Insurance companies have for many years tried to protect subrogation interests in injury lawsuits. With the advent of KRS 411.188 in 1988, the Kentucky General Assembly tried to protect the insurance industry by mandating notice by plaintiffs to all subrogees, and also by forcing a reduction of liability awards by permitting collateral source payments as evidence at trial. It didn't work - now, the remaining elements of the statute may serve Plaintiffs by forcing insurance companies into the litigation mix, rather than simply have subrogees wait on the sidelines, then collect the spoils at the end of the case.

I. THE STATUTE

411.188. Notification of parties holding subrogation rights -- Collateral source payments and subrogation rights admissible.

(1) This section shall apply to all actions for damages, whether in contract or tort, commenced after July 15, 1988.

(2) At the commencement of an action seeking to recover damages, it shall be the duty of the plaintiff or his attorney to notify, by certified mail, those parties believed by him to hold subrogation rights to any award received by the plaintiff as a result of the action. The notification shall state that a failure to assert subrogation rights by intervention, pursuant to Kentucky Civil Rule 24, will result in a loss of those rights with respect to any final award received by the plaintiff as a result of the action.

(3) Collateral source payments, except life insurance, the value of any premiums paid by or on behalf of the plaintiff for same, and known subrogation rights shall be an admissible fact in any civil trial.

(4) A certified list of the parties notified pursuant to subsection (2) of this section shall also be filed with the clerk of the court at the commencement of the action.

II. BACKGROUND HISTORY

A. Collateral Source Rule: It is improper to reduce a plaintiff's damages by payments for medical treatment under a health insurance policy if the premiums were paid by a plaintiff or a third party other than a tortfeasor.

This rule (1) allows the plaintiff to seek recovery for the reasonable value of medical services for an injury, and (2) to seek recovery for the reasonable value of medical services without consideration of insurance payments made to the injured party. Baptist Healthcare System v. Miller, 177 S.W. 3d 676 (Ky. 2005).

Insurance industry representatives have long argued that this rule results in an unfair windfall for plaintiffs in tort actions. For example, in the Baptist Healthcare case, the jury awarded the plaintiff $34,000 for medical expenses, which was reduced to $22,100 by a 35% fault apportionment verdict. Her actual doctor's bill was $41,840, but he received only $3,356.38 from Medicare and wrote off the rest. Ultimately the Plaintiff ended up with the difference. The Supreme Court noted that the recovery for Plaintiff was not a windfall; in fact, "simply because Medicare contracted with Ms. Miller's physician to provide care at a rate below usual fees does not relieve a tortfeasor from negligence or the duty to pay the reasonable value of Ms. Miller's medical expenses." Baptist Healthcare, 177 S.W. 3d at 684.

B. Early Tort Reform - The "Liability Insurance Crisis." In the late 1970's and early 1980's, the insurance industry, faced with high interest rates and mounting losses, started to take action. Premiums were increased, policies were canceled or not renewed, and many businesses were forced to simply limit services (remember when most pools had high dives?). The "liability insurance crisis" led the industry to respond in a now-familiar way: insurance companies called for tort reform, and blamed their financial woes on the civil justice system.

"Tort reform," 80's style, led several states to adapt new rules to protect insurance companies, and Kentucky was no exception, even though the task force found no "litigation explosion" in the state. The General Assembly formed the Kentucky Insurance Liability Task Force to investigate the matter, and ultimately the Task Force recommended, and the General Assembly adopted in 1988, An Act Relating to Civil Actions. The Act included 26 sections covering a wide array of issues, from apportionment of damages, and sovereign immunity to personal liability of corporate offices and, importantly, the collateral source rule. KRS 411.188, which abrogated the collateral source rule in no uncertain terms, was section 4 of the Act.

C. The New Law. The four sections of the new law were clearly intended to protect insurance injury interests in all law suits. First, all parties having subrogation rights MUST be notified by certified mail of their right to intervene, and must be warned that failure to do so could result in a loss of those rights. Second, and most harmful to plaintiffs, collateral source benefits were deemed admissible at trial as well as the premiums paid by plaintiffs for any such insurance coverage. Finally, a certified list of all parties notified under the statute had to be filed by the court.

D. Approval by the Court of Appeals. KRS 411.188 was soon tested in court in Edwards v. Land, 851 S.W. 2d 484 (Ky. App. 1992). The Boyle Circuit Court's decision that collateral source evidence was inadmissible, and that the entire Act Relating to Civil Actions, including KRS 411.188, was unconstitutional because it addressed a plurality of subjects in contravention of Section 51 of the Constitution. The Court of Appeals disagreed, noting that KRS 411.188 was within the context of the Act's title. The Court also held that the statute did not violate Section 116 of the Kentucky Constitution because it was not an unreasonable encroachment on the Supreme Court's authority to dictate the rules of practice and procedure in our state courts. Finally, the Land court decided that deference should be given to the legislature's Act under the principal of comity - although the statute does encroach on the Supreme Court's powers, it was deemed reasonable. Edwards, 851 S.W. 2d at 484. The Supreme Court denied discretionary review.

III. COLLATERAL SOURCE RULE REVIVED - O'Bryan v. Hedgespeth, 892 S.W.2d 571 (Ky. 1995)

A. Case History. In 1989, Henderson native Cathy Hedgespeth caused an accident in Daviess County in which Richard O'Bryan, represented by KJA members Jeanie Owen Miller and Russ Wilkey, was injured. Mr.O'Bryan's medical bills totaled $48,068.04, but his out of pocket expenses were $18,390.08, and collateral source payments totaled approximately $30,000. The jury awarded Mr. O'Bryan $18,400; "without question, the jury simply awarded the plaintiff the amount submitted as evidence of his out-of-pocket expenses." Id. A pretrial motion in limine to keep out collateral source payments on the ground that the statute was unconstitutional was overruled. After pain and suffering and lost wages, the total verdict was $25,100, 50% of which was attributable to a second accident. The final judgment for O'Bryan was $12,550, later affirmed by the Court of Appeals.

B. Outcome. The Supreme Court indicated that it was unclear as to how KRS 411.188 was supposed to work. Was the jury supposed to reduce its verdict to match the plaintiff's out-of-pocket expenses? Is the subrogee entitled to collect the amount awarded for medical expenses (i.e., the plaintiff's out-of-pocket expenses award), thus leaving the Plaintiff with nothing? In a unanimous decision, the court found that the statute impermissibly crossed into judicial territory, where fact-finding and awarding damages in civil cases is the exclusive function of the courts. It therefore violated Section 54 of the Constitution. The statute also served to change the rules of practice and procedure, thus transgressing the judicial prerogative guaranteed by Sections 27, 28, and 116 of the Constitution. There was certainly no comity in the decision.

IV. DOES PART OF KRS 411.188 SURVIVE?

A. GEICO v. Winsett, 153 S.W.3d 862(Ct. App. 2004). In a vehicle property damage case, GEICO, the Plaintiff's insurer, argued that KRS 411.188 was held fully unconstitutional in O'Bryan, while the Defendants, attempting to prevent a subrogation claim, argued that subsection (2) was still alive and well. The Court of Appeals said: [t]he O'Bryan case only specifically dealt with the constitutionality of KRS 411.188(3), the section of the Statute that allowed the jury to hear evidence of collateral source payments made to the plaintiff. It did not hold the Statute unconstitutional in its entirely. Therefore, KRS 411.188(2) is applicable.

Id. at 865. The case was never presented to the Supreme Court for review.

B. Schwartz v. Hasty, 175 S.W.3d 621, 629 (Ky. App. 2005). The Court of Appeals, reviewing a UIM collateral source rule issue, stated that "In the O'Bryan case the Kentucky Supreme Court held KRS 411.188(3) unconstitutional . . ." The Supreme Court declined discretionary review.

C.Baptist Healthcare Systems v. Miller, 177 S.W. 3d 676 (Ky. 2005). The Supreme Court had ample opportunity to discuss whether or not its decision in O'Bryan means that all of KRS 411.188 is unconstitutional, or only subsection (3) is unconstitutional in this case. It did not do so. It even discussed the Schwartz decision, but passed on the question. It appears, then, that one issue is clear: KRS 411.188(2) is unconstitutional, and the collateral source rule is alive and well in Kentucky. The court stated in a footnote only that the statute allowing evidence of collateral source payments is unconstitutional. Id. at 682 (FN 15). It did not address the statute otherwise.

D. KRS 411.188(2) and (4) seem to survive. However, it depends on whom you ask. The Court of Appeals says that it is alive and well. The Supreme Court seems to leave open the possibility that it is not by its silence on the matter. Under Winsett and Schwartz, the notice provisions should probably be followed until the Supreme Court gives further direction.

V. CREATIVE LAWYERING - USE KRS 411.188 TO YOUR CLIENT'S ADVANTAGE

A. Duty to Notify. In every tort case in which a health insurance company, governmental agency, disability carrier, workers compensation carrier, or any other third party has paid medical benefits or lost wages, KRS 411.188(2) instructs us to send notice by certified mail to the parties involved. The notice must contain a warning that if the third party does not intervene to protect subrogation rights, the rights might be lost. A sample notice sent out by our office is attached, along with the Notice of Service we file in court.

B. Setting Up a Collateral Estoppel Defense? If a potential subrogee is noticed pursuant to KRS 411.188, it immediately puts the third party on notice that it must intervene in the litigation or risk losing any subrogation rights it may have. In Moore v. Cabinet for Human Resources, 954 S.W. 2d 317 (Ky. 1997), the Court announced that the doctrine of collateral estoppel, or issue preclusion, requires:

(1) Identity of issues;

(2) A final decision on the merits;

(3) A necessary issue with the estopped party given a full and fair opportunity to litigate; and

(4) A prior losing litigant.

The theory of subrogation is based on the principal that one party is substituted for another to the extent of the third party's claims; the subrogee can exercise against a tortfeasor all of the rights which its insured may have done.

C. Use KRS 411.188(2) to the Plaintiff's Advantage. In theory, KRS 411.188 might work to a Plaintiff's advantage, as follows:

1. Plaintiff sends certified mail service to the subrogees, and file a notice in court confirming service.

2. Be sure to request a copy of the entire policy and the Summary Plan Description from the plan administrator.

3. The subrogee, if it is a large ERISA health plan (most of them are today), will likely send you a letter advising you that it is entitled to reimbursement in full of all expenses paid. It will likely not intervene, and will claim that it is not governed by state law. More likely, it will simply ignore the provisions of the statute.

4. If the subrogee never intervenes after receiving notice, and the case settles or is tried months later, arguably it cannot then bring a claim against the plaintiff, its insured, because it failed to protect its subrogation rights.

5. If the plan files suit in federal court using the theories expressed in Sereboff v. Mid-Atlantic Medical Services, Inc., 547 U.S. 356, 126 S.Ct. 1869 (2006), a savvy lawyer could argue that the subrogee had notice of the underlying state tort action, was warned specifically to intervene to take steps to protect its subrogation interests, but failed to do so. The plan's claims would be collaterally estopped.

D. Fleetwood Enterprises, Inc. v. Taylor, 2007 U.S. Dist. LEXIS 74802 (W.D.KY, 9/27/2007). This method was tested unsuccessfully by KJA members Austin Mehr and Tim Geertz in the attached case. The Plaintiff settled liability and UIM claims in a litigated personal injury case, which left the injured person less than $70,000 after fees, costs, and settlement of her Medicare lien. She had incurred over $900,000 in medical expenses and lost income as a result of her injuries. All of her money was spent soon after the settlement.

The Plaintiff's ERISA health insurance plan filed an action against her to recover the $44,000 it paid for benefits, because it received nothing from the settlement. It did not intervene after being given appropriate notice. Defending the plan's summary judgment motion, the Plaintiff argued that the plan forfeited its rights by not intervening in the underlying suit.

Judge Russell disagreed with the argument, finding that the plan contained a reimbursement provision, not a subrogation provision. The court based its decision on Hiney Printing Co. v. Brantner, 243 F.3d 956, 959 (6^th Cir. 2001): "unlike subrogation, which arises under state law and allows the insurer to stand in the shoes of its insured, reimbursement is a contractual right governed by ERISA and comes into play only after a plan member has received personal injury compensation."

The court did not grant the plan's summary judgment motion, though, and left plaintiffs faced with low policy limits settlements and high ERISA claims some hope. Following Popowski v. Parrott, 461 F.3d 1367 (11^th Cir. 2006), the court found that the Plan language failed to specify the portion of its insured's recovery due to the plan, and thus the plan failed to meet the Sereboff requirements of asserting an equitable lien.

VI. THE BETTER WAY - INCLUDING A SUBROGEE IN THE ORIGINAL SUIT

A. Include the Subrogee as a Party Defendant. There is no reason why a subrogee, including an ERISA health insurance plan, cannot be included in a Kentucky tort action. All ERISA health policies now include reimbursement provisions, and any claim the plan may later assert is certainly affected by the outcome of the underlying tort claim. This ostensibly puts all of the claims arising as a result of the underlying tort in the same arena.

B. Permissive Joinder - Civil Rule 20.01. This rule provides that all persons may be joined in one action as defendants if any right to relief of the parties arise from the same occurrence. There is no question that a tort action in which a subrogee pays medical payments leads to the subrogee's claim for reimbursement. There is no reason, particularly since an ERISA plan's rights are affected by the outcome, not to include the plan as a party defendant under this civil rule.

C. Declaratory Judgment Act - KRS 418.040. The rights and dues of the parties involved in any contract may be determined in a declaratory judgment action. Proctor v. Avondale Heights Co.¸ 255 S.W. 81 (Ky. 1923). There is no reason this does not apply to insurance policies, including ERISA policies, as well.

D. Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002). Although the Sereboff decision provided a new collection remedy, there is still a possibility that the preemption provisions of the ERISA statute do not prevent a state court from deciding a plan's remedies. In Knudson, the Supreme Court stated:

We note, though it is not necessary to our decision, that there may have been other means for petitioners (the plan) to obtain the essentially legal relief that they seek. We express no opinion as to whether petitioners could have intervened in the state-court tort action brought by respondents or whether a direct action by petitioners against respondents asserting state-law claims such as breach of contract would have been pre-empted by ERISA.

Id. at 220.

E. Deciding where the money goes. If all subrogees are included in an underlying lawsuit, plaintiffs are in a better position to achieve a full and final result, whether through settlement or judgment after trial. This includes an allocation of funds to an ERISA plan, if necessary and appropriate, outside of the purview of the jury. At the end of the case, plaintiffs and their attorneys will not be left to negotiate with a subrogee or worry whether or not the plan will take all of the proceeds of any settlement or judgment.