The common fund doctrine is a law that protects injured victims from having to pay all their attorney fees without help from the insurance company. It entitles a party who recovers a common fund for the benefit of others to reasonable attorney’s fees from the fund as a whole.
This doctrine is not actually designed to protect lawyers, it is designed and used to protect clients. The idea is that the victim’s attorney did the work and won a settlement, creating a “common fund” from which both the attorney and the insurance company can collect.
This prevents clients from having to pay the insurance company in full and also paying attorney fees when the insurance company did nothing to help you win the lawsuit.
Our California personal injury attorneys discuss the following frequently asked questions about the common fund doctrine:
- 1. What is the “common fund” doctrine?
- 2. Purpose of The Law
- 3. Subrogation
- 4. Application to Personal Injury
- 5. “Active Participation” Cases
- Additional Reading
1. What is the “common fund” doctrine?
The common fund doctrine:
- Makes insurance companies
- pay part of the money they recover
- to the accident victim’s attorney
- if the insurance company does not have its own attorney who participated in the case.
Because it was the accident victim’s attorney that put in the effort to resolve and win the case, including benefits to the insurance company, the insurance company should have to help pay for that recovery.1
This doctrine also gives accident victim attorneys even more incentive to handle an insurance company subrogation claim. It allows an attorney to rest comfortably that they will be paid properly but without harming the client.2
2. Purpose of The Law
The common fund doctrine is not part of any state statute; instead, it has been established and confirmed by courts through the years. It recognizes a common law power in equity that permits:
- a trustee of a fund or property (or a party preserving a fund for the benefit of another)
- to recover their costs (including attorney fees)
- from the fund.3
There are three reasons American and Californian courts commonly uphold the common fund doctrine.
- fairness to the successful party whose recovery would otherwise be consumed by expenses;
- prevention of unfair advantage to insurance companies entitled to a share in the fund but did not share the burden of expenses; and
- encouragement for insurance companies to take a more active role in helping to recover a judgment and to prepare for litigation.4
3. Subrogation
Subrogation has been described as:
- the right of an insurance company to recover money for damages the liable party paid to you.5
- the right of an insurance company to be put in the position of the accident victim so it can pursue recovery from the responsible party.6
- 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 responsible party.7
These rights to compensation stem from the accident victim’s right to compensation.
Why do insurance companies care about subrogation?
When a victim is paid for the same costs the insurance company initially paid out, the insurance company wants to be reimbursed. Subrogation is a way to make sure the injured party pays back their insurance company if the injured party is “made whole” through a settlement or a jury verdict.
This doctrine is about fairness, but it does get abused by insurance companies.
Example: Ally is hurt after a hotel balcony she was on collapsed. She suffered $50,000 in medical costs, which her insurance company paid to the hospital. Ally brings a lawsuit against the hotel and wins $50,000 in medical costs.
Her insurance company wants to recover the full $50,000 back from her. However, it did not help pay for the attorney or use its own attorney. It will be required to pay a portion of the attorney fees in order to collect its subrogation claim.
4. Application to Personal Injury
For the common fund theory to apply to personal injury cases, these requirements must be met:8
- the party applying for attorney’s fees and
- the party from whom fees are sought
- must be similarly situated
- with mutual interests and rights to recover from the common fund.9
A person will not be able to recover under this doctrine if:
- the successful party did not incur any liability or cost for attorney’s fees;10
- other interested parties are represented by attorneys in the same litigation; 11 or
- the party seeking damages did not win.12
Ultimately, it is up to the judge to decide if the common fund doctrine will apply and how much will be awarded as a result.13
5. “Active Participation” Cases
When the insurance company through its attorneys actively participated in the lawsuit, the common fund doctrine may not apply.14 This is because the doctrine is meant to prevent passive beneficiaries from recovering without payment of the legal costs involved.15
Some companies will participate minimally and then argue that they should not be held responsible for the victim’s attorney fees. When the participation in the lawsuit is minimal, the court can consider this in deciding whether to award attorney’s fees from the common fund and in what percentage.
Example: Anna is injured as a result of a car accident. Her insurance company’s attorney actively works on the case to help her recover alongside the personal attorney Anna hired. The two attorneys work nearly equally on the case and win a large settlement. Because the insurance company took such an active role in the litigation and expended costs as a result, the common fund doctrine may not apply.
Example: Sheldon is injured in a boating accident because the boat operator was negligent and sues the owner of the boating company that he rented the boat from. He hires a personal injury attorney, who does all of the work in getting the large settlement he is awarded. The lawyer for the insurance company came to some pretrial hearings and filed a few pleadings but otherwise has not participated in the trial.
When it comes time to ask the judge to limit the insurance company’s subrogation claim, the insurance company argues it “participated” in the trial, so it should not have to pay any of the attorney costs. Because the participation was so minimal, the judge may find that the common fund doctrine applies, and offset some of these costs from the insurance company’s subrogation award.
Additional Reading
For more in-depth information, refer to these scholarly articles:
- Common Fund Doctrine: An Overview – Journal of Legal Professions.
- Healthcare Liens and the Common Fund Doctrine: The Need for Legislative Action to Prevent Fee Shifting at the Expense of Healthcare Providers – Iowa Law Review.
- Applying the Common Fund Doctrine to an ERISA-Governed Employee Benefit Plan’s Claim for Subrogation or Reimbursement – Florida Law Review.
- Attorney’s Fees, Unclaimed Funds, and Class Actions: Application of the Common Fund Doctrine – Fordham Law Review.
- A Common Conflict: Common Fund Doctrine and Medical Provider Liens in Tort Settlements – Boston College Law Review.
Legal References:
- Progressive West Ins. Co. v. Yolo County (Colo. App. 2005) 135 Cal.App.4th 263 (“The “common-fund doctrine” is a limitation on an insurance company’s ability to recover funds from its insured where the insured obtains a judgment or settlement from the third party tortfeasor; under this rule, when a number of persons are entitled in common to a specific fund, and an action brought by a plaintiff or plaintiffs for the benefit of all results in the creation or preservation of that fund, such plaintiff or plaintiffs may be awarded attorney’s fees out of the fund.”)
- Same as 1.
- California Jurisprudence 3d (Common fund doctrine).
- Quinn v. State of California (1975) 15 Cal. 3d 162; Gabrielson v. City of Long Beach (1961) 56 Cal. 2d 224; In re Stauffer’s Estate (1959) 53 Cal. 2d 124, 346 P.2d 748.
- California Department of Insurance, Resources for Accident Victims.
- Fireman’s Fund Ins. Co. v. Maryland Cas. Co. (1998) 65 Cal.App.4th 1279.
- Same as 6.
- Abouab v. City and County of San Francisco (2006) 141 Cal. App. 4th 643.
- Lindsey v. County of Los Angeles (1980) 109 Cal. App. 3d 933.
- Bruno v. Bell (1979) 91 Cal. App. 3d 776 (plaintiff volunteered his own time and energy as counsel in propria persona).
- Estate of Korthe (1970) 9 Cal. App. 3d 572; In re Lagersen’s Estate (1962) 210 Cal. App. 2d 788; In re Bullock’s Estate (1955) 133 Cal. App. 2d 542, 284 P.2d 960.
- Residents Ad Hoc Stadium Com. v. Board of Trustees (1979) 89 Cal. App. 3d 274.
- Grant v. Hartman Ranch Co. (1961) 193 Cal. App. 2d 497; Bank of America Nat. Trust & Savings Ass’n v. West End Chemical Co. (1940) 37 Cal. App. 2d 685, 100 P.2d 318.
- California Jurisprudence 3d (Common fund doctrine–Limitations).
- Walsh v. Woods (1986) 187 Cal. App. 3d 1273.