The Good, the Bad, and the Ugly: The
Cooperation Clause, Medicare Secondary Payer
Requirements, and the Tripartite Relationship
Donald Patrick Eckler
Pretzel & Stouffer, Chartered
One South Wacker
Suite 2500
Chicago, IL 60606
312-578-7653
The Tripartite Relationship
“[The] so-called tripartite relationship has been well
documented as a source of unending ethical, legal, and
economic tension.” State Farm v. Tarver, 980 S.W.2d 625
(Tex. 1998) (Gonzales, J., dissenting)
These issues are terribly important and must be managed
correctly by insurance adjustors because the failure to
properly recognize a conflict and to appoint independent
counsel where appropriate could lead to the carrier being
estopped. Employers Insurance Company of Wausau v.
Ehlco Liquidating Trust, 186 Ill.2d 127 (1999).
Who is the client for counsel retained by an
insurer?
Is the client of counsel retained by the insurer
have two clients or just one?
To whom are the loyalties owed by counsel
retained to represent the insured?
Dual Client Relationship
The majority of jurisdictions hold that counsel retained by the
insurer to represent the insured has two clients, both the insurer
and the insured. This is the majority position.
See Restatement of The Law Governing Lawyers Sections 26(1) and 215;
Illinois Rules of Professional Conduct Rule 1.7; ABA Model Rule 1.7(b),
comment 10, and Rule 1.8(f); Waste Management v. International Surplus
Lines Insurance Company, 144 Ill.2d 178 (1991); Nandorf v. CNA Insurance
Companies, 134 Ill.App.3d 134 (1st Dist. 1985); Cincinnati Insurance Company
v. Wills, 717 N.E.2d 151, 161 (Ind. 1999); Nezley v. Nationwide Mutual
Insurance Company Company, 296 N.E.2d 550, 561 (Ohio App. 1971);
Goldberg v. American Homes Assurance Company, 439 N.Y.S.2d 2, 5 (N.Y.
App.Div. 1st Dep’t 1981); Lieberman v. Employers Insurance, 419 A.2d 417,
424 (N.J. 1980); Bogard v. Employer’s Casualty Co., 210 Cal.Rptr. 578, 582
(Cal.App. 1985); McCourt Co., Inc. v. FPC Properties, Inc., 434 N.E.2d 1234,
1235 (Mass. 1982).
Limitations on Dual Relationship
• Despite dual relationship the attorney owes the
same professional obligations to the insured as if
the attorney was hired personally by the insured.
• Information of client is confidential. Illinois Rule
of Professional Conduct Rule 1.6.
• Illinois Rule of Professional Conduct Rule 1.8(f)(2)
provides that the insured’s Rule 1.6 information
must be protected by the attorney.
Single Client Relationship
The majority of jurisdictions, but it is a significant minority, reject
the dual client relationship and hold that counsel retained by an
insurer only represents the insured. In these jurisdictions there
is no tripartite relationship
See Michigan: Atlanta International Company v. Bell, 448 N.W.2d 804 (Mich.Ct. App. 1989); Montana: In
The Matter of the Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 299
Mont. 321, 333-34 (Mont. 2000); Connecticut: Higgins v. Karp, 687 A.2d 539, 543 (Conn. 1997);
Continental Casualty Company v. Pullman, Comley, Bradley, & Reeves, 929 F.2d 103 (2nd Cir. 1998); In re
A.H. Robins Co. Inc., 880 F.2d 709 (4th Cir. 1989); Colorado Bar Association Formal Ethics Opinion 91
(1993); Safeway Managing General Agent v. Clark & Gamble, 985 S.W.2d 166, 168 (Tex. App. 1998);
Gibbs v. Lappies, 828 F.Supp. 6, 7 (D.N.H. 1993); Givens v. Mullikin ex. rel. McElwanney, 75 S.W.2d 383,
386 (Tenn. 2000); Finley v. Home Insurance Company, 975 P.2d 1145, 1153 (Hawaii 1998); Pine Island
Farmers Coop v. Erstad & Reimer, P.A., 696 N.W.2d 444, 452 (Minn. 2002)(in the absence of conflict of
interest between the insurer and the insured, “the insurer can become a co-client of defense counsel
based on contract or tort theory if two conditions are satisfied. First, defense counsel or another
attorney must consult with the insured, explaining the implications of dual representations and the
advantages and risks involved ... [and] second, after consultation, the insured must give express consent
to the dual representation.”)
Issues that Arise in Tripartite
Relationship
Defense counsel has a duty not to disclose adverse coverage
information to the insurer.
See Liability Insurance Company v. Superior Court, 38 Cal.App.3d 579, 592 (1974); Employers
Casualty Company v. Tilley, 496 S.W.2d 552 (Tex. 1973); Illinois Rule of Professional Conduct Rule
1.8(b) and (f) and 5.4(c).
Insured has duty to cooperate even where the insurer has taken
an adverse coverage position.
See Waste Management, Inc. v. International Surplus Lines Insurance Company, 144 Ill.2d 178
(1991).
Conflicts That Arise in the Defense of
the Insured
• Simply because there is a dispute regarding coverage
or some other issue, does not mean there is a conflict.
• What has to be determined is if the interests of the
insurer and the insured diverge and if counsel retained
by the insurer will then labor under a conflict.
• Rules 1.7, 1.9, and 1.10 define when a conflict exists
and under what conditions the lawyer can continue the
representation.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.7 states:
a) Except as provided in paragraph (b), a lawyer shall not
represent a client if the representation involves a concurrent
conflict of interest. A concurrent conflict of interest exists if:
(1) the representation of one client will be directly adverse to another
client; or
(2) there is a significant risk that the representation of one or more
clients will be materially limited by the lawyer’s responsibilities to
another client, a former client or a third person or by a personal
interest of the lawyer.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.7
further states:
b) Notwithstanding the existence of a concurrent conflict
of interest under paragraph (a), a lawyer may represent
a client if:
(1) the lawyer reasonably believes that the lawyer will be able to
provide competent and diligent representation to each affected
client;
(2)
the representation is not prohibited by law;
Applicable Rules for Conflicts
(3) the representation does not involve the assertion
of a claim by one client against another client
represented by the lawyer in the same litigation or
other proceeding before a tribunal; and
(4) each affected client gives informed consent.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.9
states:
(a) A lawyer who has formerly represented a client in
a matter shall not thereafter represent another
person in the same or a substantially related matter
in which that person’s interests are materially
adverse to the interests of the former client unless
the former client gives informed consent.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.9 further
states:
(b) A lawyer shall not knowingly represent a person in the
same or a substantially related matter in which a firm with
which the lawyer formerly was associated had previously
represented a client
(1) whose interests are materially adverse to that person; and
(2) about whom the lawyer had acquired information protected by
Rules 1.6 and 1.9(c) that is material to the matter; unless the former
client gives informed consent.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.9 further
states:
(c) A lawyer who has formerly represented a client in a
matter or whose present or former firm has formerly
represented a client in a matter shall not thereafter:
(1) use information relating to the representation to the disadvantage
of the former client except as these Rules would permit or require
with respect to a client, or when the information has become
generally known; or
(2) reveal information relating to the representation except as these
Rules would permit or require with respect to a client.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.10
states:
(a) While lawyers are associated in a firm, none of them
shall knowingly represent a client when any one of them
practicing alone would be prohibited from doing so by
Rules 1.7 or 1.9, unless the prohibition is based on a
personal interest of the prohibited lawyer and does not
present a significant risk of materially limiting the
representation of the client by the remaining lawyers in
the firm.
Applicable Rules for Conflicts
• Illinois Rule of Professional Conduct Rule 1.10 further states:
(b) When a lawyer has terminated an association with a firm, the firm is
not prohibited from thereafter representing a person with interests
materially adverse to those of a client represented by the formerly
associated lawyer and not currently represented by the firm, unless:
(1) the matter is the same or substantially related to that in which the formerly
associated lawyer represented the client; and
(2) any lawyer remaining in the firm has information protected by Rules 1.6 and
1.9(c) that is material to the matter.
(c) A disqualification prescribed by this Rule may be waived by the
affected client under the conditions stated in Rule 1.7.
Does the Conflict Require the
Appointment of Independent Counsel?
• Where a conflict exists independent counsel must be
offered by the insurer to the insured.
• The question is question is whether the interest of the
insured and the insurer diverge in such a way that the
retained counsel is in conflict with the insured.
Blanchard v. State Farm Fire & Casualty Company, 2 Cal.App.4th 345, 350 (1991) (“not
every reservation of rights creates a conflict of interest requiring appointment of
independent counsel.”); Nisson v. American Home Insurance Company, 917 P.2d 488
(Okl.App. 1996); Northern County Mutual Insurance Company v. Davalos, 140 S.W.3d
685, 689 (Tex. 2004) (If the insured’s liability and the coverage issues turn on the same
facts, the insured is entitled to independent counsel.)
Specific Instances of Conflict That Arise in the
Insurance Defense Context Potential Excess Judgment
In such a situation, make sure defense counsel advises
the insured of the potential excess judgment.
R.G. Wegman Construction Company v. Admiral Insurance
Company, 629 F.3d 724 (7th Cir. 2011); Allstate Insurance
Company v. Campbell, 334 Md. 381, 397 (Md. App. 1994);
Hartford Accident & Indemnity Company v. Foster, 528 So.
2d 255, 270-273 (Sup.Ct.Miss. 1988).
Specific Instances of Conflict That Arise in the
Insurance Defense Context Punitive Damages
• Under Illinois law the pleading of punitive damages
creates a conflict. Maryland Casualty Company v.
Peppers, 64 Ill.2d 187 (1976) (pleading of punitive
damages creates conflict).
Instances of Conflict Under Illinois
Law
• Conflict existed because the alleged conduct may have
occurred within multiple policy periods. Doe v. Illinois
State Medical Inter-Insurance Exchange, 234 Ill.App.3d
129 (1st Dist. 1992).
• Conflict of interest because the insurer asserted last
notice of defense after default judgment was entered.
Mitchell v. Tatum, 104 Ill.App.3d 986 (1st Dist. 1992).
• Assertion as late notice as defense to coverage is
typically does not create a conflict of interest.
Instances of Conflict Under Illinois
Law
• Conflict of interest existed because there was a
question as to whether the driver of a vehicle had
permission to operate the vehicle. Murphy v.
Urso, 88 ILL. 2d 444, 453-54 (1981).
• Conflict of interest existed because some of the
underlying allegations would be coverage by the
policy whereas other allegations would not be.
Burlington Northern R. Co. v. Illinois Emcasco
Insurance Company, 158 Ill.App.3d 783 (1st Dist.
1987);
Instances of Conflict Under Illinois
Law
• The best example of conflict under Illinois law is in American Family
Mutual Insurance Company v. W.H. McNaughton Builders, Inc., 363
Ill.App.3d 505, 514 (2nd Dist. 2006). In that case the Court held:
“A conflict arises when the divergent interests of the insurer and insured
are apparent and the attorney representing the insured can no longer
represent both clients’ interests without prejudice to either client. A
conflict already exists here because [the insurer’s] interests would be
served by fleshing out in discovery facts showing that the damage to the
Begys’ home occurred prior to the inception of the Policy, while
McNaughton’s interests would be served by fleshing out facts showing
that the damage occurred after the inception of the Policy. In this regard,
an attorney representing [the insurer’s] interests would be the enemy of
McNaughton.”
Disclosure of Conflict
• Both insurer and counsel retained by the
insurer should disclose conflict.
• The disclosure should be in writing and should
set forth the nature of the conflict and offers
of resolution. See Utica Mutual Insurance
Company v. David Agency Insurance, 327
F.Supp2d 922, 930 (N.D.Ill. 2004).
Disclosure of Conflict
• “If the insurer proceeds to defend the insured in
face of a conflict of interest, it must reserve its
rights in a manner that will fairly inform the
insured of the insurer’s position. In informing the
insured of the conflict, the insurer must act
openly and with the utmost loyalty to its insured
both in initially explaining the insurer’s position in
the matter and in the actual defense of the tort
litigation. Bare notice of a reservation of rights is
insufficient unless it makes specific reference to
the policy defense which may ultimately be
asserted and to the potential conflict of interest.
Disclosure of Conflict
• The letter should include the following:
(1) the attorney’s relationship to the insurer;
(2) the attorney’s own interests;
(3) the nature of the conflict between the insurer
and the insured and how the defense may impact
the coverage;
Disclosure of Conflict
(4) limitation of the scope of representation to defending
third-party claim only, thus limiting the ability to
maximize coverage;
(5) the insured’s option to retain separate counsel to
advise about coverage issues; and
(6) the insured’s right to independent counsel to defend,
whose fees will be reimbursed by the insurance
company. See David H. Anderson, “Balancing the
Tripartite Relationship between Defendant, Defense
Counsel and Insurer,” 88 Ill.Bar.J. 384, 288 (July 2000).
Disclosure of Conflict
• If the insured will not waive the conflict then,
independent counsel should be offered to the
insured.
Payment of Independent Counsel
• No rules on how much to pay in Illinois and in most other states. A
“reasonable” amount seems to be the standard. No court has set
forth what the means and there are often tremendous fights over
that.
• An exception to that vacuum is in Florida. §627.426(2) states that
the carrier shall pay agreed upon reasonable rates, or if those
cannot be agreed upon, then a court will set the rate of payment.
• An insurer can recover payments to independent counsel who an
insurer was forced to retain as a result of an erroneous judgment.
Steadfast Ins. Co. v. Caremark RX, Inc., 373 Ill.App.3d 895 (1st Dist.
2007).
Basics of the Cooperation Clause
The Cooperation Clause in American Alliance’s policy states:
6. Assistance and Cooperation of the Insured. As a condition precedent to
the Company’s duty of indemnity with respect to claims and lawsuits brought
against the insured, the insured shall cooperate with the Company and upon
request by the Company or attorneys hired by the Company to represent the
insured, the insured shall assist in completing the Company’s investigations
including answering questions and providing all reasonably available evidence
and in the litigation of any lawsuit including attending hearings, trials, and
examinations under oath, and assisting in making settlements, securing and
giving evidence, obtaining the attendance of witnesses and in the conduct of
any legal proceedings in connection with the subject matter of this insurance.
During the pendency of any claim or lawsuit against an insured, the insured
shall advise the Company in writing of his new residential address or new
residential telephone number within 14 days of any change.
Basics of the Cooperation Clause
• The Cooperation Clause is a condition precedent
to coverage under the policy.
• That means that compliance with the provision is
required or the duties owed by American Alliance
to the insured may be extinguished.
• The Cooperation Clause is part and parcel with
the Notice Clause.
Basics of the Cooperation Clause
• The purpose and objective of the cooperation clause in an
automobile insurance policy is to prevent collusion
between the insured and the injured, as well as to make
possible the insurer’s investigation.
M.F.A Mutual
Insurance Company v. Cheek, 66 Ill.2d 492, 363 N.E.2d 809
(1977).
• A condition in an insurance policy requiring the cooperation
of the insured is one of great importance and its purpose
should be observed.
Waste Management, Inc. v.
International Surplus Lines Insurance Company, 144 Ill.2d
178, 579 N.E.2d 322 (1991).
Basics of the Cooperation Clause
“Typically the insurer has little or no knowledge of the facts
surrounding a claimed loss, while the insured has exclusive knowledge
of such facts. The insurer is, therefore, dependent on its insured for
fair and complete disclosure; hence, the duty to cooperate. While the
insured has no obligation to assist the insurer in any effort to defeat
recovery of a proper claim, the cooperation clause does obligate the
insured to disclose all of the facts within his knowledge and otherwise
to aid the insurer in its determination of coverage under the policy.
The insurer is entitled, irrespective of whether its duty is to defend or
to indemnify, to gain as much knowledge and information as may aid
in its investigation, or as may otherwise be significant to the insurer in
determining its liability under the policy and in protecting against
fraudulent claims. To hold otherwise effectively places the insurer at
the mercy of the insured and severely handicaps it in contesting a
claim (citation omitted).” Waste Management, Inc., 144 Ill.2d at 204.
An Insurer Must Show Prejudice
• An insurer is required to demonstrate that it was substantially
prejudiced as a result of a breach of a cooperation condition which
means the insurer must show it was actually hampered in its
defense of the action. M.F.A. Mutual Insurance Co., 66 Ill.2d at 499-500.
• Without the presence of the assured and his aid in preparing the
case for trial, the insurance company is handicapped and such a lack
of cooperation must result in making the action incapable of
defense.” Schneider v. Autoist Mutual Ins. Co., 346 Ill. 137, 140, 178
N.E. 466 (1931).
• In Cheek, the Court found that there was no prejudice to the insurer
because the insured corrected the problem before the insurer
suffered prejudice in the defense of the case.
What Constitutes Prejudice?
• In Gallaway v. Schied, 73 Ill.App.2d 116, 123(1st Dist. 1966)
the court explained the impact the prejudicial effect the
breach of the cooperation condition had on the insurance
company:
“In the case at bar, because of the failure of the insured to appear for
deposition, her pleadings were stricken and the issue of liability was
determined adversely. The opportunity to contest the issues of
contributory negligence, due care, proximate cause, and of crossexamination, etc., were precluded. The circumstances concerning the
degree of impact, res gestae reaction, if any, and incidents that might
assist in the true determination of damages were denied to the
defense. There can be no doubt that the conduct of the insured in
failing to cooperate substantially and materially affected the insurer
and its rights.”
What Constitutes Prejudice?
• Failure of the insured to provide discovery answers,
appear at deposition, appear at arbitration, or appear
at trial leading to a barring order or adverse finding.
• It is necessary to demonstrate what could have been
shown had the insured appeared and cooperated.
• Accordingly, any statement of the insured becomes
important, including the conditions of the accident, the
weather, a short stop by the plaintiff, such that even a
rear end case can be shown to be defensible.
An Insurer Must Show Diligence in Contacting
the Insured - The Wrong Way
• In Lappo v. Thompson, 87 Ill.App.3d 253, 409 N.E.2d 26 (1st
Dist. 1980), the Court felt that more could have and should
have been done to secure the insured’s cooperation.
Although numerous letters were sent regarding various
deposition dates and trial dates, no attempt was made to
contact her personally.
• The failure to respond to letters should have put the company
on notice that there was a problem.
• Thus, the Court held, the insurer failed to establish that it
exercised reasonable diligence in securing the cooperation of
its insured. Lappo, 87 Ill.App.3d at 255.
An Insurer Must Show Diligence in Contacting
the Insured - The Wrong Way
• In Buckner v. Causey, 311 Ill.App.3d 139, 724 N.E.2D 95 (1st
Dist. 1999), the insured William Causey (“Causey”) failed to
appear for a trial and judgment was entered against him and
in favor of the Plaintiff Gwendolyn Buckner.
• Causey was first notified of the trial date three days before it
was to commence when he received a telephone call from the
attorney retained to defend him by his insurance company.
• Gallant/Warrior failed to meet its burden of showing diligence
in attempting to secure the insured’s appearance at trial or
that Causey refused to appear after receiving adequate
notice. Buckner, 311 Ill.App.3d at 143-144.
An Insurer Must Show Diligence in Contacting
the Insured - The Wrong Way
• In Wallace v. Woolfolk, 312 Ill.App.3d 1178 (5th Dist. 2000),
Maria Wallace brought a lawsuit for personal injuries
against Wenona Woolfolk (“Woolfolk”) arising from an
automobile accident.
• Over the course of six months, counsel retained by the
insurer to represent Woolfolk mailed six letters to her.
During the one and only telephone conversation with her
attorney, Woolfolk stated that she had not received any of
the correspondence. Because Woolfolk did not answer
written discovery or appear for a discovery deposition, the
trial court entered and order of default against her as well
as other sanctions.
An Insurer Must Show Diligence in Contacting
the Insured - The Wrong Way
• Because Woolfolk failed to attend the arbitration hearing, her
counsel was barred from rejecting the award in favor of Maria
Wallace and judgment was entered against Woolfolk.
• The Appellate Court agreed with the trial court that the insurer did
not exercise reasonable diligence in endeavoring to secure
Woolfolk’s cooperation. The letter advising Woolfolk of the
arbitration hearing was sent to her by regular mail only a week
before it was to be held in spite of the fact that Woolfolk had told
her attorney that she had not received previous letters. The insurer
knew months earlier that Woolfolk was either not receiving the
letters or was ignoring them yet took no further steps to determine
what the difficulty was. Wallace, 312 Ill.App.3d at 1183-1184.
An Insurer Must Use Diligence in Contacting the
Insured - The Wrong Way
• In Johnson v. Wade, 47 Ill.App.3d 610, 365 N.E.2d 11 (1st Dist.
1977) Wade, the insured, was sent a letter by her attorney on
August 16, 1974, advising her that her case was scheduled for
trial on September 18, 1974. The letter requested that she
contact him immediately regarding her availability to appear
on that date.
• Wade did not respond, yet, no attempt was made to contact
her until the day before the scheduled trial date. When the
attorney could not reach Wade by telephone, an investigator
was retained in an effort to make personal contact with her
and ensure her presence at the impending trial.
An Insurer Must Use Diligence in Contacting the
Insured - The Wrong Way
• Wade had lived at the same address for fifteen years and, prior to that
time, had attended court dates as requested. Further, she denied any
knowledge of the September 18, 1974 trial date. Johnson, 47 Ill.App.3d at
612, 614.
• The court noted that diligence was exercised in pursuing Wade’s
cooperation as of the day before the trial was to begin but that; the
actions taken prior to that time were insufficient. Had it been determined
earlier that Wade was reluctant to appear, her counsel still would have
had time to issue a subpoena to her or to request a continuance.
• The court held that the insurer failed to establish diligence and could not
argue noncooperation on the part of Wade where one letter was sent
giving notice of a trial date that was to occur one month later. In addition,
once it was discovered that Wade would not attend the trial, no attempt
was made to inform her of the consequences of a failure to cooperate.
Johnson, 47 Ill.App.3d at 615.
An Insurer Must Show Diligence in Contacting
the Insured - The Right Way
• In Safeco Insurance Co. v. Treinis, 238 Ill.App.3d 541, 606 N.E.2d 379 (1st
Dist. 1992), the insured a vehicle owned by Otto Treinis (“Treinis”). On
September 11, 1986, while driving the insured vehicle, Treinis’ roommate
was involved in an accident with Gerald Sluzewicz. Treinis reported the
accident to his agent within a couple of days. Gerald Sluzewicz filed a
lawsuit against Treinis on January 13, 1987.
• Safeco sent letters to Treinis requesting that he contact it immediately
regarding the occurrence. He did not respond. Safeco then began more
extensive efforts to contact Treinis beginning in July, 1987. Safeco utilized
its house investigator, a skip-trace and an outside investigator in order to
locate and contact Treinis without success.
• The court held that the total lack of contact between Treinis and Safeco
constituted noncooperation, especially where there was no evidence of
any extenuating circumstances. Safeco Insurance Co., 238 Ill.App.3d at
549.
An Insurer Must Show Diligence in Contacting
the Insured - The Right Way
• In Gallaway v. Schied, Barbara Schied (“Schied”) was involved in an
accident on December 12, 1959. Three days later, she reported the
accident to her carrier, Apex Mutual Insurance Company (“Apex”) and
shortly thereafter completed a written accident report and forwarded it to
Apex. A personal injury lawsuit was filed against Schied as a result of the
occurrence, and upon being served with it, sent it on to Apex.
• In March 1960 Apex sent a letter to Schied advising her that counsel had
been retained to represent her in the litigation and that she must
cooperate with her attorneys. Letters were sent to her by her attorneys in
June and July regarding dates for her deposition.
An Insurer Must Show Diligence in Contacting
the Insured - The Right Way
• In August of 1960, it was learned from a relative that
Schied had moved. Subsequently, letters sent to Scheid
were returned unclaimed or marked “Move, Left No
Address.” A private investigator hired by Apex was not
able to locate Scheid. The court found that Apex
exercised “reasonable diligence” in attempting to locate
Schied and secure her cooperation. Gallaway, 73
Ill.App.2d at 125.
An Insurer Must Show Diligence in Contacting
the Insured - The Right Way
• The most recent favorable decision regarding the cooperation
clause is Founders Insurance Company v. Shaikh, 405 Ill.App.3d 367
(1st Dist. 2010). In that case, insured acknowledged service of the
suit and then disappeared and refused contact.
• In order to locate the insured Founders set forth in detail, with
supporting documentation, the meticulous efforts undertaken to
contact the insurer, attempted telephone contact, letters, skiptraces, visits to various locations by investigators and searches of
various public records. Letters by both regular and certified mail
were sent to each and every possible address. Investigators
working on behalf of Founders made in person visits to five
different locations in efforts to find Shaikh. Family members too
denied any knowledge as to his whereabouts.
An Insurer Must Show Diligence in Contacting
the Insured - What Steps to Take
• Find the insured’s address and send correspondence to
each of those addresses until you make contact. Look at
the policy of insurance, police report, and search IDOC and
Cook County Sheriff’s database. Send all correspondence
by regular and certified, with restricted delivery.
• If that fails, then engage outside investigator to conduct
skip trace and have the investigator attempt personal
contact. Personal contact attempts with the insured, his
family members, his roommates, property managers, etc.
can be the key to showing appropriate diligence.
An Insurer Must Show Diligence in Contacting
the Insured - What Steps to Take
• Diary each contact with the insured and confirm his
telephone number and mailing address every time
you talk to him.
• Diary discovery deadline, deposition date,
arbitration, and trial dates and send correspondence
and call prior to each. This may be duplicative of the
efforts of defense counsel, but if we have to
prosecute one of these cases, it will be of great
assistance.
An Insurer Must Show Diligence in Contacting
the Insured - What Steps to Take
• Engage a bilingual investigator where necessary.
• Send correspondence in Spanish, Polish, or other appropriate
language as needed.
• Ensure defense counsel is sending appropriate correspondence and
encouraging cooperation.
• Identify problem early and take every effort to resolve it; you will
either resolve it, or make a very good record.
• This is worth the effort. There is a one-third difference between
awards at arbitration in Cook County and jury verdicts.
LIENS ARE NO LONGER JUST THE
PLAINTIFF’S PROBLEM
• Standard Settlement Language in Releases is No Longer
Effective.
• “Plaintiff specifically agrees he shall be solely responsible
for payment of any and all of Plaintiff’s medical/health care
providers and/or any other entity that may be entitled to
share in any settlement proceeds related to injuries alleged
from the incident, including Medicare and/or Medicaid and
including any and all liens, subrogated interests or
assignments for same and/or first rights of recovery and
including any expenses incurred subsequent to this
agreement.
Plaintiff specifically represents that no
assignment of any benefits has occurred nor has Plaintiff
provided information as to potential medical liens”.
LIENS ARE NO LONGER JUST THE
PLAINTIFF’S PROBLEM
We cannot do business as usual and leave these
issues up to the plaintiffs.
• Insurers and insureds, face liability if Medicare’s
interest is not protected.
• Insurers face penalties, interest, and double payments
if Medicare’s interest is not protected.
• It is an insurer’s responsibility to protect Medicare’s
interest.
LIENS ARE NO LONGER JUST THE
PLAINTIFF’S PROBLEM
What is Medicare’s current relationship to casualty insurance and selfinsurance programs?
In late December 2007, Congress passed a new amendment to the Medicare
Secondary Payer Statute known as Section 111 of the Medicare, Medicaid and
SCHIP Extension Act of 2007 (MMSEA), requiring all primary payers to report
settlements, judgments, awards or other payments to Medicare. See 42 U.S.C.
1395
Who is a “primary payer” or a “responsible reporting entity” (RRE)?
•
•
•
•
liability insurers
no-fault insurers
workers compensation insurers
self-insurers
LIENS ARE NO LONGER JUST THE
PLAINTIFF’S PROBLEM
Who is a Medicare beneficiary?
• Anyone who is a current beneficiary or was a
beneficiary at any time prior to the the event that
triggers the reporting requirement.
• As to those that might by a Medicare beneficiary in
the future that requires setting up a Medicare Set
Aside Trust (we talk about that later).
ORDINARY LIENS
• Notice of an ordinary lien is the responsibility of the lien holder
• Failure of the lien holder to notify of the lien waives the lien
• The medical lien holders collectively can take no more than onethird of the settlement or judgment
• The court has the discretion to order liens reduced or eliminated
• If a lien holders interest is not protected they can go after the
plaintiff or anyone else who had notice of the lien.
NONE OF THE PRINCIPLES OF LAW APPLICABLE
TO ORDINARY LIENS APPLY TO MEDICARE’S
INTEREST
•
Medicare’s interest is not a lien at all
•
It is the responsibility of the parties to determine if a plaintiff is a Medicare
beneficiary or a potential Medicare beneficiary which requires that Medicare’s
interest be protected
•
Medicare can take all of the judgment or settlement
•
The state court has no authority to order Medicare’s interest reduced (the
authority of the federal court is an open question)
•
If Medicare’s interest is not protected they can go after the plaintiff, the
defendant, and defendant’s insurer for the money owed, plus penalties and
interest
•
Medicare goes to the front of the line
Medicare Secondary Payer
Requirements basics
• Beginning July 1, 2009 all liability settlements involving
Medicare beneficiaries are subject to the provisions of the
Medicare, Medicaid, and SCHIP Extension Act (MMSEA).
• The implementation was backed up to January 1, 2010, but
the reporting requirements are retroactive to July 1, 2009.
See Roy Franco, Jeffrey Signor, and Thomas Thornton,
Mission Impossible: Resolution of a Case with a Medicare
Claimant?, For the Defense, May 2009, pp 8-13.
• Medicare is not required to provide notice of its interest in
a settlement or judgment and so its interest is not
technically a lien. See 42 USC § 1395y(b)(2)(B)(iv).
Medicare Secondary Payer
Requirements basics
• Medicare has a right to recovery as a secondary payer to
group health plans, workers’ compensation, automobile or
liability insurance plan or policy, including self insureds, and
no fault insurance. See 42 USC § 1395y(b)(2)(B)(I)-(ii).
• Medicare is secondary, the defendant and its insurer are
primary, and the plaintiff is the Medicare beneficiary.
• The Secretary of Health and Human Services has delegated
the responsibility for administration of the Medicare
program to the Centers for Medicare & Medicaid Services
(“CMS”). See 42 USC §§ 1935hh and ii.
Basics of Process to Report
1.
The first step in the process of dealing with the issue is to determine
if the plaintiff is a Medicare beneficiary.
See 42 USC §
1395y(b)(8)(A)(i),(ii).
2.
This can be done through discovery and it is incumbent on the
Responsible Reporting Entity (“RRE”), the insurers or self-insured,
and the entity to report that a Medicare beneficiary is involved in
litigation to CMS. Id., see also Section 111 of MMSEA; 42 CFR §
411.25(a); see also Matthew Garretson, One More Thing to Worry
About in Your Settlements, American Trial lawyer.
3.
Medicare created a website, which will allow the entities to register
claims, located at: http://www.Section111.cms.hhs.gov
Basics of Process to Report
4. Because it takes CMS time to do its job, the earlier this
process begins the better.
5. There is no safe harbor provision for an RRE who fails to
report a settlement with a Medicare beneficiary even if the
Medicare beneficiary lied about being a beneficiary.
Accordingly, a thorough investigation is required.
6. This may include getting an authorization from the claimant
if there is a suspicion that an individual is a Medicare
beneficiary, but the plaintiff has not disclosed that fact.
Basics of Process to Report
7.
Determining who is a Medicare beneficiary can be a challenge
where future payments are involved. There is a lack of
guidance in the regulations regarding whether liability
settlements are required to account for future medical
payouts. See Bradford Peterson, Medicare and Future Medical
Expenses: Does the “Super Lien” Apply, Illinois Bar Journal,
January 2010, Vol. 98, pp 26-30.
8.
Workers compensation has been dealing with this issue for 15
years. If there is any doubt regarding the need for future
medical treatment the most prudent thing to do is to account
for future payments through a trust. See Peterson, pp 26-30.
Basics of Process to Report
9. The CFR for workers’ compensation cases has
set forth guidelines defining a future
Medicare beneficiary. In the civil context
where there are no guidelines, the best
course is to use these guidelines to
determine who is a future Medicare
beneficiary:
Basics of Process to Report
A.
Receiving Social Security Disability;
B.
Applied for Social Security Disability Benefits;
C.
Denied Social Security Disability Benefits but anticipates appealing that decision;
D.
Denied Social Security Disability Benefits but anticipates appealing that decision;
E.
62 years and 6 months old (i.e., may be eligible for Medicare based upon his/her age
within 30 months); or
F.
End Stage Renal Disease (ESRD) condition but does not yet qualify for Medicare based
upon ESRD. See 42 USC § 1395y(b)(2); see also Peterson, footnote 35.
Settling A Case Involving a Medicare Beneficiary
Without Future Treatment As An Issue
A. If future payments are not an issue, a case involving a
Medicare beneficiary can be settled but Medicare’s right to
reimbursement must be protected.
B. Complicating the issue, Medicare will not issue a demand for
reimbursement before settlement.
C. Once the case is settled, the Medicare beneficiary is
required to report the settlement, including attorneys’ fees
and expenses.
D. One of the biggest problems in settling cases involving
Medicare beneficiaries is that Medicare does not account for
fault. See Franco, pp 9, 11.
Settling A Case Involving a Medicare Beneficiary
Without Future Treatment As An Issue
E. Accordingly, if CMS’s reimbursement demand is in
excess of the settlement, Medicare will take the entire
settlement.
F. Accordingly, if CMS’s reimbursement demand is in
excess of the settlement, Medicare will take the entire
settlement.
G. Until CMS has issued its demand letter, the case is not
settled as far as Medicare is concerned. Franco, pp 11.
H. It is required that our clients, the RRE, advise CMS of
the case and later advise of the settlement early on in
the process, supply them with the information they
need so as to cut down on the time at the end of the
settlement process.
Settlement And Release Of Cases Involving Medicare
Beneficiaries With No Future Treatment
A. There are two principle ways to proceed in issuing the
settlement draft. First, you can place Medicare as a payee
on the check and let the plaintiff’s attorney deal with
negotiating it. If this route is chosen, it must be part of
the settlement documents and on the release.
B. A second option is to have more than one check issued.
The first of those checks would be to the plaintiff and
plaintiff’s attorney. An estimate of Medicare’s interest
could be withheld from the total settlement, such that
once the demand is made a second check could be drawn
to pay Medicare.
Settlement And Release Of Cases Involving Medicare
Beneficiaries With No Future Treatment
C. Example: On a $300.000 settlement, the estimate of
Medicare’s interest is $60,000. You give a draft to
plaintiff’s of $220,000 and hold back $80,000 to account
for the Medicare interest and for some play in numbers.
Then when the demand comes back you issue a second
set of checks, one to Medicare and another to plaintiff’s
and plaintiff’s attorney.
D. This process is obviously fraught with potential problems;
the most obvious of which is that the estimate is wrong
and the plaintiff has to contribute to the amount owed to
Medicare. But if the plaintiff will not agree to place
Medicare on the check, it is the only option.
Settlement And Release Of Cases Involving Medicare
Beneficiaries With No Future Treatment
E. This option also has the problem that Medicare may
not be paid within the 60 days of the plaintiff
receiving settlement money required by the statute.
See 42 USC § 1395y(b)(2)(B)(ii).
F. It is important to consider that any indemnity
language in the release is hardly protection in the
face of the penalties and interest that Medicare can
seek if its interest are not protected by the RRE.
Settlement And Release Of Cases Involving Medicare
Beneficiaries Where Future Treatment Is Involved
A. Medicare expects to be compensated for future treatment
as a result of an injury. See 42 CFR §§ 411.40-41.47; see also
Peterson, pp 26-30.
B. Accordingly, it must be determined if future treatment is
reasonably likely because there is no safe harbor provision
for the determination of future treatment in the event
future treatment is not accounted for in the settlement.
Franco, pp 8-13.
C. Also, there is no safe harbor for whether an individual is a
likely beneficiary of Medicare. A determination must be
made early on if future treatment is reasonably likely.
Settlement And Release Of Cases Involving Medicare
Beneficiaries Where Future Treatment Is Involved
D. A failure to comply with Section 111 can result in a civil
penalty of $1000 per day/per claim for each day of
noncompliance.
E. In the absence of specific guidance it would seem to be
the most prudent course that if a potential or current
Medicare beneficiary is going to need future treatment a
Medicare trust must be set up.
F. This is a process that has been used in workers’
compensation for some time. The trust and the amount
to fund it must be approved by CMS. CMS often reform
these trusts.
Settlement And Release Of Cases Involving Medicare
Beneficiaries Where Future Treatment Is Involved
G. Medicare Set Aside Trusts in the workers’ compensation
context have the following characteristics. While there
has been no regulations promulgated on these in the civil
context there is no reason to believe that they will be
substantially different.
1.
2.
3.
4.
5.
Self administered by the Medicare beneficiary
The money is held in an FDIC insured, interest bearing account
The money is held in an FDIC insured, interest bearing account
There is an annual accounting required to Medicare
May be structured
Settlement And Release Of Cases Involving Medicare
Beneficiaries Where Future Treatment Is Involved
H. The key from the Medicare beneficiary’s
perspective is that when the funds are exhausted,
Medicare will pay for the remaining future
treatment. The penalty is, if the trust is not set up
with approval from CMS, then Medicare will not pay
for the future treatment.
I. CMS rejected 27% of Medicare Set Aside Trusts as
too low and the average increase was 38%.
Settlement And Release Of Cases Involving Medicare
Beneficiaries Where Future Treatment Is Involved
J. The contract language for the Medicare Set
Aside Trust must:
1.
2.
3.
4.
Acknowledge Medicare’s interest;
The amount of the Medicare Set Aside Trust;
The amount of the Medicare Set Aside Trust;
State the terms of the Medicare Set Aside Trust;
and
5. Claimant to indemnify the defendant.
Consequences Of Not Satisfying
Medicare’s Interest
Before that question can be answered we have to determine: What is
Medicare’s interest?
• Medicare is wise to schemes to try and avoid its interest and will
reject or challenge settlements and could take actions that thwart
its interests.
• As a general proposition Medicare’s right to reimbursement is
limited to funds obtained by the Medicare beneficiary. Denekas v.
Shalala, 943 F.Supp. 1073 (S.D, Iowa, 1996).
• Under Illinois’ Wrongful Death statute because the damages belong
to the survivors and not the deceased it will be argued that
Medicare cannot attach those sums.
Consequences Of Not Satisfying
Medicare’s Interest
A. If Medicare is not paid within 60 days, it is entitled to
interest. See 42 USC § 1395y(b)(2)(B)(ii).
B. The primary payer may also be required to pay Medicare
even if it already paid the Medicare beneficiary. See 42
CFR § 411.24(i).
C. Medicare can also take legal action to recover twice the
amount of the Medicare payment. See 42 USC §
1395y(b)(8)(B)(ii); 42 CFR 411.24(c)(2),(h).
D. There is also a private right of action by the plaintiff. See
42 USC § 1395y(b)(3)(A).
Consequences Of Not Satisfying
Medicare’s Interest
E. Finally, failure to report a payment to a Medicare
beneficiary can be subject to $1,000 per day/per
case fine from the date the Medicare beneficiary
received funds, as well as other remedies. See 42
USC § 1395y(b)(8)(B)(i).
F. While defense counsel cannot be sued for this
liability to Medicare, if the RRE, our client, is sued
by the United States, we can expect that our
malpractice carrier will need to get a call.
How The Process Is Supposed To Work
1. Accident Occurs
2. Injuries associated with accident are paid by Medicare
3. Negligent party becomes aware of accident involving
Medicare beneficiary
4. At the same time as #3, the Coordinator of Benefits
(“COB”) gathers information about the accident
5. The negligent party reports to the COB.
§411.25(a).
42 CFR
How The Process Is Supposed To Work
6. Medicare Secondary Payer (“MSP”) leads identified and
related case claims retrieved
7. The COB populates the Common working file
8. Within 10-14 days the COB acknowledges the claim and
sends notification to the negligent party with a consent
form
9. The Medicare Secondary Payer Recovery Contractor
(“MSPRC” or “CMS”) acknowledges receipt of the claim
within 30 days and investigates conditional payments
related to the accident
How The Process Is Supposed To Work
10. At the same time as #9, the information is submitted to the
Recovery Management Accounting System (“ReMAS”) to identify
conditional payments
11. CMS receives a ReMAS alert and applies filters to identify related
claims
12. Within 45 days CMS send a Conditional Payment letter to the
negligent party
13. CMS works with negligent party to reach agreement on accident
related claims
14. Within 30 days, CMS sends an updated Conditional Payment letter
How The Process Is Supposed To Work
15. Within 14 days CMS identifies the money owed to
Medicare and send a demand letter.
16. At that point there is either payment and a check is
sent to CMS and the case is closed, or
17. There is a dispute and correspondence regarding
relatedness occurs
18. Then there is either a waiver or compromise and that
is resolved and the case ends, or
How The Process Is Supposed To Work
19. The dispute continues and interest will begin to
accrue if 60 days from the Medicare beneficiary
receiving payment Medicare has not been
reimbursed
20. If full refund is not received CMS sends a letter of
Intent to Refer
21. If full refund is not received CMS sends a letter of
Intent to Refer
Key Acronyms related to the MMSEA:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
CMS: Centers for Medicare and Medicaid Services
COBC: Coordination of Benefits Contractor
MIR: Mandatory Insurer Reporting
MMSEA: Medicare, Medicaid and SCHIP Extension Act of 2007
MSA: Medicare Set-Aside Allocation
MSP: Medicare Secondary Payer Act
ORM: Ongoing Responsibility for Medical
PIP: Personal Injury Protection
MP: Medical Payment
RRE: Responsible Reporting Entity
RRE ID: Responsible Reporting Entity Identification Number
SFR: Self-Funded Retention
SIR: Self-Insured Retention
TPOC: Total Payment Obligation to Claimant
TPA: Third Party Administrator
Thank You!
Donald Patrick Eckler
Pretzel & Stouffer, Chartered
One S. Wacker Drive
Suite 2500
Chicago, Illinois 60606
312-346-1973