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Health Insurer May Subrogate Insured’s Tort Award, Whether or Not Insured Has Been ‘Made Whole’

2003-1880. N. Buckeye Edn. Council Group Health Benefits Plan v. Lawson, 2004-Ohio-4886.
Lucas App. No. L-02-1298, 154 Ohio App.3d 659, 2003-Ohio-5196. Judgment affirmed.
Moyer, C.J., Lundberg Stratton, O'Connor and O'Donnell, JJ., concur.
Resnick, F.E. Sweeney and Pfeifer, JJ., dissent.
Opinion: http://www.supremecourt.ohio.gov/rod/newpdf/0/2004/2004-Ohio-4886.pdf

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(Sept. 29, 2004) The Supreme Court of Ohio today upheld as valid and enforceable a clause in a health insurance contract that gives the insurer a priority “first dollar” subrogation claim against any judgment award or settlement that an injured policyholder recovers from a third party, regardless of whether the judgment was sufficient to “make the insured whole” for all of her damages.

The term “subrogation” refers to an insurance company's contractual right to recover some or all of its outlays on behalf of an injured policyholder if that person later recovers a lawsuit award or settlement from a third party arising from the same injuries. Ohio courts have adopted as a “default” rule that, absent an explicit agreement to the contrary, an insurance company's subrogation rights to an insured person's third party judgment or settlement are enforceable only after the injured party has been “made whole” for all of his damages.

In this case, child traffic accident victim Emily Lawson of Defiance was covered by a group health insurance policy covering employees and family members of the Northern Buckeye Education Council. That policy included a reimbursement clause that explicitly gave the insurer a first-priority claim against any lawsuit damage award or settlement recovered by an injured person on whose behalf the plan had paid medical expenses – regardless of whether the lawsuit award fully compensated (“made whole”) the victim for all of her damages.

Emily suffered leg injuries and other damages estimated by an expert witness at between $400,000 and $550,000. The Northern Buckeye Plan would not pay any of Emily's medical bills until her mother signed a supplemental written “subrogation reimbursement agreement” specifically entitling the plan to a first-priority claim against any lawsuit award the Lawsons won from the driver who caused Emily's injuries. That agreement covered any award the Lawsons recovered from the at-fault driver for any and all types of damages , whether or not the award made Emily whole for her overall losses.

The Lawsons sued the at-fault driver and subsequently received a total of $250,000 as policy-limits awards from the other driver's insurer and their own auto insurance policy's underinsured motorist coverage. From that amount, Northern Buckeye demanded reimbursement of all medical benefits it had paid on Emily's behalf, totaling nearly $86,000.

The Lawsons refused to pay, claiming that the reimbursement clause in the Northern Buckeye policy was illegal and unenforceable. The trial court granted summary judgment in favor of the Lawsons, citing appellate decisions that denied an insurer's priority claim to an insured's third-party lawsuit award when the award did not make the insured whole for all damages.

On review, the 6th District Court of Appeals reversed the trial court and granted summary judgment to Northern Buckeye. The appellate panel held that the “make whole” doctrine applies as a “default rule,”and that subrogation rights would not be enforced before full recovery by the insured “unless the terms of a subrogation agreement clearly and unambiguously provide otherwise.” Finding that the reimbursement clause in the Northern Buckeye group policy and the supplemental subrogation document signed by Mrs. Lawson both unambiguously asserted a priority claim by the company regardless of whether the Lawsons were made whole, the court of appeals held that the contract language took precedence and the reimbursement clause was valid and enforceable.

In today's 4-3 decision, written by Chief Justice Thomas J. Moyer, the Supreme Court affirmed the 6th District's decision. “We have long held that principles of equitable subrogation, including the make-whole doctrine, do not override clear and unambiguous contractual provisions,” wrote the Chief Justice. “Our holding … does not constitute a change in our precedent, but rather a reaffirmance of it.”

Citing the Court's prior rulings in Newcomb v. Cincinnati Insurance (1872), Peterson v. Ohio Farmers Insurance (1963) and Ervin v. Garner (1971) Chief Justice Moyer wrote that “(a)lthough some may view a subrogation provision granting priority to the insurer as unfair, courts should not rewrite contracts. As stated in Ervin , ‘Cases of contractual interpretation should not be decided on the basis of what is “just” or equitable. This concept is applicable even where a party has made a bad bargain, contracted away all his rights, and has been left in the position of doing the work while another may benefit from the work. Where various written documents exist, it is the court's duty to interpret their meaning, and reach a decision by using the usual tools of contractual interpretation ( e.g., the written documents, the intent of the parties, and the acts of the parties) and not by a determination of what is fair, equitable, or just.'”

The Chief Justice quoted a 2000 decision of the U.S. Sixth Circuit Court of Appeals, Copeland Oaks v. Haupt, which held that an ERISA insurance plan avoids the application of the make- whole rule by including language that is “clear in establishing both a priority to the funds recovered and a right to any full or partial recovery.”

“We adopt the Copeland Oaks standard applied by the Sixth Circuit,” he wrote. “We hold that a reimbursement agreement between an insured and a health-benefits provider clearly and unambiguously avoids the make-whole doctrine if the agreement establishes both (1) that the insurer has a right to a full or partial recovery of amounts paid by it on the insured's behalf and (2) that the insurer will be accorded priority over the insured as to any funds recovered.” Finding that the language of the Northern Buckeye policy under which Emily Lawson had received medical benefits met both of those criteria, the Court upheld the 6th District's grant of summary judgment to the insurance company

Chief Justice Moyer's opinion was joined by Justices Evelyn Lundberg Stratton, Maureen O'Connor and Terrence O'Donnell. The majority did not address a non-appealed ruling by the court of appeals that limited Northern Buckeye's subrogation right to the net proceeds of the Lawson family's recovery from the at-fault driver after their attorney's 33 percent contingent fee had been deducted.

Justice Paul E. Pfeifer entered a dissenting opinion that was joined by Justices Alice Robie Resnick and Francis E. Sweeney Sr.

In it, Justice Pfeifer said he would follow a 1985 decision James v. Michigan Mutual Insurance , in which this Court stated, ‘Generally, where an insured has not interfered with an insurer's subrogation rights, the insurer may neither be reimbursed for payments made to the insured nor seek setoff from the limits of its coverage until the insured has been fully compensated for his injuries.' … “I would reaffirm the ‘make whole' doctrine; I see no reason to abandon or limit a legal precedent that has been protecting injured Ohioans for over 125 years,” wrote Justice Pfeifer.

The dissenting opinion also expressed concern that the majority had left open the question of whether an insurance company can claim subrogation for the gross amount of a policyholder's recovery from a third-party lawsuit. Justice Pfeifer cited the example of a policyholder for whom a health plan paid $40,000 in medical bills. If the injured person later received a $51,000 third-party settlement, netting the victim $34,000 after legal fees, Justice Pfeifer noted that “(a)llowing subrogation of the gross amount would enable the insurance company to collect $6,000 more than the injured party received in settlement. I would answer that question now: an insurance company should not be able to exact more in subrogation that its insured receives net of costs associated with a lawsuit or settlement.”

Joseph W. O'Neill, 419.782.9881, for Karen and Emily Lawson.

Jennifer J. Dawson, 419.249.7139, for Northern Buckeye Education Council Group Health Plan.