Insured plaintiff loses argument for collateral source doctrine in auto insurance case

By Joe Forward, Legal Writer, State Bar of Wisconsin

May 31, 2011 – The collateral source rule does not entitle the plaintiffs, injured in a car accident caused by the defendant, to receive medical expenses already paid by the plaintiff’s insurer, a Wisconsin Supreme Court majority (5-2) recently concluded.

Roger Fischer sustained injuries in a car accident with Pamela Steffen, who suffered an epileptic seizure while driving. Roger and his wife, Sandra (Fischers), had a car insurance policy with American Family Insurance Company (American Family). Wilson Mutual Insurance (Wilson Mutual) covered Steffen.

American Family paid the policy limit of $10,000 to the Fischers for medical expenses. Before the Fischers filed their personal injury lawsuit against Steffen, American Family and Wilson Mutual arbitrated American Family’s subrogation claim for reimbursement of the $10,000.

But the arbitration panel ruled that Steffen was not liable because she suffered an incapacitating illness immediately prior to the accident. Thus, American Family was not entitled to reimbursement.

Subsequently, the Fischers pursued their personal injury claim against Steffen. The jury determined Steffen was 100 percent causally negligent, and awarded the Fischers $21,000 for pain and suffering, as well as $12,157 for reasonable medical expenses.

Upon Steffen’s motion, however, the circuit court reduced the award for medical expenses by $10,000, the amount the Fischers previously received from American Family. The Fischers appealed, arguing the collateral source rule applies and American Family’s subrogation claim “should revert to them.”

The appeals court, relying on supreme court case of Paulson v. Allstate Ins. Co., 2003 WI 99, 263 Wis. 2d 520, 665 N.W. 2d 744, affirmed the circuit court’s reduced judgment award. In Paulson, the supreme court ruled the collateral source rule – which provides that “a tortfeasor’s liability to an injured person is not reduced because the injured person receives funds from other sources” – did not apply.

In Fischer v. Steffen, 2011 WI 34 (May 24, 2011), the supreme court – in a majority opinion written by Chief Justice Shirley Abrahamson – relied on Paulson to affirm. That is, the Paulson case governed to bar the Fischers’ recovery of medical expenses already paid by their insurer, American Family.

Justice David Prosser dissented, arguing that Paulson does not govern. Justice Ann Walsh Bradley also dissented, asserting the collateral source doctrine applies to allow recovery of the $10,000.

Paulson governs

Concluding that “in all significant respects the present case is indistinguishable from Paulson,” the supreme court majority rejected the Fischers’ argument that the collateral source doctrine should apply.

In Paulson, the plaintiff (Paulson) suffered personal injury and property damage to her vehicle. Paulson’s insurer paid the full cost of repairing the car, and then negotiated a settlement with the plaintiff’s insurer to recover 70 percent of the repair costs.

Subsequently, the plaintiff sued the defendant. Based on the settlement, the Paulson’s insurer waived its subrogation claim and moved to be dismissed from the suit. Paulson sought the 30 percent difference in repair costs based on the reimbursement settlement between the insurance companies.

The supreme court in Paulson ruled that “[w]here the plaintiff has recovered the reasonable value of his or her expenses and makes no allegation that the agreement prevents such recovery, there is no reason to award the plaintiff the difference.”

Chief Justice Abrahamson noted the Paulson court’s concern that ruling for the plaintiff would allow an injured party to receive a double recovery and “would discourage settlement negotiations.”

In his dissent, Justice Prosser argued that Paulson does not govern, and by holding that it does, “the court is damaging the right of many plaintiffs to secure a fair recovery for their personal injuries.”

“Inevitably, Wilson Mutual’s victory in the arbitration proceeding stiffened its resistance to paying any money for Fischer’s medical bills and other damages,” Justice Prosser wrote.

The supreme court majority also rejected the argument, put forth by the Wisconsin Association for Justice in an amici brief, that “American Family had no right to settle its subrogation claim” until after the plaintiffs are “made whole.”

“Nowhere do the plaintiffs show that they were not made whole,” Chief Justice Abrahamson said. “It is clear from the record that the defendant’s insurance policy was more than sufficient to cover all of the damages suffered by the plaintiffs.”

In addition, the majority explained that settlement “through negotiation versus settlement through arbitration is a distinction without a difference for purposes of applying the teachings of Paulson.”

Finally, the majority struck down the Fischers’ argument that American Family waived its subrogation claim and “under the collateral source rule a windfall created by a waived subrogation claim should inure to the plaintiffs, not to the defendant.”

On this point, Justice Bradley grounded her dissent, arguing that “[u]nder the collateral source rule, neither the tortfeasor nor its insurer is entitled to the extra $10,000.”

Justice Bradley also questioned the wisdom of the majority’s analysis if applied to a large subrogation claim, and the “consequences of permitting a subrogated insurer to seek recovery against the tortfeasor first, at a point in time when it is unknown whether the injured party will be made whole?”

Attorneys

Shawn Brock of Wurtz, Roth, Basler & Brock S.C., Sheboygan, represented Roger and Sandra Fischer. James O. Conway of Olsen, Kloet, Gunderson & Conway, Sheboygan, represented Pamela Steffen and Wilson Mutual Insurance.