Fasso v. Doerr, 12 N.Y.3d 80 (2009)
An insurer’s equitable subrogation rights cannot be extinguished by a settlement agreement between the insured and the tortfeasor without the insurer’s consent, especially when potential insurance coverage remains.
Summary
This case addresses whether an injured party and a tortfeasor can settle a case in a way that extinguishes the health insurer’s subrogation rights. The New York Court of Appeals held that the subrogation claim could not be discontinued without the insurer’s consent, particularly since the settlement left remaining insurance coverage available from which the insurer could potentially recover. This decision clarifies that an insurer’s right to subrogation accrues upon payment and cannot be unilaterally terminated by the insured and tortfeasor if the tortfeasor is aware or should have been aware of the insurer’s right to subrogation.
Facts
Paula Fasso received medical treatment from Dr. Ralph Doerr, which led to complications necessitating liver transplants. Her health insurer, Independent Health Association, Inc. (IHA), paid approximately $780,000 for her medical expenses. The Fassos sued Dr. Doerr for medical malpractice. IHA moved to intervene in the lawsuit to assert its equitable subrogation claim for reimbursement of the medical payments it made on Mrs. Fasso’s behalf. The court allowed IHA to intervene. The Fassos later sought summary judgment dismissing IHA’s claim, arguing that Mrs. Fasso could not be made whole due to the doctor’s limited malpractice coverage ($2 million). The court denied this motion.
Procedural History
The Supreme Court initially allowed IHA to intervene in the Fassos’ malpractice suit. Subsequently, the court approved a settlement between the Fassos and Dr. Doerr that included dismissal of IHA’s subrogation claim, reasoning that Mrs. Fasso was not made whole. IHA’s request for a mistrial to present its own evidence was denied. The Appellate Division affirmed the Supreme Court’s decision. The New York Court of Appeals granted leave to appeal and reversed the Appellate Division’s order.
Issue(s)
Whether an injured party and a tortfeasor can enter into a settlement agreement that extinguishes a health insurer’s equitable subrogation rights without the insurer’s consent, when additional insurance coverage remains available.
Holding
No, because once an insurer has paid a claim and the tortfeasor knows or should have known of the insurer’s subrogation rights, the tortfeasor and the insured cannot agree to terminate the insurer’s claim without its consent. Such an agreement cannot be used as a defense against the insurer’s cause of action.
Court’s Reasoning
The Court of Appeals based its decision on the doctrine of equitable subrogation, which allows an insurer to recover payments made on behalf of an insured from a wrongdoer. The Court emphasized that the right to subrogation accrues upon payment of the loss by the insurer and cannot be imperiled by the insured. The Court found that the “made whole” rule (which prevents an insurer from recovering until the insured is fully compensated) was not applicable here because the settlement left $1.1 million in potential insurance coverage, meaning the insured *could* be made whole. The court stated, “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.” This ensures the insurer can seek reimbursement from available assets after the insured has been compensated. The Court also commented on the procedural issue of intervention, noting the conflicting views on whether health insurers should be allowed to intervene in tort cases due to potential conflicts of interest. The court suggested the legislature should reexamine permissive intervention under CPLR 1013 in personal injury actions involving health insurers’ subrogation claims.