Med-Pay below for examples of contractual subrogation.
- Statutory subrogation laws give subrogation rights in certain situations. This is not as narrow as contractual subrogation because it doesn’t depend on the contract but on the type of relationship between the accident victim and the benefits they are getting. See workers’ compensation below as an example of statutory subrogation.
- Equitable or judicial subrogation comes from cases decided by judges. This is the broadest type of subrogation because your attorney can probably argue for it in many situations. 9
An insurance policy will often require your cooperation with the insurance company’s subrogation efforts. You cannot take any action that jeopardizes the insurance company’s right to recover the money it paid you. For example, you cannot sign an agreement releasing the party at fault in exchange for them paying your insurance deductible.10 This may help you but will hurt the insurance company’s ability to get their money back.
Subrogation can apply in any situation where a payment was made to someone who is not the primary person responsible. The following situations are common in personal injury claims.
Medical Pay (Med-Pay) is part of an auto insurance policy that allows you to send your medical bills from an accident for payment by your own auto insurance. It gives an added source of money (beyond comprehensive collision coverage) for medical treatment if you are injured.11 There is no requirement that an insurance company provides this though. It’s something that is negotiated between you and your insurance company.12
Med-Pay payments that your insurance company wants to be reimbursed for must come from whatever you recover from the party at fault. The insurance company can’t sue the party at fault directly for this.13
Jill is involved in an auto accident that is the fault of Bob. She receives chiropractic treatment totaling $1,000 and submits this for payment to her insurance company. The insurance company pays this amount per the Med-Pay portion of her auto insurance contract.
Jill then receives a $10,000 settlement from Bob’s insurance company. Out of this her insurance company is reimbursed for the $1,000 it paid for the chiropractic treatment.
Essentially the insurance company loaned Jill $1,000 for medical treatment until she could collect the money from Bob and pay back the insurance company.
An insurance company paying a claim under your uninsured motorist coverage can use subrogation to get reimbursed by the responsible party.14 A subrogation clause in your insurance contract may state:
“if we (the insurance company) make a payment under the uninsured motor vehicle coverage, we have the right to recover the amount of our payment from any person legally responsible for the loss. You (the policyholder) must transfer all rights to recover to us, execute all legal papers we need, and not harm our rights to recover from the responsible party.”15
It is the insurance company’s responsibility to try to obtain money from the uninsured motorist that caused the accident.
Joe is involved in a head-on collission accident and the other driver, Sam, is at fault but does not have auto insurance. Joe receives payments for his damages of $25,000 from his insurance company under the uninsured motorist provision of his auto policy. His insurer has subrogation rights to “step into Joe’s shoes” and go after Sam for the money paid to Joe. After all, Sam is the person at fault.
Whether the insurance company is successful at getting any money from Sam has no effect on Joe keeping the $25,000. If Sam is uninsured, it’s unlikely he will have $25,000 to pay back the insurance company, and they will never get their money back.
Subrogation does apply in lawsuits for workplace injuries in California. The injured employee has a right to file both a workers’ compensation claim and a civil claim if his work injury was caused by someone else while he was working.
The employer, through its workers’ compensation insurance carrier, can independently sue the person at fault on its own or join in the lawsuit by the injured worker at any time before trial. 16 17
If either the injured employee or workers’ compensation insurance company files a civil lawsuit against the third party, they are to notify the other.18
The workers’ compensation carrier can file a lien in lieu of joining the matter.19 The lien can be updated up until the time of judgment if the insurance company continues to pay benefits to the injured worker.20 See below for a discussion of liens.
The Common Fund Doctrine applies here.21 See below for a discussion of the Common Fund Doctrine.
Any funds the injured employee receives from the person at fault after attorney fees, expenses, and payment of the employer’s lien will relieve the workers’ compensation insurance company of having to make further payments to the injured worker until those funds are used up.22
Jack drives a delivery truck and is involved in an auto accident that is the fault of Chris. Jack files a workers’ compensation claim and receives medical care and temporary disability benefits totaling $30,000.
Jack files a trucking accident lawsuit against Chris and receives a settlement of $100,000 that factors into his medical treatment and disability.
The workers’ compensation insurance company has a right to recover the $30,000 in payments it made to Jack. If they could not, Jack would get $30,000 in workers’ compensation benefits and the same amount would be counted again in his settlement with Chris, meaning that he would be getting paid double.
Moreover, the worker’s compensation insurance company does not have to make further payments to Jack until he spends up to $70,000 on benefits the insurance company would have given if he didn’t receive money from the person at fault.
See 7.1 Health Insurance and Cal. Civ. Code § 3040 below.
Subrogation often occurs at the expense of the accident victim as it reduces the total amount of money she receives in her pocket.23 There are protections in place to prevent entire settlements from being used up reimbursing insurance companies who initially made payments before the party at fault pays for it.
Cal. Civ. Code § 3040 deals with the reduction of health insurance bills in personal injury cases. Section 3040 places a limit on what an insurance company can recover out of a settlement for payments made to an accident victim.
(There is often contractual language in your health insurance contract that may allow them to go outside of the Made Whole Doctrine. See below for a discussion of the Made Whole Doctrine.)
The insurance company is limited in its recovery by the lesser of:
1) the cost of the medical services or;
2) a percentage of the total settlement.
The cost of the medical services depends on how the insurance company pays medical providers. This is based on a concept called capitation.24 Capitation is a set fee paid by an insurance company to a doctor for each person it treats regardless of the services provided.25 Alternatively, in a non-capitated setting, the health insurance company pays doctors based on the actual medical services provided.
Some health insurance plans pay medical providers based on a capitated basis and others on a non-capitated basis. In a non-capitated case, it’s easy to figure out what medical care the accident victim had that was related to the accident because you can just look at the charges to determine the first factor.
But in a case where the insurance company pays a set fee for each person a doctor treats, how do you figure out what part of those payments were for medical treatment related to the accident? Section 3040 says that those paid on a capitated basis are limited to 80% of the usual charge by medical providers on a non-capitated basis.26 In this way, they can get a reasonable estimate of the cost of the treatment for the first factor.
Once you figure out the cost of the medical services – the first factor – you must look at the second factor so that you can take the lower value of the two factors, as required by the statute.
The second factor depends on whether the accident victim retained a car accident attorney. If they did have an attorney, the second factor is one-third of the settlement amount. If the accident victim did not have an attorney, the second factor is one half of the settlement amount.27
Jane had $15,000 in medical bills and received an $18,000 settlement. The medical services costs on a non-capitated basis are $12,000. Jane did not have an attorney, so based on the total settlement, the insurance company could collect one half of the settlement, or $9,000. As this is less than the $12,000 in medical costs, this is the most the insurance company could collect from the $18,000 settlement.
If Jane did have an attorney, the insurance company could collect only one-third, or $6,000, out of the settlement.
The Common Fund Doctrine also applies here.28 See a discussion of this below.
The accident victim and his insurance company are going after the same pool of money from the person at fault. The Made Whole Doctrine says that a settlement must make the accident victim whole before reimbursing the insurance company.29 This may come up if the person at fault does not have enough insurance to cover the accident victim’s loss.30
Jane is involved in a motorcycle accident that is the fault of Justin. Her auto insurance company under a Med-Pay plan pays $1,000 for Jane’s chiropractic treatment. Jane has damages totaling $18,000 but only receives a $15,000 settlement from Justin.
Jane has not been made whole because her damages of $18,000 are more than her settlement of $15,000. Therefore, she can use the Made Whole Doctrine to argue that her insurance company should not be reimbursed for the $1,000 in chiropractic treatment it paid for. If they were, it would be taken out of Jane’s $18,000.
Note that the Made Whole Doctrine may not actually make you whole because your car accident attorney obtains his or her fee from your settlement.31
Jane’s personal injury attorney will take a one-third fee out of her $18,000 settlement. She will only pocket $12,000. For Jane to be made whole, the settlement would have to be $24,000. This would give her the damages she suffered of $18,000 and pay an attorney fee of $6,000. Jane cannot claim that the made whole calculation should factor in the attorney fee.
You should be aware that the Made Whole Doctrine may be overruled by language in the insurance contract that gives the insurance company “all rights of recovery to the extent of its payment.”32
The Common Fund Doctrine makes insurance companies pay part of the money it recovers to the accident victim’s attorney if the insurance company does not have its own attorney. Since the accident victim’s attorney put in the effort to resolve the case – including getting the insurance company their money back – the attorney should receive a fee out of the insurance company’s recovery for his or her effort.33
This gives the accident victim’s attorney an incentive to handle the insurance company’s subrogation claim. Even though the insurance company did not hire its own attorney, it should still pay some of the cost of getting its money back.34
Nancy is involved in an auto accident where Mark was at fault. Her insurance company pays $6,000 in medical expenses. Her lawsuit against Mark results in a settlement of $24,000. The insurance company did not take part in the lawsuit. Without the Common Fund Doctrine, the insurance company could receive $6,000, but why should it get all of its money when it didn’t even hire its own attorney?
With the Common Fund Doctrine, the attorney’s fee of one-third, or $8,000, is paid in part out of the insurance company’s recovery.
The insurance company will only receive $4,000. This is the $6,000 they paid for medical treatment minus a one-fourth share of the $8,000 attorney fee. The one-fourth comes from the fact that $6,000 is one-fourth of the $24,000 settlement.
For Nancy, without the Common Fund Doctrine, she would get $10,000, which is $24,000 less the $8,000 attorney fee and the $6,000 to the insurance company. But with the Common Fund Doctrine, the deduction is $8,000 for the attorney fee but only $4,000 for the insurance company, and Nancy will pocket $12,000.
The following terms refer to a payment by someone that was not primarily responsible for the payment. In these cases though, they are not standing in the shoes of the accident victim, even though the result is a similar recovery of money.
Contribution is often confused with subrogation.35 But it does not place a person in the shoes of another. It is a separate right. This may occur when two insurance companies defend the same loss and one pays more than the other. Each insurance company has the right to seek contribution from the other if it paid more than its fair share because both insurance companies are primarily liable for the loss. This does not affect the accident victim’s rights.36
However, even if two insurance companies cover the same policyholder, there may be a subrogation right if one insurance company is not primarily liable for the loss. 37 38
Alpha Insurance and Beta Insurance both insure Maria equally for the same accident. If Alpha pays Maria’s entire damages of $20,000, Alpha can pursue a contribution claim against Beta for 50% of the amount they paid. In this case, that would be $10,000. This has nothing to do with Maria’s rights.
Reimbursement is a right to receive a payment back for what has been paid by the insurance company.39 It is not a legal right to step into the shoes of the accident victim, but it does give the insurance company the right to recover payments out of the settlement. Subrogation and reimbursement are often used interchangeably.40 In California, the subrogation and reimbursement right of an insurance company are often referred to as subrogation rights. 41
A lien is an independent right of an insurance company to recover money from a settlement.42 The settlement will not be distributed to the accident victim until the lien is paid. A lien can be created by a contract or by operation of law an