Made Whole Made Simple

Format of Presentation

I. Qualitative Analysis

II. Managing Claims (Investigation, negotiation, litigation)

III. Quantative Analysis

IV. Summary

Qualitative Analysis

Goals and Purposes of Subrogation In General

Prevent the insured (property) or claimant (worker’s compensation) from receiving a double recovery

Enforcing accountability and apportioning fault to third parties

Enhance the efficiency of the pricing mechanism in the insurance market

Made-Whole Doctrine Defined

Property Recovery

Carrier seeks recovery for loss dollars paid to insured

For losses that do not exceed policy limits: Insured seeks deductible For losses that exceed policy limit: Insured seeks amount of excess of loss

Made-Whole Doctrine fromInsured’s Perspective

For losses that do not exceed policy limit: Deductible + Covered and Uncovered Loss = Made Whole**

For losses that exceed the policy limit: Excess of Loss + Uncovered Loss = Made Whole

** Policy language aside, in non-made whole states a carrier has priority for entire loss payment or is made whole before insured receives it’s deductible

Workers’ Compensation Recovery

Carrier seeks recovery for loss dollars paid to claimant by any of the following methods – dependent on jurisdiction and circumstances:

Independent action brought in the name of the carrier, employer or claimant (voluntary or involuntary)

Claim in Intervention for a suit brought by the claimant Assert a lien without a legal filing against an action

brought by the claimant File a Notice of Lien against an action brought by the

claimant

Made-Whole from Claimant’s Perspective

Fully and completely or adequately compensated from the combined proceeds of the workers’ compensation and third party claims

$$ Third Party + $$ Workers’ Compensation = Made Whole

Instances in which Made-Whole DoctrineAdversely Impacts Lien Recovery

Inadequate assets or insurance limits from tortfeasor(s)

Comparative fault on the part of the insured worker

Multiple plaintiffs competing for limited proceeds, diminishing injured workers’ share of settlement

Multiple defendants, primary tortfeasor has inadequate assets/insurance and state does not recognize joint and several liability

Dual Goals of Made-Whole Doctrine forWorkers’ Compensation Subrogation

Ensure the claimant:1. Is completely or fully and adequately

compensated from the combined proceeds of the third party and workers’ compensation claims

2. The claimant has priority of recovery

Genesis of Made-Whole Doctrine

Equitable and contractual subrogation (case law) versus statutory subrogation (workers’ compensation)

Not applied uniformly for all lines within a state

Multi-line adjusters beware

Categorizing Made-Whole Doctrines

Clear methodology or guidance provided by statute:

1. Ratios * Determine percentage of reimbursement for each worker’s

compensation benefit type from the corresponding proportion that element represents to the third party settlement

* Claimant’s net recovery to pure value of third party claim 2. Dollar-for-dollar matching of workers’ compensation benefits to

elements of tort claim

3. Always provide reimbursement, but percentage of recovery varies

4. Facts and figures determined if there is a recovery

No structure offered by statute

When is a Claimant Considered Not Made-Whole? (i.e. subrogation interest reduced or extinguished)

Terms and concepts:

Pure Value Subrogation interest vs. recovery Factors to consider in connection with the Made Whole

Doctrine – conventional wisdom vs. reality

Pure Value – The “X” Factor

Referred often in case law as “total damages” or “total tort claim”

Starting point for many made whole calculations Pure value assumes third party:

1. Third Party is completely liable (i.e. not considered comparative negligence)2. No consideration for financial viability of tortfeasor

Includes all economic and non-economic damages (i.e. all damages a jury would consider)

Not an exact science and subject to local valuations for similar cases (i.e. the “X” factor)

Subrogation Interest vs. Recovery

Subrogation Interest

Does not exist until the claimant is made whole in a state that does not afford a carrier reimbursement in every instance

Can include both a cash and credit recovery Gross Interest: The amount of benefit

payments that can be asserted as lien against the third party claim

Net Interest or Maximum Statutory Reimbursement: Gross interest minus statutory contribution for total litigation costs

Recovery

Actual amount recovered for past and future benefit payments (i.e. cash and credit)

Most made whole doctrines do not provide for a credit against future benefits either by statute or it is extinguished or negligible under most circumstances

Factors to Consider in Connection with the Made-Whole Doctrine and Their Effect on a Carrier’s Negotiating Position and

Recovery Rights

UIM claims Payment for pre-existing condition(s) Comparative fault Third party financial viability (policy limits and

liquid assets) Future exposure/benefit obligation Conflicts of Law Stringency of Workers’ Compensation Law

Which States Maintain Some Type of Made-Whole Doctrine for Workers’ Compensation?

Arkansas Colorado Florida Georgia Indiana Montana New

Mexico North

Carolina South

Carolina

Who has the Burden of Proof as to Whether the Claimant is Made-Whole?

The answer depends upon whether the case is in suit and the jurisdiction: Georgia – carrier; Florida, New Mexico, Montana – claimant

Case is pre-suit, claimant’s attorney and carrier try to reach an agreement as to pure value and if the claimant is made whole. If no agreement, case goes to an evidentiary hearing.

Case is in suit, the judge or jury, if tried, decides. (Many subrogation practitioners feel their odds are better with a jury.)

CASE STUDY FOR RECOVERY

POTENTIAL OF LIENS UNDER

THE MADE-WHOLE DOCTRINE

Case Study(Fact Pattern)

Claimant is involved in motor vehicle accident while on a sales call.

Claimant’s vehicle is rear-ended while stopped at a red light.

Claimant sustains an injury to her low back which requires surgery.

The tortfeasor’s policy limits are $100,000.

The worker’s compensation carrier has paid $50,000 in medical expenses for the claimant.

The worker’s compensation carrier has paid $25,000 for indemnity benefits (lost time & permanent injury rating).

No significant litigation expenses incurred.

3rd party case settles before trial for $100,000 policy limits.

Case Study(Fact Pattern)

“Pure Value” of 3rd party case is $250,000. Most important factor in determining recovery

of lien under “Made Whole” doctrine. Determine “pure value” of case by: Experience in handling claims. Discussions with counsel from that state. Research on Westlaw, Lexis and national jury

reporting databases.

Case Study(Non-Structured States)

Georgia: If claimant is not “made whole” to any degree,

the lien is expunged. The lien is diminished for two main reasons: Settlement before trial and therefore no

special verdict by jury and/or “Pure value” exceeds tortfeasor’s policy limits Result: No recovery on lien.

Case Study(Non-Structured States)

North Carolina: No consistent methodology to determine reimbursement and no

right to credit. Worker’s Compensation Lien can be reduced for the following

reasons: Medical expenses and wages represent less than 1/3 of “total

damages” Future medical and disability benefits are speculative 3rd Party liability is not well established. Limited or insufficient funds available to “Make Whole” the

claimant. Carrier has burden to demonstrate that claimant will be made

whole from combination of worker’s compensation benefits and 3rd party case funds.

Result: Most likely no recovery on lien.

Case Study(Structured States)

New Mexico Reimbursement is determined by calculating % of

each type of tort damage to “pure value” of case Medical payments = $50,000 / $250,000 = 20% and

Indemnity = $25,000 / $250,000 = 10%. Next, take % of each tort element and multiply by

amount of 3rd party settlement. Medical: 20% x $100,000 = $20,000 and Indemnity:

10% x $100,000 = $10,000. Result: $30,000 minus pro rate shares of any

litigation expenses.

Case Study(Structured States)

FloridaReimbursement is determined by % of

claimant’s net recovery to “pure value” of case.

Net recovery: $100,000“Pure value”: $250,000Result: Recovery of $30,000 (40% of

$75,000 lien)

Case Study(Structured States)

South Carolina Reimbursement is determined by statute, S.C. Code Annotated

Section 42-1-560 (f). Reimbursement = 3rd party settlement/ pure value. Additional factors that Commission can consider: Strength of claimant’s 3rd party case. Liability of 3rd party. Claimant’s desire to settle. Carrier reasonableness in consenting to settle. Carrier’s fulfillment of statutory obligations. Carrier’s actual exposure. Extent of claimant’s injuries. Result: Max recovery of $30,000 or 40% of lien ($100,000 /

$250,000) with additional reduction by listed factors possible.

Case Study(Structured States)

Indiana Reimbursement of lien determined by statue, Indiana Code 22-3-2-13 and 34-51-

2-19 Reduction of lien (claimant’s attorney’s fee) controlled by statute. 1/3 reduction of lien if 3rd party action filed and ¼ reduction if settled without suit. Additional year (after two year statute of limitation for claimant) for carrier to bring

its own action against the tortfeasor. Lien also can be reduced due to comparative fault of claimant and insufficient

available funds by tortfeasor. Settlement of 3rd party action terminates additional and future benefits under

Workers Compensation Act. Presumption claimant is “made whole” if 3rd party settlement is greater than lien. Lien is statutory and no notice required. Consent of settlement of 3rd party action is required from carrier unless carrier is

fully indemnified. Result: $20,000 recovery (40% of lien value minus 1/3 attorney fees).

Case Study(Structured States)

ArkansasLien right is not absolute and only arises

once the claimant is “made whole” by judgment or settlement.

“Pure value” of 3rd party case exceeds lien and therefore the net recovery will not be enough to “make whole” the claimant.

Result: No recovery on lien.

Case Study(Quasi-Made-Whole States)

Kentucky “Made Whole” doctrine has not officially been adopted

by the state. Factors used to reduce value of liens: Deduction of claimant’s attorney’s full legal expenses. Lien does not attach to non-economic & economic

benefits not paid by worker’s compensation carrier. Lien reduced by fault assigned to claimant. Result: Unknown because of lack of information on

amount of attorney’s fees. However, recovery of a % of the lien is possible.

Summary and Some Insights

Made-Whole Doctrine and Philosophy

Redefined:

Legislature and Judicial Systems attempt to protect and balance the competing interests between carriers’ rights to recover and claimants right to adequate of compensation in a third party claim

Competing Interests:

Workers’ Compensation System: works most efficiently and best when third party bears the burden for its portion of the loss

Tort System: works best when injured parties have an incentive to pursue tortfeasors

Claimant: Ensure full compensation without a windfall

1. Determined only by looking at elements and amounts paid in workers’ compensation and third party claims

2. Adequate compensation or windfall does not exist simply because the claimant is compensated from workers’ compensation and, net of total litigation costs, receives all the proceeds from the third party claim.

Judicial Justification for Made-Whole Doctrine

Carriers are already compensated, in the form of premium, to undertake the risk of loss and, therefore, its interest should be subordinated or secondary to that of the injured worker, who is seeking full and adequate compensation.

Carriers can make up for the loss in the form of future premium increases

Made Whole Doctrine is consistent with spirit and legislative intent of workers’ compensation remedy