Coordination of Benefits    Employee Benefits Series             THOMPSON            July 2011 | VOL. 19, No.3 

When a person is injured in an auto accident and is covered by both a health plan and auto liability insurance, the health plan usually pays its benefits first. That’s because the auto liability insurer has to determine that it has liability under its policy terms. However, in some cases, the auto liability insurer can establish its liability amount before a lawsuit or a trial to determine third-party liability. In those cases, the auto liability insurer is usually aware of the health plan’s right to reimbursement. Can it delay payment of its benefits until the health plan establishes its claim for reimbursement? That question arose in a recent decision involving Medicare. The case is Wilson v. State Farm Mutual Automobile Insurance Co., 2011 WL 2378109 (D.C. Ky., June 15, 2011). The Facts

Steven Wilson, a Medicare beneficiary, was injured in an auto accident. He incurred significant medical bills, some of which were paid by Medicare. The other driver was uninsured. Wilson had auto liability coverage with State Farm that included uninsured motorist coverage with a policy limit of $50,000.

State Farm concluded that the uninsured driver was responsible for the accident and Wilson’s injuries and that it would be liable for the full $50,000 policy limit under the uninsured motorist coverage of Wilson’s auto liability policy. However, State Farm recognized that Medicare would have a lien for reimbursement of the medical expenses it paid, and it wanted to determine the value of Medicare’s lien for reimbursement from tort settlement proceeds before it paid any benefits. However, it could not do so because Wilson refused to give State Farm permission to contact Medicare to determine that amount of its lien.

Wilson wanted State Farm to deposit the full amount of its policy limit into an escrow account from which Medicare’s lien would be paid. He agreed to hold State Farm harmless from any such Medicare claim. Medicare would not have been a party to that agreement, and it would not have been bound by that agreement if for some reason it did not receive the amount of its lien. As an alternative, State Farm suggested that it include Medicare as a co-payee of its settlement check, but Wilson did not agree with that approach.

To break this standoff, Wilson filed this lawsuit, claiming that it was bad faith for State Farm to delay payment of the $50,000 more than 30 days merely to protect it from later liability to Medicare. Two months after the start of this lawsuit, State Farm learned the value of the Medicare lien, and the next day it paid both Medicare and Wilson. Nevertheless, this suit continued. State Farm and Wilson both moved for summary judgment. 

The Decision

Wilson’s arguments in support of his claim were based on two Kentucky statutes. One of them provided that “not attempting in good faith to effectuate prompt, fair and equitable settlements of claims in which liability has become reasonably clear” can constitute bad faith. The other statute required “all claims arising under the terms of any contract of insurance shall be paid to the named insured person or health care provider not more than” 30 days after due proof of the claim is furnished to the insurer. 

The court concluded, based on Kentucky case law, that mere delay of payment alone does not constitute bad faith. It noted that State Farm had the primary responsibility to repay Medicare based on federal law. It would have had absolute liability to Medicare if Wilson did not satisfy Medicare’s lien from the settlement funds. Thus, State Farm acted responsibly in taking the steps it did. The court concluded: 

Since State Farm paid both [Wilson] and Medicare the day after it received notice of the value of Medicare’s lien, State Farm believes it acted well within the [Kentucky] statutory guidelines. … State Farm’s delay in payment does not constitute bad faith, and in fact, its multiple attempts to speed settlement suggest just the opposite. 

The court concluded that State Farm had a reasonable foundation to delay settlement by seeking assurances concerning the amount and payment of the Medicare lien, and so it granted summary judgment in favor of State Farm, denied Wilson’s motion for summary judgment and dismissed the lawsuit with prejudice. 

Implications

It was reasonable for State Farm to reject Wilson’s request to have the tort settlement proceeds deposited into an escrow account even with Wilson’s guarantee that he would reimburse State Farm if Medicare did not receive reimbursement of its lien from that account. He could have demanded that the escrow agent pay the $50,000 to him after 30 days (based on the Kentucky statute). Had this occurred, Medicare would have immediately proceeded against State Farm for its lien, since federal law allows that. Medicare would not waste its time chasing Wilson. When Medicare came after Wilson based on his promise to reimburse State Farm, it is likely that the proceeds of the settlement would be difficult (if not impossible) to find.

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This entry was posted by cmonfils on Monday, August 22nd, 2011 at 8:28 pm and is filed under Medicare. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.