I posted comments here and here earlier this week about the proposed amendment to ERISA to give insurers and self-funded plans full rein to pursue their subrogation interests. Let me give a little more explanation for why this is a very important change to ERISA. The amendment involves the intersection of tort law and legal principles involving when a person is obligated to reimburse insurers for losses the insurer has covered.
In legalese, tort law deals with the right to compensation a person has when they are injured as a result of someone else's wrongful act. If you are injured because someone else has violated a legal duty (usually, but not necessarily, a negligent act), you are generally entitled to bring a claim against the wrongdoer and recover for your losses.
For what losses can you recover? Both "special" and "general" damages. Special damages are past or future financial losses. General damages are more intangible, difficult to measure, but nevertheless real, losses. Examples of special damages in a car accident scenario include such things as medical expenses, costs to repair your car, rental car expense, taxi fare, lost wages, expenses in hiring someone to do things you used to do at your home but now can't such as mowing the lawn, vacuuming, etc. Anything that represents an out of pocket loss to you, either in money you pay out or in money that would come in to you but doesn't, as a consequence of someone's wrongful act is a special damage.
General damages include such things as pain and suffering, loss of enjoyment of life, emotional distress, anxiety, etc. General damages are easiest to identify and understand in the context of severe injuries. An accident that leaves someone a quadriplegic is going to result in general damages that could dwarf the special damages. And those general damages are very real.
Putting a dollar amount on general damages is, by its very nature, imprecise and difficult. Based on experience in dealing with judges and juries, personal injury lawyers agree that general damages are usually a multiple of the amount of special damages. The amount of past and future out of pocket loss is the foundation on which judges and juries add an award of general damages. The amount of those generals depends on the nature of the injuries, the jurisdiction, and many, many other factors as you can imagine.
In my car accident hypothetical, a person who has $20,000 in medical expenses (not to mention other components of special damages and the whole realm of general damages) and who recovers $25,000 in insurance money will almost certainly not be in a position to have recovered his entire loss associated with the accident. He will not be "made whole" by the $25,000. And due to the fact that most states have relatively low minimum legal requirements for auto liability insurance, an injured person’s ability to recover only $25,000, or a similarly modest number, is not uncommon regardless of how badly they have been injured.
So in this scenario, does the health insurer who paid $20,000 of the injured person’s medical expenses have any right to be reimbursed out of the $25,000 the injured person received? The insurer argues that if it has paid the injured person's medical expenses and the injured person recovers all or a portion of those medical expenses from a negligent third party, the insurer is entitled to be reimbursed. Insurers claim that not requiring the injured party to reimburse the insurer for all or a portion of the money paid to the injured person to compensate him for his loss is to give the injured person a windfall. I don't believe that is necessarily true. The injured person paid money to the insurer in the form of premium to cover the risk that the injured person could get in an accident and need insurance to cover medical expenses. So you could reasonably say that the injured person, in having the foresight and paying the money to obtain insurance that they may or may not need, is entitled to any extra compensation he receives for losses that may also be covered by insurance. But insurers have persuaded people that an injured person may, at least in some situations, be getting a windfall and we can’t have that.
So we arrive at the intersection of tort law and reimbursement claims that I referred to in the first paragraph: at what point can an insurer enforce the right it claims to be reimbursed out of money paid by a negligent third party to our hurt car driver? The doctrine of equitable subrogation (a/k/a, the "made whole" rule) is in place to help resolve that tension between the competing claims of a health insurer and our injured party. I’ll cover that in the next post.