Insurer's Subrogation Claim Is
‘Debt' Under Federal Law
By Susan Hsieh
An insurance company's subrogation claim for medical bills it paid to an accident victim who later recovered damages from a third party is a "debt" under the Fair Debt Collection Practices Act, the 5th Circuit has ruled in reversing a dismissal.
The ruling could open a can of worms for insurance companies, which have gotten aggressive about enforcing their subrogation rights against plaintiffs.
The court said that because the insured's obligation to pay back his insurance company rose out of his contract with the company, it fell within the definition of "debt" under the act.
"We cannot avoid the inescapable conclusion that the plain meaning of ‘debt' encompasses the funds owed in this case," the court held.
Moundsville, W.Va., plaintiffs' attorney Donald Kresen said the ruling is "good news for plaintiffs anywhere." Kresen successfully raised a similar argument in a class action over overbilling.
Randy Slovin, chair of the Commercial Law League's committee on the act, said the decision is "significant because most cases have gone the other way."
But Professor Roger Baron, who teaches insurance law at the University of South Dakota School of Law, said the ruling was only a "minor victory" for the rights of insured.
"It's no solution to the problems of subrogation. All this does is say an entity collecting subrogation debt has to comply with the act and mind its manners," he said.
Kresen predicted that if insurance companies are subject to the act, they could face lawsuits for substantive violations, such as seeking reimbursement from plaintiffs for more than the actual discounted or capitated rates they charge doctors.
"Serious logistical problems" could also result if insurers are covered under the act, said Austin, Texas, attorney Manuel Newburger, because of limits on communications between a "debt collector" and "third parties." Newburger has written a book about the act.
The 5th Circuit remanded the case for a determination of whether the insurer was a "debt collector."
Car Accident
The plaintiff, Kyle Hamilton, was seriously injured in a single-car accident in which he was a passenger. He was covered by his father's group health insurer, United Healthcare of Louisiana, Inc., which paid over $100,000 in medical bills. His father also had an underinsured motorist policy with State Farm, which paid $255,000 in benefits.
United hired a subrogation enforcement service, HRI, to collect from the plaintiff and State Farm.
Hamilton sued, arguing that HRI had violated the Fair Debt Act and a state unfair trade practices statute.
HRI removed the suit to federal court under ERISA. The U.S. District Court dismissed the case, finding that the money owed was not a "debt."
But the 5th Circuit reversed, holding that the subrogation claim fell under the plain meaning of "debt."
Under the act, a debt is defined as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." 15 U.S.C. 1692.
The court rejected HRI's argument that the plaintiff's obligation to pay rose out of the car accident, not the insurance contract.
"There is no question that the obligation to pay arose out of [the plaintiff's] transaction of purchasing insurance. HRI is simply incorrect in it's assertion that the obligation to pay arose out of a tortious act...[The plaintiff's] obligations arose from a business transaction where [he] contracted for personal and family services, i.e., insurance. Moreover, the plain meaning of ‘arising out of' as ‘stemming from' leads us to conclude that the obligation to pay arose from the contract/transaction for insurance," the court said.
HRI also argued that it was exempt from the act because it wasn't a "debt collector."
The act exempts "any person collecting any debt...to the extent such activity...concerns a debt which was not in default at the time it was obtained by such person."
But the 5th Circuit remanded the case for the lower court to decide whether HRI was a debt collector under the act, noting that the answer depended on "the circumstances surrounding the inception of the debt."
The ruling could open a can of worms for insurance companies, which have gotten aggressive about enforcing their subrogation rights against plaintiffs.
A dissenting judge complained that the plaintiff's obligation to pay arose out of a string of events including the contract, the accident and the payment of bills-not simply the contract for insurance. He noted that a subrogation claim:does not fit our traditional concept of debt."
"The FDCPA was not designated to cover this case. The act was drafted to protect consumer who were having difficulty paying their debts. It was not intended to protect an accident victim who attempts to get a ‘windfall' by receiving money from multiple sources," the judge wrote.
‘Murkey Area
The ruling puts insurers in a "murkey area," said Slovin. "It's going to tell a lot of insurers to change the way they're doing things."
This will include following the notice requirements under the act, and other requirements, such as sending a verification of the "debt" if the "consumer" disputes the amount.
Insurers will also have to beware of their provisions of the act, such as restrictions on third party communications, said Newburger.
"If it's a debt, and I treat it like a debt, and I am a debt collector, I can't talk to other parties," he said.
This could interfere with an insurer's ability to investigate a claim, said Slovin.
"A lot of information insurers need to get [comes] from third parties, such as getting public records and interviewing witnesses. That in itself creates a lot of problems. Doing something that might seem reasonable, i.e. investigation a claim, may be violating the Fair Debt Act," he said.
Kresen said that if insurers are covered under the act, it will open the door to move lawsuits like the class action he brought against an insurer for overcharging its insureds.
A "debt collector" can be sued under the act for misleading a debtor about the amount owed.
Kresen said most lawyers aren't aware that insurers sometimes overbill by seeking repayment of the full amount of services, even though only a portion was paid because many insurers have discounted programs with their member doctors.
He said that plaintiff's lawyers should always ask for the contract and not assume it contains a right to subrogate.
However, some lawyers noted that if the insurer goes after the tortfeasor directly, this might not be a "debt" because it would "arise out of" a tort claim, not the insurance contract.
Are Insurers Debt Collectors?
The ruling leaves open the question of whether an insurer is a debt collector under the act.
But now that the court has said the money is a debt, it may be difficult to argue that the insurer isn't a debt collector.
"I don't think there's any question they're debt collectors when seeking reimbursement from plan members, because of the definition of ‘debt.' You couldn't get any more personal a transaction than buying health insurance. The obligation arises from a contract," said Kresen.
The insurer here argued that it was exempt because the act doesn't cover the collection of a debt that isn't in default.
But that is "splitting hairs," Kresen said.
He added that plaintiffs have a good argument that insurers themselves claim the debt is in default, because they often take the position that the plaintiff owes the insurer as soon as the plaintiff receives money from the tortfeasor.
"Plaintiffs have plenty of ammunition where the claim is made immediately. The insurance companies always claim as soon as the money transfers into my hands, I owe it," he said.
"If an insurer claimed the money is past due, it seems to me it will have a hard time denying debt collector status," said Newburger. "If they don't [claim the money is past due], there's a fight to be had."
U.S. Court of Appeals, 5th Circuit. Hamilton v. United Healthcare of Louisiana, Inc., No. 01-31179. November 1, 2002. Lawyers Weekly USA No. 9924527.
Questions or comments can be directed to the writer at: shsieh@lawyersweekly.com
