Settling Subrogation Claims and the Dreaded Release
The bane of any subrogation professional’s existence is the dreaded release. It is no coincidence that when Zeus uttered the words, “Release the Kraken!” in the 1981 fantasy adventure film The Clash of the Titans, he chose the word “Release.” The meme itself connotes setting loose utter destruction on one’s enemy—a description which can be woefully accurate to describe the potential aftermath of signing releases which are overbroad and contain terms, conditions, and obligations which a subrogated carrier has no business agreeing to or assuming.
It is said that releases and settlement agreements “use a thousand words when ten would do” and there is a good reason for that. Those drafting the release are often paid by the hour and/or want to pack in the very maximum of future protections, claims released, and indemnity provided by the document. Conversely, those signing the release want to limit the promises made and tailor them to the specific claims and damages made the subject of the release. The concern over limiting the scope and future liability assumed in such broadly worded documents is most-vitally important when the party signing the release is an insurance company settling a simple subrogation claim. The world of insurance is full of horror stories involving publicly-traded insurance companies finding themselves on the hook for liability many times greater than the amount recovered in the subrogation settlement; all because they didn’t take the time and energy to carefully parse the language in the release they signed.
Take, for example, a case in which you have put in considerable work to investigate and develop a potential subrogation claim. You’ve hired investigators and experts, conducted inspections, talked to witnesses, and perhaps even retained an outside “subrogation vendor.” Though settlement negotiations were rough, you won a hard-earned recovery which you believe is reasonable. You start to feel good about all the work you put in when you receive a settlement check and, along with it, a broad, seven-page document entitled “Settlement Agreement, Release of Claims, Indemnity and Hold Harmless Agreement” which purports to be a cross between a release of claims and a mid-sized paperback novel. You flip through the multiple pages and see that it contains lengthy paragraphs referring to indemnity and hold-harmless obligations which rival the Affordable Care Act in length, complexity, and uncertainty. Perhaps you decide to just sign it and find out later what is in it. But that might be the worst move in your career. Knowing what to do and how to even respond can be daunting.
Most insurance defense counsel and liability adjusters cut and paste release language, regurgitating the same settlement agreements over years of handling them. They do this because they feel more is better and because it’s easier for them to include everything rather than actually look at the facts of the case and craft reasonable language specific to each case. They also do it because like you, they don’t understand the import of all the words. And, let’s face it, they’re creatures of habit. Even seasoned lawyers and liability adjusters sometimes have a hard time grasping subrogation concepts in the claims we are pursuing. So, what do you do? Do you sign the release containing the harsh and open-ended indemnity and hold-harmless language in exchange for the immediate gratification of cashing the check? Or do you push back and risk losing your hard-earned settlement? In making that decision it is important that you precisely understand the obligations and future potential liability you are exposing the insurance company to. If you’re not careful, the released party may end up with the last laugh, and you will wish you had never settled the case in the first place.
Let’s review some common release language defense counsel and liability adjusters include in releases and the concepts you want to keep in mind when negotiating the release language.
You should only release the claims that you own – only the ones you are being paid for. In subrogation, the identity of the insurance carrier as the plaintiff should be known and care should be taken as to the caption of the lawsuit. For example, in a worker’s compensation subrogation action, the insurance carrier has made medical benefit payments to medical providers on the claimant’s behalf and indemnity payments to the claimant. In states where workers’ compensation is the exclusive remedy of the injured worker (most states), the worker’s compensation insurance carrier is obligated to pay those medical bills that are related to the covered injury. Where the worker’s compensation claimant is unwilling or uninterested in pursuing a third-party claim, the insurance carrier is often able to pursue subrogation of its indemnity and medical benefit payments. These are the only claims which the insurance carrier possesses and has the obligation to release.
It is important for everyone to understand what they are signing. That importance is tripled when the person signing is signing on behalf of an insurance company with assets in the hundreds of millions or billions. Why? You are an easy target. When you “release” somebody, you voluntarily relinquish a known right to sue that person for the claim or cause of action described in the release or settlement agreement. This is the purpose of a release and you must agree to this – but only insofar as it relates to a carefully-crafted description of the limited cause of action being released. If it’s too broad (e.g., release personal injury claims where only property damage is involved), you could be headed for trouble. A property carrier signing a full release and hold harmless agreement with a tortfeasor paying for repair of water damage may inadvertently be releasing the tortfeasor for future mold and mildew claims which have yet to surface. Look carefully at the definitions contained in the release document. They often contain the details which constitute the devil in the agreement.
Hold-harmless and indemnity clauses are known as “exculpatory clauses” and should be well-understood before they are agreed to. A “hold harmless” agreement, on the other hand, is one party agreeing not to hold the other party responsible for any loss, damage, or legal liability that may arise from the matters made the subject of the agreement. A “hold harmless” or “liability waiver” provision in a contract is an agreement between the parties whereby one or both parties agree not to hold the other party responsible for any loss, damage, or legal liability that may arise under the agreement. In other words, the two parties cannot sue each other for any damage they may suffer due to the negligence of the other party. Hold harmless provisions are often combined with indemnity language.
An “indemnity” agreement means that the party signing the release agrees to “indemnify” the party being released – protecting them against and/or reimbursing them for future damages or liabilities incurred by the released party associated with any threatened or actual civil or criminal proceedings. It is literally the assumption of responsibility and liability that would otherwise belong to someone else, and, for insurance companies, it represents the greatest risk assumed in a settlement agreement. At Matthiesen, Wickert & Lehrer, S.C., we let all parties know from the very beginning of settlement negotiations that our clients will not sign indemnity language. We will release and hold harmless, but will not, under any circumstances, sign releases which require our clients to indemnify anyone. Such a stance makes negotiation transparent and eliminates the potential waste of time which could result if the other side has their heart set on being indemnified.
In a general personal injury release, the defendant will often ask that the injured plaintiff sign a broad release. An injured plaintiff/insured can agree to this broad scope of the release because they own the bodily injury claim. In a subrogation setting, however, the insurance carrier does not own the bodily injury claim and should not agree to this broad scope of release.
The subrogated insurance carrier can only agree to release the claims that it owns. Therefore, broad release and indemnification language should never be agreed to, and you should be able to convince the third-party insurance carrier or defense attorney of the fact that you are not a personal injury plaintiff and that this type of language is inappropriate – perhaps even ineffectual. At a minimum, you should take the time to give him an example of the absurdity that could result if you were to sign on behalf of your insurance company employer. The release often contains broad language requiring you to:
…completely release, discharge and forever hold defendants harmless from any and all claims, demands, suits known or unknown, fixed or contingent, liquidated or unliquidated, whether or not asserted in the referenced case, as of this date, arising from or related to the events and transactions which are the subject matter of this case.
A carrier subrogating only for property damage which agrees to the above language could find a summons and complaint showing up in the mail should the insured later sue the released party for bodily injury damages. It would be hard to explain why you didn’t insist on specifically tailoring the release to property damages.
Following along with our workers’ compensation subrogation scenario, let’s look at some common release language proposed by defense counsel and how it should be modified.
Proposed Language: In consideration of the settlement amount, releasors agree to defend, indemnify, and hold the released parties harmless for any and all claims, demands, judgments, damages, liens, or liability arising out of the incident, including, but not limited to, claims, demands, damages, expenses, actions, liabilities, or other obligations that may be brought against the released parties as to medical liens and wage benefit liens.
Modified Language: In consideration of the settlement amount, releasors agree to defend, indemnify, and hold the released parties harmless, and reimburse for claims, demands, or other obligations that may be brought against the released parties as to medical liens and wage benefit liens and liens payable under the worker’s compensation policy.
As you can see, the modified language limits the liability to only those claims that should appropriately be covered under the workers’ compensation policy. If the proposed language were not modified, the insurance carrier would be opening themselves up to liability where it wasn’t previously contemplated.
Release clauses which need to be carefully reviewed and, if possible, avoided altogether, include:
Once you have successfully convinced the third-party insurance carrier that you can only release those claims which you own, and the release language has been sufficiently modified to reflect that, there are a couple other areas that you should be aware of. The first involves a choice of attorney clause:
In the event of any of the types of claims described in the Agreement are brought against any of the Released Parties, the Released Parties have the right to defend any and all claims with attorneys of their own choosing. Releasors will reimburse the Released Parties for all legal fees incurred in defending any and all lawsuits, claims, suits, demands, actions, and causes of action in connection therewith.
This language is concerning for a couple of reasons. The biggest reason is that, should a medical provider or the like pursue a claim against the third-party carrier, the workers’ compensation carrier has the best information related to this type of claim. Either the medical invoice has been overlooked (for numerous reasons: the medical bill was improperly submitted to the insurance carrier, the medical bill was improperly coded, the medical bill was submitted late, etc.) or the medical bill is not related to the covered injury. In either case, the workers’ compensation carrier has the best information to respond to the claim. Should the third-party insurance carrier be allowed to defend this claim with an attorney of their choosing, there is no control over the defense.
Most insurance companies—both large and small—do not have by-laws or corporate rules governing the signing of indemnity. But one errant signature can bind a $50 billion corporation to unlimited liability. While many companies require supervisor or in-house claims counsel approval of release signatures, rules are not always followed, and denying that a claims handling employee did not have apparent authority to bind the corporation to indemnity could be an expensive uphill battle. A release is an agreement between two parties which purportedly consists of the terms that the parties are willing to agree to. Subrogation claims are comprised of specific rights and for specifically stated damages which were paid under the terms of a carefully drafted insurance policy. If a subrogation claim goes to trial and the subrogee wins, there is no indemnity required; no release will need to be signed. Money is simply handed over. Accordingly, if there is a subrogation settlement, the subrogated carrier should not be required or expected to take on an extra duty, responsibility, or liability which expands its potential liability beyond the scope of the policy and the claim it is settling.
An insurance policy pays a claim according to its terms. Any subrogation recovery is posted back to the policy as a subrogation recovery in order to offset the original claim payment. If the settling insurance company is sued on a first-party insurance claim, the defense and ultimate payment under the policy are paid off of the claim file. But if the insurance company is sued based on indemnity or hold harmless language contained in an overbroad release and settlement agreement, the payment is no longer paid on off of the claim file and must be paid directly by the carrier as an errors and omissions claim. This payment comes directly off of the carrier’s bottom line, and the defense of that subsequent suit and any payments made by the carrier in connection with it affects the company’s profits and its shareholders. As such, insurance companies are loathed to accept business risks which are beyond the scope of their policies.
Armed with this knowledge and a keen insight into the inner workings of releases and settlement agreements, you’ll be better able to negotiate harmful release language out of your releases and will be better prepared to protect your company from future liability based on such release language and liability the insurance company should never have assumed. When in doubt, have subrogation counsel (one firm comes to mind) assist you with the review of your settlement agreements and release language. It may save you from headaches and considerable expense and liability in the future. If there was ever a scenario in which a simple one-second signature could change the course of a career—this is it.
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