Failure to Hold Back Settlement Funds Subject to a Medical Lien Can Expose an Insurer to Treble Damages
A court’s decision to impose liability for committing an unfair or deceptive trade practice in a particular case may have wide-ranging implications—even when the amount in dispute in the matter itself is relatively minor.
Such is the case in Nash Hospitals, Inc. v. State Farm Mutual Automobile Insurance, Co., a recent decision by the North Carolina Court of Appeals.
In Nash, the Court of Appeals concluded that State Farm committed an unfair and deceptive trade practice in its handling of the disbursement of settlement proceeds subject to a medical lien. Although the matter arose over a hospital bill of only $757, the reasoning and holding in Nash could have broader implications for how insurers handle personal injury settlements.
State Farm settles without notifying the hospital
Jessica Whitaker was injured in an automobile accident caused by another driver. She incurred medical expenses with Nash Hospitals and two other healthcare providers following the accident.
State Farm insured the culpable driver. State Farm negotiated a settlement with Ms. Whitaker to pay a substantial portion of her medical expenses. Ms. Whitaker did not involve counsel in those negotiations.
State Farm sent a check to Ms. Whitaker for the negotiated settlement amount. The check was jointly payable to Ms. Whitaker, Nash Hospitals, and the other medical providers. Ms. Whitaker was unable to cash the check because it required the endorsement of the co-payees.
North Carolina law grants hospitals and medical providers with certain statutory rights to assert an interest in the personal injury recoveries of their patients. These statutory rights are commonly referred to as medical liens. Pursuant to N.C. Gen. Stat. § 44-50, Nash Hospitals possessed a medical lien on Ms. Whitaker’s settlement proceeds pro rata with the other healthcare providers. Under the statute, the lienholders’ recovery was capped at 50% of the total settlement.
Nash Hospitals notified State Farm of its medical lien prior to the settlement. State Farm did not notify Nash Hospitals, however, that it had reached a settlement with Ms. Whitaker.
Nash Hospitals subsequently contacted State Farm to inquire about the status of the claim. Only then did State Farm disclose that it had reached a settlement with Ms. Whitaker and issued the joint check to her. State Farm took the position that the issuance of the joint check satisfied and extinguished any obligation it had to satisfy Nash Hospitals’ medical lien. State Farm told Nash Hospitals to contact Ms. Whitaker directly to resolve how the settlement proceeds should be divided.
After finding out about the settlement, Nash Hospitals advised State Farm that State Farm’s failure to retain funds sufficient to satisfy its lien violated the medical lien statutes. Nash Hospitals also pointed out that, by issuing a joint check to Ms. Whitaker that she was unable to cash, Ms. Whitaker would be forced to obtain an attorney and incur additional unnecessary expenses in order to actually recover any of the insurance proceeds.
Nash Hospitals sues for its share of the settlement proceeds
State Farm did not respond to the letter. Nash Hospitals then sued State Farm for violating North Carolina’s medical lien statutes. Nash Hospitals’ complaint also included an unfair and deceptive trade practices claim.
The trial court granted summary judgment to Nash Hospitals, finding that State Farm violated both the medical lien statutes and N.C. Gen. Stat. § 75-1.1.
State Farm appealed and the North Carolina Court of Appeals affirmed State Farm’s liability for both claims. The Court of Appeals remanded the case, however, to have the trial court recalculate the damages originally awarded.
The Court of Appeals determined that State Farm had a statutory duty to retain sufficient funds from the settlement to satisfy the lien claims and to distribute proceeds to the lienholders before disbursing to Ms. Whitaker.
With respect to the 75-1.1 claim, State Farm first challenged the hospital’s standing to bring the claim. State Farm argued that Nash Hospitals lacked privity with the insurer. The Court of Appeals rejected that argument. The court reasoned that Nash Hospitals was a third-party beneficiary of the insurance contract and came into privity with State Farm upon notifying State Farm of its asserted lien.
The court also found that State Farm’s failure to notify Nash Hospitals of the settlement with Ms. Whitaker, coupled with its direction that Nash Hospitals seek recovery from Ms. Whitaker herself, was both an unfair and a deceptive act. The Court of Appeals appears to have viewed the insurer’s conduct as a species of direct unfairness. The court also indicated that the same conduct met the statutory definition of a deceptive act because State Farm’s handing of the lien claim possessed “the capacity or tendency to deceive.”
The court was careful, however, to indicate that State Farm’s violation of the North Carolina medical lien statutes did not make State Farm per se liable under 75-1.1. Rather, liability stemmed from State Farm’s underlying conduct and “its failure to cure the violation absent litigation.”
The Court of Appeals directed the trial court to enter summary judgment to Nash Hospitals for a mere $971.07 (treble the actual damages of $323.69 awarded) . Upon remand, it is possible that Nash Hospitals will also seek an attorney fee per N.C. Gen Stat. § 75-16.1.
Although it appears that State Farm will not incur a significant cash outlay in this matter, the case is likely to have broader implications for how the company handles claims settlement generally. State Farm’s counsel indicated at oral argument that the insurer routinely issued joint checks and told “the . . . parties [to] agree . . . who’s going to get what.” State Farm will presumably need to end the practice of issuing joint checks to head off potential future treble damages awards. Going forward, it also appears the burden of determining how personal injury settlement proceeds should be allocated will fall more on the insurer.
Author: George Sanderson