This Legal Lines article was written by Steven J. Dawes and Kate L. McDonald of the law firm Light, Kelly & Dawes, P.C. Light, Kelly & Dawes is a member of CIRSA’s defense counsel panel and provides legal services to CIRSA and its members in a wide variety of claims. Mr. Dawes and Ms. McDonald welcome any questions regarding this article and can be reached at 303.298.1601.

Introduction

Legislation adopted in 2010 directly affects an insurer’s right of subrogation for any recovery made on or after August 11, 2010. HB 10-1168 (the “Act”) clarified that an insurer cannot seek reimbursement from an insured under a subrogation clause until the insured is fully compensated out of the judgment for the tortfeasor’s damages.¹  While the Act prioritizes the interests of an insured over that of his insurer when collecting on a judgment from a tortfeasor, it does not affect the principle that a subrogated insured must reimburse the insurer for any doubly recovered treatment costs.²  This article discusses how the bill has affected an insurer’s right of subrogation.

Right of Subrogation

Nearly all insurance policies contain a clause which expressly gives an insurance company a right of subrogation. This type of contractual subrogation is known as “conventional subrogation.” It allows an insurance company, which has paid a debt of its insured (medical bills, for example), to pursue a legally responsible third party to recover the amount paid.³  In pursuing its right of subrogation, an insurance company “stands in the shoes of its insured” for all legal purposes and may pursue any rights held by the insured (the “subrogor”). If the insurance company (the “subrogee”) is allowed to pursue the legal claims of its subrogor, the mere existence of subrogation does not transform those claims at law into equitable actions. In other words, a subrogated insurer “has no greater rights than the insured, for one cannot acquire by subrogation what another, whose rights he or she claims, did not have.”⁴

“Fully Compensated” Presumption

The law now recognizes that a full policy settlement on a liability policy is rebuttably presumed not to compensate fully an injury victim, thereby making it difficult for the insurance company to recover under its right of subrogation.⁵  However, if the injured party makes a recovery of an amount that is less than the total amount of coverage available under the policy limits, there is a rebuttable presumption that the injured party has been fully compensated.⁶  Furthermore, if an injured party obtains a judgment, the amount of the judgment is presumed to be the amount necessary to fully compensate the injured party.⁷  These presumptions have an important effect on an insurer’s right of subrogation because an insurer will not legally be entitled to any recovery to the extent the limits of liability coverage do not make the victim whole.

Requirements Under the Act

Subrogation Amount
If the injured party is fully compensated and reimbursement or subrogation of benefits is authorized, the reimbursement or subrogation amount cannot exceed the amount actually paid by the insurer to cover benefits under the policy, contract, or benefit plan. For instance, assume Jane had insurance and accumulated $10,000 in medical bills in an accident, and her health insurance carrier would pay these bills. However, pursuant to a contract between the hospital and Jane’s health insurance carrier, or by negotiation with the insurance company, the hospital might accept $5,000 as payment in full. While Jane is allowed to collect the full $10,000 as damages in any suit against the at-fault third-party, her health insurance carrier can only seek subrogation for the amount it paid (i.e. $5,000), assuming Jane was fully compensated.

Arbitration
Any disputes regarding entitlement to reimbursement or subrogation must be resolved in accordance with subsection (4)(a) of the Act.⁸  Under this subsection, an injured party who obtains a recovery that is less than the sum of all damages incurred must notify the payer of benefits within sixty days of receipt of such recovery.⁹  If the injured party does not give this notice, the insurer will be able to pursue subrogation, despite the fact that the injured party may not be fully compensated. If the notice is properly given and the payer disputes that the settlement is less than the injured party’s damages, then the dispute shall be resolved by arbitration.¹⁰  The payer must request arbitration of such issue no later than sixty days after the receipt of notice from the injured party.

If the parties fail to choose an arbitrator, then the dispute shall be resolved by a panel of three arbitrators: one selected by the injured party, one selected by the payer, and one selected by the two previously selected arbitrators.¹²  Upon a finding that the amount of the recovery does not fully compensate the injured party for his damages, the payer shall have no right to repayment, reimbursement, or subrogation.

“Once an arbitration award is entered, the finality of arbitration weighs heavily in its favor and cannot be upset except under exceptional circumstances.”¹⁴  An arbitration award will only be vacated for the reasons enumerated in the Federal Arbitration Act¹⁵ or for “a handful of judicially created reasons.”¹⁶ Therefore, courts are required to “give extreme deference to the determination of the [arbitrator].”¹⁷  In light of this, it is clear that the arbitrator selection process will be a critical step on the road to recovery.

Third-Parties at Fault
An insurer cannot initially bring a direct action for subrogation or reimbursement of benefits against a third-party allegedly at fault for the injury to the injured party or an insurer providing uninsured motorist coverage.¹⁸  However, if the injured party has not pursued such a claim within sixty days of the expiration of the statute of limitations, then the insurer may bring an action against such third-party.

Attorney Fees and Costs
The Act requires the insurer to pay its proportionate share of attorney fees and costs incurred by the injured party in obtaining a recovery against an at-fault third-party.²⁰  In evaluating whether to pursue its right of subrogation, the insurance company should determine whether it will have to pay more for its portion of the attorney fees than it can recover thereby making any recovery cost ineffective. If, however, the insurer obtains a recovery for property damage or uninsured/underinsured (UM/UIM) motorist coverage against an at-fault third-party, then recovery will not be reduced by such fees and costs.²¹

Applicability To CIRSA’s Coverage

CIRSA provides property and liability coverage to its Members.²²  The Property and Crime Policy and the Liability Lines Aggregate Coverage Policy give to CIRSA all rights to pursue subrogation, and the Policies require each Member to assist CIRSA in enforcing its right of subrogation.²³  The right of subrogation given to CIRSA can include pursuing recovery of the Member’s deductible.  Any such subrogation claims will be subject to the Act.

In addition, not infrequently private insurance companies pursue subrogation claims against CIRSA’s Members, particularly for property damage losses. The subrogation claim of the private insurance company will be subject to the Act.  The following examples illustrate the effect of the Act.

Property/Casualty
Previously, an insurer that paid benefits to a person who was injured due to an act or omission of a third party could obtain repayment of those benefits out of any recovery paid to the injured party, regardless of whether the injured party had been fully compensated for his or her losses. For instance, assume Jane had $100,000 in medical bills which her health insurance carrier covered, and she incurred $30,000 in past wage loss, and $60,000 in loss of future earnings, making her total damages $190,000. John, a Member employee driving a Member vehicle rear-ended Jane’s car.  John has $150,000 in coverage under CIRSA’s Liability Lines Aggregate Coverage Form.²⁴  Jane’s health insurance carrier could seek recovery of the $100,000 it paid for Jane’s medical expenses from the $150,000 settlement with CIRSA.

This Act, however, limits the ability of an insurance company to obtain such a recovery if the repayment would cause the injured party to not be fully compensated. In the above example, Jane’s health insurance carrier can only recover on its subrogation claim from Jane’s settlement with CIRSA after Jane is fully compensated for her losses. The effect of this may be an increase in the number of disputes between insurers and insureds over the amount of wage loss and non-economic damages claimed by the injured party. Since the Act requires that such disputes be handled in arbitration, this may cause additional expense to consider when evaluating claims, especially since there is no guarantee of any recovery.

Uninsured and Underinsured Motorist Benefits
CIRSA provides uninsured and underinsured (UM/UIM) motorist benefits for bodily injury.²⁵  If an uninsured or underinsured driver injures a Member employee in an automobile accident, the coverage received from the CIRSA UM/UIM coverage will be subject to the Act.

Workers’ Compensation
The requirements of this Act do not apply to claims for workers’ compensation.²⁶

Conclusion

Evaluating the merits of pursuing an insurer’s right of subrogation requires careful consideration, not only in determining whether the insured has been fully compensated so as to ripen the insurer’s claim for  subrogation, but also in determining whether pursuing such a claim will be cost-effective. Additionally, close attention must be paid to the time constraints prescribed by the Act.

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¹Codified at C.R.S. § 10-1-135.
² Volunteers of America Colorado Branch v. Gardenswartz, 242 P.3d 1080, 1092 (Colo. 2010).
³ This is distinguished from “equitable subrogation” which is a judicially created remedy that allows a party who has paid the debt of another to pursue reimbursement from a legally responsible third party. See American Family Insurance Company v. Dewitt, 218 P.3d 318 (Colo. 2009),
⁴ American Family Insurance Company v. Dewitt, supra, at 323, citing 16 Couch on Insurance § 222:5 (3d ed.).
⁵ HB 10-1168(3)(d)(I).
⁶ See Id.
⁷ HB 10-1168(3)(d)(II).
⁸ HB 10-1168(4)(a).
⁹ HB 10-1168(4)(a)(II).
¹⁰ HB 10-1168(4)(a)(III).
¹¹ See Id.
¹² HB 10-1168(4)(a)(IV).
¹³ HB 10-1168(4)(b).
¹⁴ Ormsbee Dev. Co. v. Grace, 668 F.2d 1140, 1146-47 (10th Cir. 1982).
¹⁵ Under the Federal Arbitration Act, 9 U.S.C. § 10, the district court wherein an arbitration award was made may vacate the award in four instances: (1) where the award was procured by corruption, fraud, or undue means; (2) where there was evident partiality or corruption in the arbitrators, or either of them; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or (4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
¹⁶ Denver & Rio Grande Western R. Co. v. Union Pacific R. Co., 119 F.3d 847, 849 10th Cir. 1997) (citing W.R. Grace & Co. v. Local Union 759, 461 U.S. 757, 766 (1983) (courts may vacate arbitration awards which violate public policy); Wilko v. Swan, 346 U.S. 427, 436-37 (1953) (courts may set aside arbitration awards which are based upon a manifest disregard of the law), overruled on other grounds, 490 U.S. 477 (1989)).
¹⁷ Brown v. Coleman Co., 220 F.3d 1180, 1182 (10th Cir. 2000). 
¹⁸ HB 10-1168(6)(a)(I).
¹⁹ HB 10-1168(6)(a)(II).
²⁰ HB 10-1168(3)(c).
²¹ HB 10-1168(3)(a)(II).
²² The Property and Crime Policy, PR 01-2011, and the Liability Lines Aggregate Coverage Form, LIAB 01-2011.
²³ See the Property and Crime Policy, General Conditions, Paragraph H, and the Liability Lines Aggregate Coverage Form, General Conditions, Paragraph G.
²⁴ See the sublimit for claims subject to the Colorado Governmental Immunity Act.
²⁵ See the Liability Lines Aggregate Coverage Form, Coverage Part I, and Endorsement.
²⁶ HB 10-1168(10)(c).