Relates to the impact of collateral source payments upon tort claims for personal injury, property damage or wrongful death

The statute originally was enacted in response to the medical malpractice crises of the 1980's. It was hoped that by precluding plaintiffs from recovering for those damages compensated by other sources, recoveries could be reduced and malpractice premiums significantly lowered, Another legislative goal was to avoid "windfall" "double recoveries," Later, because these goals were considered salutary in other types of cases, the Legislature made the statute applicable to all previously unaddressed property damage, personal injury and wrongful death actions.

In the small minority of cases that actually go all the way to verdict and judgment, the statute appears to work fairly well. However, significant problems have arisen in the context of settlements because of two gaps in the statutory language: one regarding settlements of personal injury and wrongful death actions, and the other regarding subrogation claims that are from the same personal injury or wrongful death action.

Regarding the "subrogation gap," although the Legislature specified that a plaintiff could not recover for a loss that had been reimbursed by a collateral source payment that did not constitute a lien on the recovery, the Legislature did not expressly say that the health insurer or other collateral source payor could not sue in subrogation for those damages.

In this context, familiar principles of common law hold that a party who asserts a subrogation claim, the subrogee, "stands in the shoes" of the party from which the claim arises, the subrogor. Under this general principle, the subrogee's rights derive from and cannot be greater than those of the subrogor. This would mean that, where a plaintiff cannot himself or herself assert a claim against a third person, nor could the plaintiffs insurance company (the subrogee) assert that claim. Although the legislative history is silent on this point, we believe that it is likely that the Legislature did not address subrogees' rights because it knew that their rights are derivative and assumed that their rights would automatically be diminished along with those of the plaintiff. Yet, the statute did not expressly say that such a principle was desired or expected.

There is, in consequence, a split of authority as to the impact of the statute on subrogation claims. There is some authority for the proposition that an insurer (or any other entity that made collateral source payments to the plaintiff) can sue the tortfeasor for the very damages that the statute prevents the plaintiff from recovering. See e.g. Kelly v Seager, 163 AD2d 877 (4th Dept 1990); Excellus Health Plan, Inc. v Federal Express Corp., 5 Misc.3d 727 (Sup Ct Onondaga Co, 2003), aff'd 11 AD3d 948 (4th Dept 2004). But there is also some authority for the opposite view, the view that the Legislature intended that the doctors, the municipalities, and the other groups who complained of escalating tort liability costs achieve real relief. See Oxford Health Plans, Inc v Augustino Deli and Caterers, Inc., 282 AD2d 728 (2d Dept 2001).

Of course, if the statute provided or were construed as providing that the plaintiffs subrogee could recover funds from the defendant even when the plaintiff was personally barred from doing so, any savings achieved by the defendant would be temporary and illusory, for the defendant would ultimately have to pay the same amount of money that it would have been required to pay if the statute had never been enacted. This concern that the "subrogation gap" could effectively thwart the statutory intent is now particularly acute by virtue of two recent decisions in which the Court of Appeals implied, without actually reaching the merits, that such a subrogation claim (i.e., a claim in which the subrogee seeks to recover damages that the subrogor would be barred from recovering by current CPLR 4545) was not meritless on its face. Allstate Insurance Company v Stein, 1 NY3d 416 (2004); Blue Cross and Blue Shield of New Jersey, Inc. v Phillip Morris USA, Inc., 3 NY3d 200 (2004).

Apart from raising concerns as to whether tort defendants may be denied a benefit that the Legislature intended they have, the "subrogation gap" has led to an array of procedural complications that threaten to increase litigation expense (both for plaintiffs and defendants), inhibit settlements, and delay disposition of personal injury and wrongful death actions. Reflective of the underlying uncertainty as to whether the plaintiff's subrogee may now have greater rights than the plaintiff himself or herself, there is also uncertainty as to whether such subrogees can formally intervene into ongoing personal injury and wrongful death actions, and, effectively veto any settlement that does not include full repayment of whatever sums were previously paid to the plaintiff. Some years ago, the Third Department held that subrogees could not inject themselves into the litigation or "veto any result that was not favorable to their interest," Berry v St. Peter's Hosp., 250 AD2d 63, 68 (3d Dept 1998). More recently, however, the Fourth Department twice ruled, each time by a 3 to 2 vote, to the contrary. Kaczmarski v Suddaby,9 AD3d 847 (4th Dept 2004); Omiafek v Marine Midland Bank, NA., 9 AD3d 831 (4th Dept 2004). Additionally, the Court of Appeals suggested in 2004 (but only in dictum) that intervention is possible (Allstate v Stein, 1 NY3d at 423).

If the statute provided or was construed as providing that subrogees could intervene in the underlying action or that they could veto any settlement not to their liking, then a simple "one-an-one" case involving a two-car collision or a trip over a pavement defect could become a five-party action if three different insurers or other payors had covered parts of the plaintiff's various resultant expenses or losses. In such event, the defendant would likely end up paying exactly what it would have paid had the statue never been enacted in the first place, except that the defendant and the plaintiff, and the court as well, would now find it more costly to litigate the claim.

Regarding the so-called "settlement gap," although the statute precludes plaintiff from obtaining a "double recovery" at the trial, it says nothing about whether plaintiff can obtain a "double recovery" by way of settlement. We suspect that the Legislature focused solely on the trial because (1) it assumed that no rational defendant would ever pay more in settling a claim than he or she could be forced to pay at the trial itself and (2) there was no perceived need to restrict the parties' freedom to settle actions.

The "settlement problem" occurs when the plaintiff settles an action and the plaintiff's subrogee then proceeds against the plaintiff for repayment of funds that plaintiff was not legally entitled to recover from the defendant and which therefore would not have been included in any settlement. The problem arises from a Court of Appeals ruling in which the court held that the statute does not govern settlements, with the consequence that settlement of the underlying suit can give rise to an ancillary dispute as to whether the settlement the plaintiff obtained did or did not include compensation for those funds that plaintiff could not have collected at a trial Teichman v Community Hosp. of Western Suffolk, 87 NY2d 514 (1996).

To address the above-noted problems, this measure would amend CPLR 4545 to provide that:

(1) The only payments as to which the collateral source payor may seek reimbursement are those payments as to which there is a statutory right of reimbursement (such as for Medicaid, Medicare, or workers' compensation payments);

(2) By entering into a settlement agreement, the plaintiff shall not be considered to have taken an action in derogation of the contract or subrogation rights of the collateral source payor; and

(3) It will be conclusively presumed that a settlement does not include collateral source payments that could not be recovered at trial.

The amendments to subdivisions (a), (b) and (c) are intended to eliminate confusion as to what constitutes a collateral source payment for purposes of section 4545, and make it clear that a collateral source payor may seek reimbursement only where there is a statutory right. While the current statute specifically identifies certain kinds of collateral source payments as illustrations of the payments that may fall within the statute's scope, and while the amendment proposed in this measure deletes that list, this was simply because the merely illustrative list becomes unnecessary once the subject class is clearly defined. Under the measure, however, the specified examples would continue to be treated as collateral sources subject to offset except to the extent any of them were subject to statutory reimbursement to the payor.

The final two sentences of subdivisions (a), (b) and (c) have been added to make it clear that the plaintiff may prove the amount of the particular category of loss at trial, and that the deduction will be made following the verdict. This represents not a change, but a clarification of existing law. This measure could reduce state and municipal liability in certain cases in which the State or its subdivisions is sued in tort. The measure should, by reducing disincentives to settlement, also reduce the burdens on the courts. Finally, the measure should reduce state and municipal litigation costs in certain cases in which those entities are defendants.

Legislative history

S.5861/A.9327 - 2007-08

Fiscal implications

None.

Effective date

This act shall take effect immediately and shall apply to all trials and settlements after such effective date.