Valora ex rel. Valora v. Pennsylvania Employees Trust, 2004 WL 551139 (Pa.Super. March 22, 2004)

A health plan’s insured’s child was born severely handicapped. The plan paid out in excess of $200,000 to assist with the child’s special care, and intended to continue making payments into the foreseeable future. The child’s parents filed a medical malpractice lawsuit, alleging errors in the child's prenatal care. The case proceeded through litigation and trial, and ultimately the parties reached a settlement that was approved in April 1998, and that provided for payments over the course of the child's life.

Upon learning of the settlement, a plan representative contacted the family’s counsel in October 1998 concerning a subrogation lien on the settlement monies. The parties exchanged correspondence starting at that time and continuing until September 2000 regarding the plan's subrogation rights. Initially, the parents and their counsel were not cooperative or responsive toward the plan’s inquiries regarding the subrogation claim. As a result, the benefits under the plan were discontinued, which prompted a suit by the parents to force resumption of benefit payments.

In that suit, the trial court found that while the health plan may have been entitled to subrogation, it waived that right by failing to raise such claims until after the case had settled. The court stated in its opinion that “the totality of the circumstances surrounding the duration of time does not equate to the [plan] exercising reasonable diligence in presenting its subrogation claim.”

As the timing was important to the court’s decision, it should be reiterated that the plan’s first actual notice of the malpractice law suit came approximately three and a half years after the suit was started, about a year after the trial, ten months after settlement had occurred, and approximately six months after the trial court approved and sealed the settlement.

On appeal, the Pennsylvania Superior Court agreed that the plan’s subrogation lien was waived by its failure to act with reasonable diligence before raising its subrogation claim.

The court relied heavily on another recent Pennsylvania appellate court opinion wherein a subrogating insurer sought unsuccessfully to assert its lien against a workers' compensation award. Independence Blue Cross v. Workers' Compensation Appeal Board, 820 A.2d 868 (Pa.Cmwlth.2003). In that case, the Pennsylvania Commonwealth Court had similarly held that a healthcare carrier’s failure to assert with reasonable diligence its claim for subrogation against a settlement award of which it had no notice also resulted in waiver. In that decision, the court found that even a carrier with a “statutory right to subrogation [can] be defeated by equitable considerations, such as lack of due diligence.” The “due diligence” that both courts refer to was the simple effort to find out the existence and status of any recovery efforts to which their liens could attach.

The court identified the following reasons why it decided that the carrier should have been more diligent in identifying and acting upon the medical malpractice lawsuit undertaken by the insureds:

1. The plan “had been paying not insignificant benefits for the child for more than five years before it exercised what would be considered due diligence and investigated the possibility of a subrogation interest.”

2. The parents “did nothing to hide the fact [that they] had filed a law suit or [were] negotiating a settlement.”

3. “[N]othing in the contract between the parties, drafted by [the plan], placed an affirmative duty on [the insureds] to notify [the plan] … of such actions.

4. The trial court found that the plan should have known of the likelihood or at least the possibility that legal action was likely to take place in a case such as this.

After reaching the conclusion that the plan had not taken the appropriate steps to identify the existence of the lawsuit, the court offered guidance as to the alternative steps the plan should have taken, and its basis for placing the burden on the plan and not the family:

a. The plan “can easily send out a notice to clients as a reminder that subrogation rights may exist. Such a reminder could be placed in one of the many notices that a company normally sends to its clients.”

b. It was more reasonable for a party such as the plan, to send a simple reminder or to explore their rights, than it is for a party such as the family, “in the midst of caring for a severely retarded child and bearing the duties of a medical malpractice litigation, to remind a company of that entity's own rights.”

c. As an administrator of several health plans, it routinely deals with subrogation claims, more often than not for claims much less significant dollar-wise than the one before the court. In turn, it “is only logical that its employees and/or counsel would investigate possible subrogation claims as a matter of course, especially when its records show, as here, inordinately large payments over an extended period of time.”

For all these reasons, the court agreed with the trial court that the plan’s failure to exercise due diligence in asserting its undeniable right to subrogation resulted in waiver of that right.

Practice Tips:

1. Most jurisdictions require – for equity reasons – that carriers assert any subrogation lien in a reasonably timely manner. This typically requires assertion of the lien within a certain time period after the carrier is aware of the third-party claim. Thus, a carrier, immediately upon notice of a recovery action (or claim), to which its lien might attach, should always send out a “reminder” of the lien and of the carrier’s intent to assert it in any proper third-party claim or lawsuit.

2. This decision’s significance arises from its criticism that the carrier was not diligent in discovering the existence of the third-party claim, i.e. the medical malpractice action. To avoid the waiver applied by this court (as the court itself noted), we suggest the following:

a. Upon payment of insurance benefits, a carrier should send out additional notice of its lien and a statement of its intent to assert such lien on any recovery claim or in any related action.

b. It is very important - because most insurance contracts do not require an insured to notify the carrier of claims it might assert - for the carrier to affirmatively ask each insured (through use of a form letter or otherwise) if any recovery claim has been or will be asserted against a third-party. By making such an inquiry, insureds cannot later assert (as was done in this case) that they “did nothing to hide the fact [that they] had filed a law suit or [were] negotiating a settlement.”

3. These Practice Tips come with one cautionary warning: In certain jurisdictions, a carrier cannot assert a lien arising from workers compensation payments or healthcare coverage. Therefore, it would be improper to send out blanket lien-protection notices and inquiries about possible third-party claims without first taking into consideration the validity of any such lien in the particular jurisdiction.