The Good, the Bad, and the Ugly: The Cooperation Clause, Medicare Secondary Payer Requirements, - PowerPoint Presentation

The Good, the Bad, and the Ugly: The Cooperation Clause, Medicare Secondary Payer Requirements, and the Tripartite Relationship Donald Patrick Eckler Pretzel & Stouffer, Chartered One South Wacker Suite 2500 Chicago, IL 60606 312-578-7653

The Tripartite Relationship “[The] so-called tripartite relationship has been well documented as a source of unending ethical, legal, and economic tension.” State Farm v. Tarver , 980 S.W.2d 625 (Tex. 1998) (Gonzales, J., dissenting) These issues are terribly important and must be managed correctly by insurance adjustors because the failure to properly recognize a conflict and to appoint independent counsel where appropriate could lead to the carrier being estopped. Employers Insurance Company of Wausau v. Ehlco Liquidating Trust , 186 Ill.2d 127 (1999).

Who is the client for counsel retained by an insurer? Is the client of counsel retained by the insurer have two clients or just one? To whom are the loyalties owed by counsel retained to represent the insured?

Dual Client Relationship The majority of jurisdictions hold that counsel retained by the insurer to represent the insured has two clients, both the insurer and the insured. This is the majority position. See Restatement of The Law Governing Lawyers Sections 26(1) and 215; Illinois Rules of Professional Conduct Rule 1.7; ABA Model Rule 1.7(b), comment 10, and Rule 1.8(f); Waste Management v. International Surplus Lines Insurance Company , 144 Ill.2d 178 (1991); Nandorf v. CNA Insurance Companies , 134 Ill.App.3d 134 (1 st Dist. 1985); Cincinnati Insurance Company v. Wills , 717 N.E.2d 151, 161 (Ind. 1999); Nezley v. Nationwide Mutual Insurance Company Company , 296 N.E.2d 550, 561 (Ohio App. 1971); Goldberg v. American Homes Assurance Company , 439 N.Y.S.2d 2, 5 (N.Y. App.Div . 1 st Dep’t 1981); Lieberman v. Employers Insurance , 419 A.2d 417, 424 (N.J. 1980); Bogard v. Employer’s Casualty Co. , 210 Cal.Rptr . 578, 582 ( Cal.App . 1985); McCourt Co., Inc. v. FPC Properties, Inc. , 434 N.E.2d 1234, 1235 (Mass. 1982).

Limitations on Dual Relationship Despite dual relationship the attorney owes the same professional obligations to the insured as if the attorney was hired personally by the insured. Information of client is confidential. Illinois Rule of Professional Conduct Rule 1.6. Illinois Rule of Professional Conduct Rule 1.8(f)(2) provides that the insured’s Rule 1.6 information must be protected by the attorney.

Single Client Relationship The majority of jurisdictions, but it is a significant minority, reject the dual client relationship and hold that counsel retained by an insurer only represents the insured. In these jurisdictions there is no tripartite relationship See Michigan: Atlanta International Company v. Bell , 448 N.W.2d 804 ( Mich.Ct . App. 1989); Montana: In The Matter of the Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures , 299 Mont. 321, 333-34 (Mont. 2000); Connecticut: Higgins v. Karp , 687 A.2d 539, 543 (Conn. 1997); Continental Casualty Company v. Pullman, Comley , Bradley, & Reeves , 929 F.2d 103 (2 nd Cir. 1998); In re A.H. Robins Co. Inc. , 880 F.2d 709 (4 th Cir. 1989); Colorado Bar Association Formal Ethics Opinion 91 (1993); Safeway Managing General Agent v. Clark & Gamble , 985 S.W.2d 166, 168 (Tex. App. 1998); Gibbs v. Lappies , 828 F.Supp . 6, 7 (D.N.H. 1993); Givens v. Mullikin ex. rel. McElwanney , 75 S.W.2d 383, 386 (Tenn. 2000); Finley v. Home Insurance Company , 975 P.2d 1145, 1153 (Hawaii 1998); Pine Island Farmers Coop v. Erstad & Reimer, P.A. , 696 N.W.2d 444, 452 (Minn. 2002)(in the absence of conflict of interest between the insurer and the insured, “the insurer can become a co-client of defense counsel based on contract or tort theory if two conditions are satisfied. First, defense counsel or another attorney must consult with the insured, explaining the implications of dual representations and the advantages and risks involved ... [and] second, after consultation, the insured must give express consent to the dual representation.”)

Issues that Arise in Tripartite Relationship Defense counsel has a duty not to disclose adverse coverage information to the insurer. See Liability Insurance Company v. Superior Court , 38 Cal.App.3d 579, 592 (1974); Employers Casualty Company v. Tilley , 496 S.W.2d 552 (Tex. 1973); Illinois Rule of Professional Conduct Rule 1.8(b) and (f) and 5.4(c). Insured has duty to cooperate even where the insurer has taken an adverse coverage position. See Waste Management, Inc. v. International Surplus Lines Insurance Company , 144 Ill.2d 178 (1991).

Conflicts That Arise in the Defense of the Insured Simply because there is a dispute regarding coverage or some other issue, does not mean there is a conflict. What has to be determined is if the interests of the insurer and the insured diverge and if counsel retained by the insurer will then labor under a conflict. Rules 1.7, 1.9, and 1.10 define when a conflict exists and under what conditions the lawyer can continue the representation.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.7 states: a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client , a former client or a third person or by a personal interest of the lawyer.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.7 further states: b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law;

Applicable Rules for Conflicts (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.9 states: (a) A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client unless the former client gives informed consent.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.9 further states: (b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client (1) whose interests are materially adverse to that person; and (2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter; unless the former client gives informed consent.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.9 further states: (c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter: (1) use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or (2) reveal information relating to the representation except as these Rules would permit or require with respect to a client.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.10 states: (a) While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm.

Applicable Rules for Conflicts Illinois Rule of Professional Conduct Rule 1.10 further states: (b) When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless: (1) the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and (2) any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter. (c) A disqualification prescribed by this Rule may be waived by the affected client under the conditions stated in Rule 1.7.

Does the Conflict Require the Appointment of Independent Counsel? Where a conflict exists independent counsel must be offered by the insurer to the insured. The question is question is whether the interest of the insured and the insurer diverge in such a way that the retained counsel is in conflict with the insured. Blanchard v. State Farm Fire & Casualty Company , 2 Cal.App.4th 345, 350 (1991) (“not every reservation of rights creates a conflict of interest requiring appointment of independent counsel.”); Nisson v. American Home Insurance Company , 917 P.2d 488 ( Okl.App . 1996); Northern County Mutual Insurance Company v. Davalos , 140 S.W.3d 685, 689 (Tex. 2004) (If the insured’s liability and the coverage issues turn on the same facts, the insured is entitled to independent counsel.)

Specific Instances of Conflict That Arise in the Insurance Defense Context - Potential Excess Judgment In such a situation, make sure defense counsel advises the insured of the potential excess judgment. R.G. Wegman Construction Company v. Admiral Insurance Company , 629 F.3d 724 (7 th Cir. 2011); Allstate Insurance Company v. Campbell , 334 Md. 381, 397 (Md. App. 1994); Hartford Accident & Indemnity Company v. Foster , 528 So. 2d 255, 270-273 ( Sup.Ct.Miss . 1988).

Specific Instances of Conflict That Arise in the Insurance Defense Context - Punitive Damages Under Illinois law the pleading of punitive damages creates a conflict. Maryland Casualty Company v. Peppers , 64 Ill.2d 187 (1976) (pleading of punitive damages creates conflict).

Instances of Conflict Under Illinois Law Conflict existed because the alleged conduct may have occurred within multiple policy periods. Doe v. Illinois State Medical Inter-Insurance Exchange , 234 Ill.App.3d 129 (1 st Dist. 1992 ). Conflict of interest because the insurer asserted last notice of defense after default judgment was entered. Mitchell v. Tatum , 104 Ill.App.3d 986 (1 st Dist. 1992). Assertion as late notice as defense to coverage is typically does not create a conflict of interest.

Instances of Conflict Under Illinois Law Conflict of interest existed because there was a question as to whether the driver of a vehicle had permission to operate the vehicle. Murphy v. Urso , 88 ILL. 2d 444, 453-54 (1981 ). Conflict of interest existed because some of the underlying allegations would be coverage by the policy whereas other allegations would not be. Burlington Northern R. Co. v. Illinois Emcasco Insurance Company , 158 Ill.App.3d 783 (1 st Dist. 1987);

Instances of Conflict Under Illinois Law The best example of conflict under Illinois law is in American Family Mutual Insurance Company v. W.H. McNaughton Builders, Inc. , 363 Ill.App.3d 505, 514 (2 nd Dist. 2006). In that case the Court held: “A conflict arises when the divergent interests of the insurer and insured are apparent and the attorney representing the insured can no longer represent both clients’ interests without prejudice to either client. A conflict already exists here because [the insurer’s] interests would be served by fleshing out in discovery facts showing that the damage to the Begys ’ home occurred prior to the inception of the Policy, while McNaughton’s interests would be served by fleshing out facts showing that the damage occurred after the inception of the Policy. In this regard, an attorney representing [the insurer’s] interests would be the enemy of McNaughton.”

Disclosure of Conflict Both insurer and counsel retained by the insurer should disclose conflict. The disclosure should be in writing and should set forth the nature of the conflict and offers of resolution. See Utica Mutual Insurance Company v. David Agency Insurance , 327 F.Supp2d 922, 930 ( N.D.Ill . 2004).

Disclosure of Conflict “If the insurer proceeds to defend the insured in face of a conflict of interest, it must reserve its rights in a manner that will fairly inform the insured of the insurer’s position. In informing the insured of the conflict, the insurer must act openly and with the utmost loyalty to its insured both in initially explaining the insurer’s position in the matter and in the actual defense of the tort litigation. Bare notice of a reservation of rights is insufficient unless it makes specific reference to the policy defense which may ultimately be asserted and to the potential conflict of interest.

Disclosure of Conflict The letter should include the following: ( 1) the attorney’s relationship to the insurer; ( 2) the attorney’s own interests; (3) the nature of the conflict between the insurer and the insured and how the defense may impact the coverage;

Disclosure of Conflict (4) limitation of the scope of representation to defending third-party claim only, thus limiting the ability to maximize coverage; (5) the insured’s option to retain separate counsel to advise about coverage issues; and (6) the insured’s right to independent counsel to defend, whose fees will be reimbursed by the insurance company. See David H. Anderson, “Balancing the Tripartite Relationship between Defendant, Defense Counsel and Insurer,” 88 Ill.Bar.J . 384, 288 (July 2000).

Disclosure of Conflict If the insured will not waive the conflict then, independent counsel should be offered to the insured.

Payment of Independent Counsel No rules on how much to pay in Illinois and in most other states. A “reasonable” amount seems to be the standard. No court has set forth what the means and there are often tremendous fights over that. An exception to that vacuum is in Florida. §627.426(2) states that the carrier shall pay agreed upon reasonable rates, or if those cannot be agreed upon, then a court will set the rate of payment. An insurer can recover payments to independent counsel who an insurer was forced to retain as a result of an erroneous judgment. Steadfast Ins. Co. v . Caremark RX, Inc. , 373 Ill.App.3d 895 (1 st Dist. 2007).

Basics of the Cooperation Clause The Cooperation Clause in American Alliance’s policy states: 6. Assistance and Cooperation of the Insured. As a condition precedent to the Company’s duty of indemnity with respect to claims and lawsuits brought against the insured, the insured shall cooperate with the Company and upon request by the Company or attorneys hired by the Company to represent the insured, the insured shall assist in completing the Company’s investigations including answering questions and providing all reasonably available evidence and in the litigation of any lawsuit including attending hearings, trials, and examinations under oath, and assisting in making settlements, securing and giving evidence, obtaining the attendance of witnesses and in the conduct of any legal proceedings in connection with the subject matter of this insurance. During the pendency of any claim or lawsuit against an insured, the insured shall advise the Company in writing of his new residential address or new residential telephone number within 14 days of any change.

Basics of the Cooperation Clause The Cooperation Clause is a condition precedent to coverage under the policy. That means that compliance with the provision is required or the duties owed by American Alliance to the insured may be extinguished. The Cooperation Clause is part and parcel with the Notice Clause.

Basics of the Cooperation Clause The purpose and objective of the cooperation clause in an automobile insurance policy is to prevent collusion between the insured and the injured, as well as to make possible the insurer’s investigation. M.F.A Mutual Insurance Company v. Cheek, 66 Ill.2d 492, 363 N.E.2d 809 (1977). A condition in an insurance policy requiring the cooperation of the insured is one of great importance and its purpose should be observed. Waste Management, Inc. v. International Surplus Lines Insurance Company, 144 Ill.2d 178, 579 N.E.2d 322 (1991).

Basics of the Cooperation Clause “ Typically the insurer has little or no knowledge of the facts surrounding a claimed loss, while the insured has exclusive knowledge of such facts. The insurer is, therefore, dependent on its insured for fair and complete disclosure; hence, the duty to cooperate. While the insured has no obligation to assist the insurer in any effort to defeat recovery of a proper claim, the cooperation clause does obligate the insured to disclose all of the facts within his knowledge and otherwise to aid the insurer in its determination of coverage under the policy. The insurer is entitled, irrespective of whether its duty is to defend or to indemnify, to gain as much knowledge and information as may aid in its investigation, or as may otherwise be significant to the insurer in determining its liability under the policy and in protecting against fraudulent claims. To hold otherwise effectively places the insurer at the mercy of the insured and severely handicaps it in contesting a claim (citation omitted).” Waste Management, Inc., 144 Ill.2d at 204.

An Insurer Must Show Prejudice An insurer is required to demonstrate that it was substantially prejudiced as a result of a breach of a cooperation condition which means the insurer must show it was actually hampered in its defense of the action. M.F.A. Mutual Insurance Co. , 66 Ill.2d at 499-500. Without the presence of the assured and his aid in preparing the case for trial, the insurance company is handicapped and such a lack of cooperation must result in making the action incapable of defense.” Schneider v. Autoist Mutual Ins. Co ., 346 Ill. 137, 140, 178 N.E. 466 (1931). In Cheek , the Court found that there was no prejudice to the insurer because the insured corrected the problem before the insurer suffered prejudice in the defense of the case.

What Constitutes Prejudice? In Gallaway v. Schied , 73 Ill.App.2d 116, 123(1 st Dist. 1966) the court explained the impact the prejudicial effect the breach of the cooperation condition had on the insurance company: “In the case at bar, because of the failure of the insured to appear for deposition, her pleadings were stricken and the issue of liability was determined adversely. The opportunity to contest the issues of contributory negligence, due care, proximate cause, and of cross-examination, etc., were precluded. The circumstances concerning the degree of impact, res gestae reaction, if any, and incidents that might assist in the true determination of damages were denied to the defense. There can be no doubt that the conduct of the insured in failing to cooperate substantially and materially affected the insurer and its rights.”

What Constitutes Prejudice? Failure of the insured to provide discovery answers, appear at deposition, appear at arbitration, or appear at trial leading to a barring order or adverse finding. It is necessary to demonstrate what could have been shown had the insured appeared and cooperated. Accordingly , any statement of the insured becomes important, including the conditions of the accident, the weather , a short stop by the plaintiff, such that even a rear end case can be shown to be defensible.

An Insurer Must Show Diligence in Contacting the Insured - The Wrong Way In Lappo v. Thompson, 87 Ill.App.3d 253, 409 N.E.2d 26 (1st Dist. 1980), the Court felt that more could have and should have been done to secure the insured’s cooperation. Although numerous letters were sent regarding various deposition dates and trial dates, no attempt was made to contact her personally. The failure to respond to letters should have put the company on notice that there was a problem. Thus , the Court held, the insurer failed to establish that it exercised reasonable diligence in securing the cooperation of its insured. Lappo , 87 Ill.App.3d at 255.

An Insurer Must Show Diligence in Contacting the Insured - The Wrong Way In Buckner v. Causey , 311 Ill.App.3d 139, 724 N.E.2D 95 (1 st Dist. 1999), the insured William Causey (“Causey”) failed to appear for a trial and judgment was entered against him and in favor of the Plaintiff Gwendolyn Buckner. Causey was first notified of the trial date three days before it was to commence when he received a telephone call from the attorney retained to defend him by his insurance company. Gallant/Warrior failed to meet its burden of showing diligence in attempting to secure the insured’s appearance at trial or that Causey refused to appear after receiving adequate notice. Buckner , 311 Ill.App.3d at 143-144.

An Insurer Must Show Diligence in Contacting the Insured - The Wrong Way In Wallace v. Woolfolk , 312 Ill.App.3d 1178 (5 th Dist. 2000), Maria Wallace brought a lawsuit for personal injuries against Wenona Woolfolk (“ Woolfolk ”) arising from an automobile accident. Over the course of six months, counsel retained by the insurer to represent Woolfolk mailed six letters to her. During the one and only telephone conversation with her attorney, Woolfolk stated that she had not received any of the correspondence. Because Woolfolk did not answer written discovery or appear for a discovery deposition, the trial court entered and order of default against her as well as other sanctions.

An Insurer Must Show Diligence in Contacting the Insured - The Wrong Way Because Woolfolk failed to attend the arbitration hearing, her counsel was barred from rejecting the award in favor of Maria Wallace and judgment was entered against Woolfolk . The Appellate Court agreed with the trial court that the insurer did not exercise reasonable diligence in endeavoring to secure Woolfolk’s cooperation. The letter advising Woolfolk of the arbitration hearing was sent to her by regular mail only a week before it was to be held in spite of the fact that Woolfolk had told her attorney that she had not received previous letters. The insurer knew months earlier that Woolfolk was either not receiving the letters or was ignoring them yet took no further steps to determine what the difficulty was. Wallace , 312 Ill.App.3d at 1183-1184.

An Insurer Must Use Diligence in Contacting the Insured - The Wrong Way In Johnson v. Wade , 47 Ill.App.3d 610, 365 N.E.2d 11 (1 st Dist. 1977) Wade, the insured, was sent a letter by her attorney on August 16, 1974, advising her that her case was scheduled for trial on September 18, 1974. The letter requested that she contact him immediately regarding her availability to appear on that date. Wade did not respond, yet, no attempt was made to contact her until the day before the scheduled trial date. When the attorney could not reach Wade by telephone, an investigator was retained in an effort to make personal contact with her and ensure her presence at the impending trial.

An Insurer Must Use Diligence in Contacting the Insured - The Wrong Way Wade had lived at the same address for fifteen years and, prior to that time, had attended court dates as requested. Further, she denied any knowledge of the September 18, 1974 trial date. Johnson , 47 Ill.App.3d at 612, 614. The court noted that diligence was exercised in pursuing Wade’s cooperation as of the day before the trial was to begin but that; the actions taken prior to that time were insufficient. Had it been determined earlier that Wade was reluctant to appear, her counsel still would have had time to issue a subpoena to her or to request a continuance. The court held that the insurer failed to establish diligence and could not argue noncooperation on the part of Wade where one letter was sent giving notice of a trial date that was to occur one month later. In addition, once it was discovered that Wade would not attend the trial, no attempt was made to inform her of the consequences of a failure to cooperate. Johnson , 47 Ill.App.3d at 615.

An Insurer Must Show Diligence in Contacting the Insured - The Right Way In Safeco Insurance Co. v. Treinis , 238 Ill.App.3d 541, 606 N.E.2d 379 (1 st Dist. 1992), the insured a vehicle owned by Otto Treinis (“ Treinis ”). On September 11, 1986, while driving the insured vehicle, Treinis ’ roommate was involved in an accident with Gerald Sluzewicz . Treinis reported the accident to his agent within a couple of days. Gerald Sluzewicz filed a lawsuit against Treinis on January 13, 1987. Safeco sent letters to Treinis requesting that he contact it immediately regarding the occurrence. He did not respond. Safeco then began more extensive efforts to contact Treinis beginning in July, 1987. Safeco utilized its house investigator, a skip-trace and an outside investigator in order to locate and contact Treinis without success. The court held that the total lack of contact between Treinis and Safeco constituted noncooperation, especially where there was no evidence of any extenuating circumstances. Safeco Insurance Co. , 238 Ill.App.3d at 549.

An Insurer Must Show Diligence in Contacting the Insured - The Right Way In Gallaway v. Schied , Barbara Schied (“ Schied ”) was involved in an accident on December 12, 1959. Three days later, she reported the accident to her carrier, Apex Mutual Insurance Company (“Apex”) and shortly thereafter completed a written accident report and forwarded it to Apex. A personal injury lawsuit was filed against Schied as a result of the occurrence, and upon being served with it, sent it on to Apex. In March 1960 Apex sent a letter to Schied advising her that counsel had been retained to represent her in the litigation and that she must cooperate with her attorneys. Letters were sent to her by her attorneys in June and July regarding dates for her deposition.

An Insurer Must Show Diligence in Contacting the Insured - The Right Way In August of 1960, it was learned from a relative that Schied had moved. Subsequently, letters sent to Scheid were returned unclaimed or marked “Move, Left No Address.” A private investigator hired by Apex was not able to locate Scheid . The court found that Apex exercised “reasonable diligence” in attempting to locate Schied and secure her cooperation. Gallaway , 73 Ill.App.2d at 125.

An Insurer Must Show Diligence in Contacting the Insured - The Right Way The most recent favorable decision regarding the cooperation clause is Founders Insurance Company v. Shaikh , 405 Ill.App.3d 367 (1 st Dist. 2010). In that case, insured acknowledged service of the suit and then disappeared and refused contact . In order to locate the insured Founders set forth in detail, with supporting documentation, the meticulous efforts undertaken to contact the insurer, attempted telephone contact, letters, skip-traces, visits to various locations by investigators and searches of various public records. Letters by both regular and certified mail were sent to each and every possible address. Investigators working on behalf of Founders made in person visits to five different locations in efforts to find Shaikh . Family members too denied any knowledge as to his whereabouts.

An Insurer Must Show Diligence in Contacting the Insured - What Steps to Take Find the insured’s address and send correspondence to each of those addresses until you make contact. Look at the policy of insurance, police report, and search IDOC and Cook County Sheriff’s database. Send all correspondence by regular and certified, with restricted delivery. If that fails, then engage outside investigator to conduct skip trace and have the investigator attempt personal contact. Personal contact attempts with the insured, his family members, his roommates, property managers, etc. can be the key to showing appropriate diligence.

An Insurer Must Show Diligence in Contacting the Insured - What Steps to Take Diary each contact with the insured and confirm his telephone number and mailing address every time you talk to him . Diary discovery deadline, deposition date, arbitration, and trial dates and send correspondence and call prior to each. This may be duplicative of the efforts of defense counsel, but if we have to prosecute one of these cases, it will be of great assistance.

An Insurer Must Show Diligence in Contacting the Insured - What Steps to Take Engage a bilingual investigator where necessary. Send correspondence in Spanish, Polish, or other appropriate language as needed. Ensure defense counsel is sending appropriate correspondence and encouraging cooperation. Identify problem early and take every effort to resolve it; you will either resolve it, or make a very good record. This is worth the effort. There is a one-third difference between awards at arbitration in Cook County and jury verdicts.

LIENS ARE NO LONGER JUST THE PLAINTIFF’S PROBLEM Standard Settlement Language in Releases is No Longer Effective. “Plaintiff specifically agrees he shall be solely responsible for payment of any and all of Plaintiff’s medical/health care providers and/or any other entity that may be entitled to share in any settlement proceeds related to injuries alleged from the incident, including Medicare and/or Medicaid and including any and all liens, subrogated interests or assignments for same and/or first rights of recovery and including any expenses incurred subsequent to this agreement. Plaintiff specifically represents that no assignment of any benefits has occurred nor has Plaintiff provided information as to potential medical liens”.

LIENS ARE NO LONGER JUST THE PLAINTIFF’S PROBLEM We cannot do business as usual and leave these issues up to the plaintiffs. Insurers and insureds , face liability if Medicare’s interest is not protected. Insurers face penalties, interest, and double payments if Medicare’s interest is not protected. It is an insurer’s responsibility to protect Medicare’s interest.

LIENS ARE NO LONGER JUST THE PLAINTIFF’S PROBLEM What is Medicare’s current relationship to casualty insurance and self-insurance programs? In late December 2007, Congress passed a new amendment to the Medicare Secondary Payer Statute known as Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007 (MMSEA), requiring all primary payers to report settlements, judgments, awards or other payments to Medicare. See 42 U.S.C. 1395 Who is a “primary payer” or a “responsible reporting entity” (RRE)? liability insurers no-fault insurers workers compensation insurers self-insurers

LIENS ARE NO LONGER JUST THE PLAINTIFF’S PROBLEM Who is a Medicare beneficiary? Anyone who is a current beneficiary or was a beneficiary at any time prior to the the event that triggers the reporting requirement. As to those that might by a Medicare beneficiary in the future that requires setting up a Medicare Set Aside Trust (we talk about that later ).

ORDINARY LIENS Notice of an ordinary lien is the responsibility of the lien holder Failure of the lien holder to notify of the lien waives the lien The medical lien holders collectively can take no more than one-third of the settlement or judgment The court has the discretion to order liens reduced or eliminated If a lien holders interest is not protected they can go after the plaintiff or anyone else who had notice of the lien.

NONE OF THE PRINCIPLES OF LAW APPLICABLE TO ORDINARY LIENS APPLY TO MEDICARE’S INTEREST Medicare’s interest is not a lien at all It is the responsibility of the parties to determine if a plaintiff is a Medicare beneficiary or a potential Medicare beneficiary which requires that Medicare’s interest be protected Medicare can take all of the judgment or settlement The state court has no authority to order Medicare’s interest reduced (the authority of the federal court is an open question) If Medicare’s interest is not protected they can go after the plaintiff, the defendant, and defendant’s insurer for the money owed, plus penalties and interest Medicare goes to the front of the line

Medicare Secondary Payer Requirements basics Beginning July 1, 2009 all liability settlements involving Medicare beneficiaries are subject to the provisions of the Medicare, Medicaid, and SCHIP Extension Act (MMSEA). The implementation was backed up to January 1, 2010, but the reporting requirements are retroactive to July 1, 2009. See Roy Franco, Jeffrey Signor, and Thomas Thornton, Mission Impossible: Resolution of a Case with a Medicare Claimant? , For the Defense, May 2009, pp 8-13. Medicare is not required to provide notice of its interest in a settlement or judgment and so its interest is not technically a lien. See 42 USC § 1395y(b)(2)(B)(iv).

Medicare Secondary Payer Requirements basics Medicare has a right to recovery as a secondary payer to group health plans, workers’ compensation, automobile or liability insurance plan or policy, including self insureds , and no fault insurance. See 42 USC § 1395y(b)(2)(B)(I)-(ii). Medicare is secondary, the defendant and its insurer are primary, and the plaintiff is the Medicare beneficiary. The Secretary of Health and Human Services has delegated the responsibility for administration of the Medicare program to the Centers for Medicare & Medicaid Services (“CMS”). See 42 USC §§ 1935hh and ii.

Basics of Process to Report The first step in the process of dealing with the issue is to determine if the plaintiff is a Medicare beneficiary. See 42 USC § 1395y(b)(8)(A)(i),(ii). This can be done through discovery and it is incumbent on the Responsible Reporting Entity (“RRE”), the insurers or self-insured, and the entity to report that a Medicare beneficiary is involved in litigation to CMS. Id. , see also Section 111 of MMSEA; 42 CFR § 411.25(a); see also Matthew Garretson, One More Thing to Worry About in Your Settlements , American Trial lawyer. Medicare created a website, which will allow the entities to register claims, located at : http://www.Section111.cms.hhs.gov

Basics of Process to Report Because it takes CMS time to do its job, the earlier this process begins the better. There is no safe harbor provision for an RRE who fails to report a settlement with a Medicare beneficiary even if the Medicare beneficiary lied about being a beneficiary. Accordingly, a thorough investigation is required. This may include getting an authorization from the claimant if there is a suspicion that an individual is a Medicare beneficiary, but the plaintiff has not disclosed that fact.

Basics of Process to Report 7. Determining who is a Medicare beneficiary can be a challenge where future payments are involved. There is a lack of guidance in the regulations regarding whether liability settlements are required to account for future medical payouts. See Bradford Peterson, Medicare and Future Medical Expenses: Does the “Super Lien” Apply , Illinois Bar Journal, January 2010, Vol. 98, pp 26-30. 8. Workers compensation has been dealing with this issue for 15 years. If there is any doubt regarding the need for future medical treatment the most prudent thing to do is to account for future payments through a trust. See Peterson, pp 26-30.

Basics of Process to Report The CFR for workers’ compensation cases has set forth guidelines defining a future Medicare beneficiary. In the civil context where there are no guidelines, the best course is to use these guidelines to determine who is a future Medicare beneficiary:

Basics of Process to Report Receiving Social Security Disability; Applied for Social Security Disability Benefits; Denied Social Security Disability Benefits but anticipates appealing that decision; Denied Social Security Disability Benefits but anticipates appealing that decision; 62 years and 6 months old (i.e., may be eligible for Medicare based upon his/her age within 30 months); or End Stage Renal Disease (ESRD) condition but does not yet qualify for Medicare based upon ESRD. See 42 USC § 1395y(b)(2); see also Peterson, footnote 35.

Settling A Case Involving a Medicare Beneficiary Without Future Treatment As An Issue If future payments are not an issue, a case involving a Medicare beneficiary can be settled but Medicare’s right to reimbursement must be protected. Complicating the issue, Medicare will not issue a demand for reimbursement before settlement. Once the case is settled, the Medicare beneficiary is required to report the settlement, including attorneys’ fees and expenses . One of the biggest problems in settling cases involving Medicare beneficiaries is that Medicare does not account for fault . See Franco, pp 9, 11.

Settling A Case Involving a Medicare Beneficiary Without Future Treatment As An Issue Accordingly , if CMS’s reimbursement demand is in excess of the settlement, Medicare will take the entire settlement. Accordingly , if CMS’s reimbursement demand is in excess of the settlement, Medicare will take the entire settlement. Until CMS has issued its demand letter, the case is not settled as far as Medicare is concerned. Franco, pp 11 . It is required that our clients, the RRE, advise CMS of the case and later advise of the settlement early on in the process, supply them with the information they need so as to cut down on the time at the end of the settlement process.

Settlement And Release Of Cases Involving Medicare Beneficiaries With No Future Treatment There are two principle ways to proceed in issuing the settlement draft. First, you can place Medicare as a payee on the check and let the plaintiff’s attorney deal with negotiating it. If this route is chosen, it must be part of the settlement documents and on the release . A second option is to have more than one check issued. The first of those checks would be to the plaintiff and plaintiff’s attorney. An estimate of Medicare’s interest could be withheld from the total settlement, such that once the demand is made a second check could be drawn to pay Medicare.

Settlement And Release Of Cases Involving Medicare Beneficiaries With No Future Treatment Example: On a $300.000 settlement, the estimate of Medicare’s interest is $60,000. You give a draft to plaintiff’s of $220,000 and hold back $80,000 to account for the Medicare interest and for some play in numbers. Then when the demand comes back you issue a second set of checks, one to Medicare and another to plaintiff’s and plaintiff’s attorney. This process is obviously fraught with potential problems; the most obvious of which is that the estimate is wrong and the plaintiff has to contribute to the amount owed to Medicare. But if the plaintiff will not agree to place Medicare on the check, it is the only option.

Settlement And Release Of Cases Involving Medicare Beneficiaries With No Future Treatment This option also has the problem that Medicare may not be paid within the 60 days of the plaintiff receiving settlement money required by the statute. See 42 USC § 1395y(b)(2)(B)(ii ). It is important to consider that any indemnity language in the release is hardly protection in the face of the penalties and interest that Medicare can seek if its interest are not protected by the RRE.

Settlement And Release Of Cases Involving Medicare Beneficiaries Where Future Treatment Is Involved Medicare expects to be compensated for future treatment as a result of an injury. See 42 CFR §§ 411.40-41.47; see also Peterson, pp 26-30. Accordingly , it must be determined if future treatment is reasonably likely because there is no safe harbor provision for the determination of future treatment in the event future treatment is not accounted for in the settlement. Franco, pp 8-13. Also , there is no safe harbor for whether an individual is a likely beneficiary of Medicare. A determination must be made early on if future treatment is reasonably likely .

Settlement And Release Of Cases Involving Medicare Beneficiaries Where Future Treatment Is Involved A failure to comply with Section 111 can result in a civil penalty of $1000 per day/per claim for each day of noncompliance. In the absence of specific guidance it would seem to be the most prudent course that if a potential or current Medicare beneficiary is going to need future treatment a Medicare trust must be set up. This is a process that has been used in workers’ compensation for some time. The trust and the amount to fund it must be approved by CMS. CMS often reform these trusts.

Settlement And Release Of Cases Involving Medicare Beneficiaries Where Future Treatment Is Involved Medicare Set Aside Trusts in the workers’ compensation context have the following characteristics. While there has been no regulations promulgated on these in the civil context there is no reason to believe that they will be substantially different . Self administered by the Medicare beneficiary The money is held in an FDIC insured, interest bearing account The money is held in an FDIC insured, interest bearing account There is an annual accounting required to Medicare May be structured

Settlement And Release Of Cases Involving Medicare Beneficiaries Where Future Treatment Is Involved The key from the Medicare beneficiary’s perspective is that when the funds are exhausted, Medicare will pay for the remaining future treatment. The penalty is, if the trust is not set up with approval from CMS, then Medicare will not pay for the future treatment . CMS rejected 27% of Medicare Set Aside Trusts as too low and the average increase was 38%.

Settlement And Release Of Cases Involving Medicare Beneficiaries Where Future Treatment Is Involved The contract language for the Medicare Set Aside Trust must: Acknowledge Medicare’s interest ; The amount of the Medicare Set Aside Trust ; The amount of the Medicare Set Aside Trust ; State the terms of the Medicare Set Aside Trust; and Claimant to indemnify the defendant.

Consequences Of Not Satisfying Medicare’s Interest Before that question can be answered we have to determine: What is Medicare’s interest? Medicare is wise to schemes to try and avoid its interest and will reject or challenge settlements and could take actions that thwart its interests. As a general proposition Medicare’s right to reimbursement is limited to funds obtained by the Medicare beneficiary. Denekas v. Shalala , 943 F.Supp . 1073 (S.D, Iowa, 1996 ). Under Illinois’ Wrongful Death statute because the damages belong to the survivors and not the deceased it will be argued that Medicare cannot attach those sums.

Consequences Of Not Satisfying Medicare’s Interest If Medicare is not paid within 60 days, it is entitled to interest. See 42 USC § 1395y(b)(2)(B)(ii). The primary payer may also be required to pay Medicare even if it already paid the Medicare beneficiary. See 42 CFR § 411.24(i). Medicare can also take legal action to recover twice the amount of the Medicare payment. See 42 USC § 1395y(b)(8)(B)(ii); 42 CFR 411.24(c)(2),(h ). There is also a private right of action by the plaintiff. See 42 USC § 1395y(b)(3)(A).

Consequences Of Not Satisfying Medicare’s Interest Finally, failure to report a payment to a Medicare beneficiary can be subject to $1,000 per day/per case fine from the date the Medicare beneficiary received funds, as well as other remedies. See 42 USC § 1395y(b)(8)(B)(i ). While defense counsel cannot be sued for this liability to Medicare, if the RRE, our client, is sued by the United States, we can expect that our malpractice carrier will need to get a call.

How The Process Is Supposed To Work Accident Occurs Injuries associated with accident are paid by Medicare Negligent party becomes aware of accident involving Medicare beneficiary At the same time as #3, the Coordinator of Benefits (“COB”) gathers information about the accident The negligent party reports to the COB. 42 CFR §411.25(a ).

How The Process Is Supposed To Work Medicare Secondary Payer (“MSP”) leads identified and related case claims retrieved The COB populates the Common working file Within 10-14 days the COB acknowledges the claim and sends notification to the negligent party with a consent form The Medicare Secondary Payer Recovery Contractor (“MSPRC” or “CMS”) acknowledges receipt of the claim within 30 days and investigates conditional payments related to the accident

How The Process Is Supposed To Work At the same time as #9, the information is submitted to the Recovery Management Accounting System (“ ReMAS ”) to identify conditional payments CMS receives a ReMAS alert and applies filters to identify related claims Within 45 days CMS send a Conditional Payment letter to the negligent party CMS works with negligent party to reach agreement on accident related claims Within 30 days, CMS sends an updated Conditional Payment letter

How The Process Is Supposed To Work Within 14 days CMS identifies the money owed to Medicare and send a demand letter . At that point there is either payment and a check is sent to CMS and the case is closed, or There is a dispute and correspondence regarding relatedness occurs Then there is either a waiver or compromise and that is resolved and the case ends, or

How The Process Is Supposed To Work The dispute continues and interest will begin to accrue if 60 days from the Medicare beneficiary receiving payment Medicare has not been reimbursed If full refund is not received CMS sends a letter of Intent to Refer If full refund is not received CMS sends a letter of Intent to Refer

Key Acronyms related to the MMSEA: CMS : Centers for Medicare and Medicaid Services COBC: Coordination of Benefits Contractor MIR : Mandatory Insurer Reporting MMSEA : Medicare, Medicaid and SCHIP Extension Act of 2007 MSA : Medicare Set-Aside Allocation MSP : Medicare Secondary Payer Act ORM : Ongoing Responsibility for Medical PIP : Personal Injury Protection MP : Medical Payment RRE : Responsible Reporting Entity RRE ID: Responsible Reporting Entity Identification Number SFR : Self-Funded Retention SIR : Self-Insured Retention TPOC : Total Payment Obligation to Claimant TPA : Third Party Administrator

Thank You! Donald Patrick Eckler Pretzel & Stouffer, Chartered One S. Wacker Drive Suite 2500 Chicago, Illinois 60606 312-346-1973