Case Title: Paula Fasso v. Ralph J. Doerr, M.D.

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2009-02-24T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 21  
Paula Fasso et al., 
            Respondents, 
Independent Health Association, 
Inc., 
            Intervenor-Appellant,
        v. 
Ralph J. Doerr, M.D., 
            Respondent.
Michael R. McGee, for intervenor-appellant.
John A. Collins, for respondents Fasso et al.
Joseph V. McCarthy, for respondent Doerr.
Medical Society of the State of New York; The New York
State Health Plan Association, Inc., amici curiae.
GRAFFEO, J.:
When a person suffers personal injuries because of the
wrongdoing of another and the injured party's health insurer pays
for medical treatment, a cause of action for equitable
subrogation accrues to the health insurer, allowing the insurer
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1 IHA could have instituted its own action directly against
Dr. Doerr, but by the time it became involved in this case, the
statute of limitations had run.  Instead, IHA decided to request
intervention on the basis that an "intervenor's claim will be
deemed to have been interposed as of the filing date of the
petition . . . . if the proposed intervenor's claim and that of
the original petitioner are based on the same transaction or
occurrence" and "the proposed intervenor and the original
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to seek recoupment of its expenditures.  The issue before us is
whether the injured party and the tortfeasor can agree to a
settlement that extinguishes the insurer's subrogation rights. 
We conclude that the subrogation claim in this case cannot be
discontinued without the subrogee's consent.
I
Plaintiff Paula Fasso received medical services from
defendant Ralph Doerr, M.D., in 1996.  She subsequently developed
complications that required her to undergo a liver transplant. 
Approximately two years later, Mrs. Fasso and her husband
commenced this action against Dr. Doerr and the hospital where he
treated her, alleging that Dr. Doerr had committed medical
malpractice.  Mrs. Fasso required a second liver transplant in
2003, resulting in her medical and surgical expenses totaling
approximately $780,000, all of which were paid by her health
insurance carrier, Independent Health Association, Inc. (IHA).
In 2005, IHA moved to intervene in the Fassos' medical
malpractice action pursuant to CPLR 1013 in order to assert an
equitable subrogation claim against Dr. Doerr for reimbursement
of the payments made on Mrs. Fasso's behalf.1  IHA represented
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No. 21
petitioner [are] so closely related that the original
petitioner's claim would have given the respondent notice of the
proposed intervenor's specific claim so that the imposition of
the additional claim would not prejudice the respondent" (Matter
of Greater N.Y. Health Care Facilities Assn. v DeBuono, 91 NY2d
716, 720-721 [1998]).  If intervention had not been available,
IHA's remedy would have been to seek reimbursement from any
portion of the Fassos' recovery that was attributable to the
medical expenses paid by IHA.
2 IHA's representations mirrored the language of the
permissible intervention statute, CPLR 1013.
3 Supreme Court also granted the hospital's motion for
summary judgment and the Fassos discontinued their action against
the hospital.
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that it would "not unduly delay" the litigation or "prejudice the
substantial rights of any party" if permitted to intervene.2 
Neither plaintiffs nor defendants opposed IHA's motion and
Supreme Court therefore allowed IHA to become a party to the
case.
The Fassos eventually sought summary judgment
dismissing IHA's complaint for equitable subrogation.  They
contended that IHA could not expect to receive reimbursement from
Dr. Doerr because Mrs. Fasso's damages exceeded the $2 million of
malpractice coverage available to Dr. Doerr.  Hence, the Fassos
claimed that Mrs. Fasso could not be "made whole" in light of the
coverage limits of the doctor's malpractice policies.  Supreme
Court denied the Fassos' motion to dismiss IHA's complaint.3
Before the trial began, IHA informed Supreme Court that
it would rely on the Fassos' proof of Dr. Doerr's alleged
negligence and would present only one witness to establish the
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medical expenses.  Mrs. Fasso was the first witness to testify
and, the following morning, the attorneys for plaintiffs and the
doctor advised the court that a settlement had been reached. 
Under the terms of the agreement, plaintiffs would receive
$900,000, Dr. Doerr would not admit wrongdoing and IHA's
equitable subrogation claim would be dismissed on the basis that
Mrs. Fasso was not "made whole" since the settlement payment was
less than her actual damages.  IHA, which had not participated in
the negotiations or agreed to the dismissal of its cause of
action against Dr. Doerr, did not object to plaintiffs receiving
the monetary payment.  But it did contest the dismissal of its
equitable subrogation claim because, after Dr. Doerr paid the
$900,000 settlement, there remained $1.1 million in potential
insurance coverage -- an amount greater than the sum IHA sought
in subrogation.  IHA also moved for a mistrial so that it could
obtain its own witnesses and evidence to prove Dr. Doerr's
negligence.
Supreme Court denied IHA's request for a mistrial and
approved the settlement between the Fassos and Dr. Doerr.  Since
Mrs. Fasso was not being paid the full amount of her damages, the
court held that IHA's subrogation claim could not survive and sua
sponte dismissed IHA's complaint.  The Appellate Division
affirmed (46 AD3d 1358 [2007]).  We granted leave (10 NY3d 707
[2008]) and now reverse.
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No. 21
4 There is also a contract-based theory of subrogation but
that is not at issue in this appeal.
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II
It is well established that when an insurer pays for
losses sustained by its insured that were occasioned by a
wrongdoer, the insurer is entitled to seek recovery of the monies
it expended under the doctrine of equitable subrogation (see e.g.
Blue Cross & Blue Shield of N.J., Inc. v Philip Morris USA Inc.,
3 NY3d 200, 206 [2004]; Winkelmann v Excelsior Ins. Co., 85 NY2d
577, 581 [1995]; Federal Ins. Co. v Arthur Andersen & Co., 75
NY2d 366, 372 [1990]; Connecticut Fire Ins. Co. v Erie Ry. Co.,
73 NY 399, 402 [1878]).4  Equitable subrogation is premised on
two related concepts.  First, that the party who causes injury or
damage should be required to bear the loss by reimbursing the
insurer for payments made on behalf of the injured party. 
Second, that the injured party should not recover twice for the
same harm -- once from its insurer and again from the wrongdoer
(see Winkelmann v Excelsior Ins. Co., 85 NY2d at 581). 
Therefore, if an injured party receives monies from the
tortfeasor attributable to expenses that were paid by its
insurer, the insurer may recoup its disbursements from its
insured; but when the wrongdoer does not pay damages for an
insured's medical expenses, generally the insurer, as subrogee,
has been allowed to seek recovery directly from the tortfeasor
(see e.g. Teichman v Community Hosp. of W. Suffolk, 87 NY2d 514,
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No. 21
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521-523 [1996]).  
There is, however, an important limitation on recovery
under the doctrine of equitable subrogation.  If "the sources of
recovery ultimately available are inadequate to fully compensate
the insured for its losses, then the insurer -- who has been paid
by the insured to assume the risk of loss -- has no right to
share in the proceeds of the insured's recovery from the
tortfeasor" (Winkelmann, 85 NY2d at 581).  In other words, the
insurer may seek subrogation against only those funds and assets
that remain after the insured has been compensated.  This
designation of priority interests -- referred to as the "made
whole" rule -- assures that the injured party's claim against the
tortfeasor takes precedence over the subrogation rights of the
insurer.
The Fassos and Dr. Doerr contend that the "made whole"
rule precludes IHA from pursuing equitable subrogation against
the doctor in this case because plaintiffs settled for less than
the total damages caused by Dr. Doerr's alleged negligence.  This
position misconstrues the made whole principle.  If the recovery
the injured party receives, whether determined by settlement or
verdict, is greater than the wrongdoer's assets and available
insurance coverage, there is nothing left for the insurer to
execute its subrogation rights against and the made whole rule
prevents the insurer from sharing in the insured's judgment or
recovery.  But that is not the situation here.  In this case, the
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made whole doctrine does not present an obstacle to the insurer's
right to seek recoupment from the tortfeasor because the
settlement between the Fassos and Dr. Doerr left a potential
source of recovery -- $1.1 million in remaining insurance
coverage.  Consequently, the made whole rule did not mandate
dismissal of IHA's equitable subrogation claim merely because the
Fassos decided to accept a settlement figure that did not
completely compensate them for the full extent of their damages. 
The Fassos and Dr. Doerr alternatively maintain that
their agreement to extinguish IHA's equitable subrogation cause
of action is binding on IHA because an insurer stands in the
shoes of its insured and acquires only those rights that the
insured possesses.  This argument misapprehends the nature of the
equitable subrogation doctrine.  The right to subrogation
"accrue[s] upon payment of the loss" by the insurer (Federal Ins.
Co. v Arthur Andersen & Co., 75 NY2d at 372) and it generally
cannot be imperiled by the insured (see e.g. Ocean Acc. & Guar.
Corp. v Hooker Electrochemical Co., 240 NY 37, 50 [1925]; Aetna
Cas. & Sur. Co. v Bekins Van Lines Co., 67 NY2d 901, 903 [1986]). 
Once an insurer has paid a claim and the tortfeasor knows or
should have known that a right to subrogation exists, the
wrongdoer and the insured cannot agree to terminate the insurer's
claim without its consent and such an agreement cannot be
asserted as a defense to the insurer's cause of action (see Ocean
Acc. & Guar. Corp., 240 NY at 50-51; see generally Connecticut
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No. 21
5 There is a wealth of precedent supporting this rule (see
e.g. Allstate Ins. Co. v Mazzola, 175 F3d 255, 260-261 [2d Cir
1999]; Allied Mut. Ins. Co. v Heiken, 675 NW2d 820, 828-829 [Iowa
2004]; Primax Recoveries, Inc. v Carey, 247 F Supp 2d 337, 345
[SD NY 2002]; State Farm Fire & Cas. Co. v Pacific Rent-All,
Inc., 90 Haw 315, 330, 978 P2d 753, 768 [1999]; Westchester Fire
Ins. v Heddington Ins. Ltd., 883 F Supp 158, 162 [SD Tex 1995],
affd 84 F3d 432 [5th Cir 1996]; National Ins. Underwriters v
Piper Aircraft Corp., 595 F2d 546, 551 [10th Cir 1979]; Sentry
Ins. Co. v Stuart, 246 Ark 680, 685-686, 439 SW2d 797, 799-800
[1969]; Home Ins. Co. v Hertz Corp., 71 Ill 2d 210, 214-215, 375
NE2d 115, 118 [1978]; Nationwide Mut. Ins. Co. v Canada Dry
Bottling Co., 268 NC 503, 507-508, 151 SE2d 14, 17 [1966]; Aetna
Cas. & Sur. Co. v Associates Transps., Inc., 1973 OK 62, 512 P2d
137, 142 [Okla 1973]; Hospital Serv. Corp. of R.I. v Pennsylvania
Ins. Co., 101 RI 708, 718, 227 A2d 105, 112 [1967]; Calvert Fire
Ins. Co. v James, 236 SC 431, 114 SE2d 832, 836-837 [1960];
Buckner, Annotation, Rights and Remedies of Property Insurer as
Against Third-Person Tortfeasor Who Has Settled With Insured, 92
ALR2d 102 [collecting authorities]; 16 Couch on Insurance 3d    
§ 224:179, at 224-203; Windt, 1 Insurance Claims and Disputes 5th
§ 3:7 n 9 [collecting authorities]). 
6 We also do not find merit to the alternative contention
that IHA's assertions in its motion to intervene gave the Fassos
permission to waive the equitable subrogation cause of action.
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Fire Ins. Co. v Erie Ry. Co., 73 NY at 402-403; cf. Weinberg v
Transamerica Ins. Co., 62 NY2d 379, 384 and n 4 [1984]).5  Hence,
the provision of the settlement between the Fassos and Dr. Doerr
that purported to bar IHA's equitable subrogation claim cannot be
enforced and does not prevent IHA from proceeding to obtain
reimbursement from Dr. Doerr for the payments it made for Mrs.
Fasso's medical expenses as a result of the doctor's alleged
negligence.6  We therefore reverse and remit to Supreme Court for 
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7 In light of this conclusion, IHA's argument that Supreme
Court erred in dismissing the equitable subrogation cause of
action sua sponte is academic.
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further proceedings.7
III  
Although we conclude that plaintiffs could not
extinguish IHA's equitable subrogation cause of action without
its consent, we find it necessary to comment on the procedural
posture of this case.  CPLR 1013 allows a party to request
permission to intervene in a civil proceeding "when the person's
claim or defense and the main action have a common question of
law or fact" (CPLR 1013).  In exercising its discretion to grant
or deny intervention, a trial court must "consider whether the
intervention will unduly delay the determination of the action or
prejudice the substantial rights of any party" (id.).  
New York courts have disagreed on the issue of whether
it is permissible to grant intervention to health insurers of
injured parties in tort cases.  The predominant view is that the
participation by insurers in settlement negotiations creates
conflicts of interest with plaintiffs, who may wish to accept
settlements that do not allocate sufficient monies to cover all
or part of the medical expenses, and discourages or prevents
settlements since insurers will be inclined to object to anything
less than full recovery of their expenditures (see Berry v St.
Peter's Hosp. of City of Albany, 250 AD2d 63 [3d Dept 1998,
Carpinello, J.], lv dismissed 92 NY2d 1045 [1999]; see also
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8 Another problem relates to the burden of litigation
expenses.  When an insurer is allowed to intervene, it usually
remains in the background of the case, imposing on the insured
the duty and cost of proving the defendant's wrongdoing.
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Marshall v 426-428 W. 46th St. Owners, Inc., 33 AD3d 444 [1st
Dept 2006]; Humbach v Goldstein, 229 AD2d 64 [2d Dept 1997], lv
dismissed 91 NY2d 921 [1998]).  Taking a contrary view, the
Fourth Department has permitted discretionary intervention (see
e.g. Oakes v Patel, 23 AD3d 1023 [4th Dept 2005]; Omiatek v
Marine Midland Bank, N.A., 9 AD3d 831 [4th Dept 2004], lv
dismissed 3 NY3d 738 [2004]).  
Clearly, intervention can create an adversarial posture
between a plaintiff/insured and its insurer because neither has
an incentive to consider the interests of the other, especially
where the potential damages exceed the available sources of
recovery (see generally Siegel, NY Prac § 180, at 309-310 [4th
ed]).8  The injured party's goal is to maximize recovery without
regard to whether its insurer recoups any monies it expended for
the plaintiff's medical bills; the insurer's objective is to
reclaim as much of the money it paid as possible regardless of
whether its insured has a desire to settle the case rather than
proceed to trial.  Thus, allowing an insurer to intervene
inevitably complicates settlement negotiations over the
tortfeasor's insurance coverage.
In this case, neither the Fassos nor Dr. Doerr opposed
IHA's motion to intervene under CPLR 1013 so the issue of whether
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intervention was properly granted to IHA is not before us.  We
note, however, that the question of permissive intervention
raises competing policy concerns that are deserving of
legislative consideration.  Certainly, plaintiffs and defendants
need to weigh the benefits and detriments of settlement offers
with knowledge of the consequences.  But in light of spiraling
health care costs and their effect on the availability and
affordability of medical insurance, "[h]ealth insurers in this
state have increasingly invoked the subrogation doctrine in an
effort to protect limited plan assets" (Hourihan & Zeitounzian,
The Prognosis for Recovery:  Health Insurance Subrogation, 80 NY
St BJ 22 [May 2008]).  As a result, there has emerged an
uncertainty regarding how and when health insurers should assert
their subrogation claims.  
The Legislature considered some of these issues when it
codified CPLR provision 4545, which deals with the collateral
source rule.  That statute provides that a verdict that includes
past medical expenses should be reduced by the amounts paid by an
insurer for the plaintiff's medical treatments (see CPLR 4545) --
to avoid double recovery by a plaintiff -- but the Legislature
did not address the procedures and means of recovery for the
equitable subrogation rights of insurers.  Moreover, the
collateral source doctrine applies only to verdicts, not
settlements, and nothing in the language or legislative history
of CPLR 4545 indicates that the Legislature intended to alter the
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established rules of equitable subrogation.  Consequently, the
Legislature may wish to reexamine the concept of permissible
intervention under CPLR 1013 as it applies to personal injury
actions involving a health insurer's claim of equitable
subrogation.
Accordingly, the order of the Appellate Division should
be reversed, with costs, and the case remitted to Supreme Court
for further proceedings in accordance with this opinion.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   * 
Order reversed, with costs, and case remitted to Supreme Court,
Erie County, for further proceedings in accordance with the
opinion herein.  Opinion by Judge Graffeo.  Judges Ciparick,
Read, Smith, Pigott and Jones concur.  Chief Judge Lippman took
no part.
Decided February 24, 2009