How does the Collateral Source Rule interact with Subrogation?
For subrogated parties, a lawsuit or claim isn’t resolved as soon as the injured Plaintiff and the Defendant, usually another insurance company, reach a settlement.
Auto and health insurers with medical payments subrogation liens (*those subject to the Made Whole Doctrine and other equitable doctrines) still have to negotiate repayment of their liens within the context of the Plaintiff’s settlement award. (Typically, Plaintiffs provide releases to Defendants agreeing to resolve all subrogation liens, and hold the Defendant harmless from subrogation claims.)
The Collateral Source Rule legally defines the measure of a Plaintiff’s medical expense damages as the amounts billed for treatment, not the amounts actually paid for treatment. Because of the prevalence of negotiated discounts between healthcare providers and insurers, this causes apparently inconsistent results. For example, if a hospital billed a patient’s insurer $200,000.00, but the insurer negotiated a discount of $100,000.00, the legal measure of damages is the $200,000.00 billed. The subrogated carrier has the right to collect only the $100,000.00 it actually paid. See Koffman v. Leichtfuss, 2001 WI 111, ¶ 28, 246 Wis. 2d 31, 630 N.W.2d 201,
The courts have continually upheld this seemingly illogical result under the principle that if there is any “windfall” as a consequence of the insurer’s discounts, the person to benefit should be “the person who has been injured, not the one whose wrongful acts caused the injury.” Koffman v. Leichtfuss, id. at ¶ 27, citing Campbell v. Sutliff, 193 Wis. 370, 374, 214 N.W. 374 (1927). The tortfeasor is not relieved of “his obligation to the victim simply because the victim had the foresight to arrange, or good fortune to receive, benefits from a collateral source for injuries or expenses.” Ellsworth v. Schelbrock, 2000 WI 63, ¶ 7, 235 Wis. 2d 678, 611 N.W.2d 764.
The Collateral Source Rule may reduce or eliminate the right of subrogation when the Made Whole Doctrine also applies.
Simply put, the Made Whole Doctrine requires that the injured party be completely compensated for their damages before subrogated parties are reimbursed. It states, “if the damages, as properly found by the trial to the court, exceeded those received in the settlement, the insured was not made whole.” Rimes v. State Farm Mutual Auto. Ins. Co., 106 Wis. 2d 263, 279, 316 N.W.2d 348 (1981). Caselaw in Wisconsin allows the following to be true simultaneously: (1) the injured person was not made whole, (2) the injured person receives a cash settlement for well more than was paid out-of-pocket or by her insurer, and (3) the subrogated carrier has no right of recovery. The calculation never is “is there enough money in the settlement to re-pay the actual costs and liens?”
This result does seem unjust or illogical, given the purpose behind what is known as “the equitable rule of subrogation” — to “ensure that the loss is ultimately placed on the tortfeasor and prevents the subrogor (the injured party) from being unjustly enriched through double recovery.” Fischer v. Steffen, 2011 WI 34, ¶ 31, 333 Wis. 2d 503, 797 N.W.2d 501. The only way to achieve a different result may be for the legislature and the courts to re-define medical expense “damages” to be the actual out-of-pocket payments made.