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O'Brien v. State Compensation Insurance Fund

Court of Workers Compensation of Montana

June 16, 1998

JACK J. O'BRIEN, Petitioner,
v.
STATE COMPENSATION INSURANCE FUND, Respondent/Insurer for PINE HILLS SCHOOL, Employer.,

          Date Submitted: May 11, 1998

          ORDER IMPOSING SANCTIONS AND CERTIFICATION OF JUDGMENT AS FINAL

          MIKE McCARTER JUDGE.

         Summary: After claimant received a settlement in a medical malpractice action brought following an industrial injury, State Fund claimed a subrogation interest in the settlement. Claimant disagreed and filed a petition in this Court. State Fund responded to the petition, claiming the subrogation interest. Eleven days later, State Fund capitulated and eventually moved for summary judgment on the basis of its agreement that it did not have a subrogation interest. Claimant persisted in seeking sanctions, arguing the insurer's position had been without basis in law or fact.

         Held: Sanctions ordered pursuant to section 39-71-2914, MCA (1991), but ordered against State Fund, not in-house counsel representing the insurer. While it may have been reasonable to assert an equitable interest in a medical malpractice recovery under the circumstances alleged by the insurer, the insurer asserted that interest without consideration of whether claimant had been made whole for his entire loss, a position without basis under statutes and Supreme Court precedent. Sanctions consist of reasonable attorneys fees and costs, along with a penalty consisting of ten percent per annum interest on the amount of the settlement State Fund argued it would take in settlement of its subrogation claim.

         Topics:

Sanctions. Sanctions ordered pursuant to section 39-71-2914, MCA (1991), but ordered against State Fund, not in-house counsel representing the insurer. While it may have been reasonable for the insurer to assert an equitable subrogation interest in a medical malpractice recovery under the circumstances alleged by the insurer, the insurer asserted that interest without consideration of whether claimant had been made whole for his entire loss, a position without basis under statutes and Supreme Court precedent. Sanctions consist of reasonable attorneys fees and costs, along with a penalty consisting of ten percent per annum interest on the amount of the medical malpractice recovery State Fund argued it would take in settlement of its subrogation claim.
Subrogation. While it may have been reasonable for the insurer to assert an equitable subrogation interest in a medical malpractice recovery under the circumstances alleged by the insurer, the insurer asserted that interest without consideration of whether claimant had been made whole for his entire loss, a position without basis under statutes and Supreme Court precedent. Sanctions ordered pursuant to section 39-71-2914, MCA (1991), but ordered against State Fund, not in-house counsel representing the insurer. Sanctions consist of reasonable attorneys fees and costs, along with a penalty consisting of ten percent per annum interest on the amount of the medical malpractice recovery State Fund argued it would take in settlement of its subrogation claim.

         ¶1 Petitioner's request for sanctions was heard on May 11, 1998, in Helena. Mr. Gene R. Jarussi represented the petitioner. Mr. Charles G. Adams appeared for the respondent, State Compensation Insurance Fund (State Fund).

         ¶2 The request for sanctions arises out of the State Fund's assertion of a subrogation interest in a $325, 000 medical malpractice settlement received by the petitioner. Petitioner notified the State Fund of the settlement on July 21, 1997. (petitioner's brief in response to state fund's motion for summary judgment, Attached Document No. 39.) On August 6, 1997, the State Fund's claims adjuster notified claimant's attorney that it had an "equitable right of subrogation" in the settlement:

Please be advised that I met with Jim McCluskey, Vice President of Claims, this morning regarding your request that the State Fund waive all subrogation rights on this settlement. We understand that you do not think that the State Fund has a subrogation interest in a medical malpractice case. The State Fund however, believes it has an equitable right of subrogation, potentially for the full amount of disability caused by the alleged malpractice. Even so however, the State Fund would be willing to compromise it's [sic] full entitlement in order to resolve this issue.
The total settlement amount is $325, 000.00, with your fees and costs totaling $126, 460.07, leaving a net amount of $198, 539.93. As a compromise, The State Fund makes the offer of accepting one half of that net amount or $99, 269.97 in settlement of it's [sic] subrogation entitlement. We would not ask for subrogation on any of Mr. O'Brien's future medical or indemnity costs. [Emphasis added.]

(Id. at Attached Document No. 42.)

         ¶3 Petitioner's attorney held back the $99, 269.97 and on October 26, 1997, petitioned this Court for a determination that the State Fund has no subrogation interest in the settlement. On November 21, 1997, the State Fund filed its response, alleging therein:

The State Fund is entitled to subrogation interest in the proceeds of the Claimant's third-party action against St. Vincent's Hospital and General Electric Medical Services.

(Response to Petition for Hearing at 1.)

         ¶4 Eleven days later the State Fund capitulated. On December 2, 1997, it notified petitioner's attorney that it was waiving all claims of "equitable subrogation." (Brief in Support of Motion for Summary Judgment at 1.) In its brief, the State Fund stated specifically that it agreed to the relief requested by petitioner, which, as set out in the brief, included a request "[t]hat a ruling be made that the Defendant does not have a subrogation right in the third-party settlement." (Id. at 2.) Thus, the brief conceded that the State Fund also has no statutory subrogation right in the settlement. Based on its waiver, the State Fund then moved for a summary dismissal of the petition. (Id. at 4; Motion for Summary Judgment.)

         ¶5 Petitioner countered with a request for a penalty and for sanctions. (Petitioner's Brief in Response to State Fund's Motion for Summary Judgment.)

         ¶6 On February 10, 1998, I entered an order granting partial summary judgment, 1998 MTWCC 6, holding that the State Fund's waiver is binding and that the petition is therefore moot. However, I found that petitioner had made a prima facia case for sanctions:

In urging this Court to allow him to prosecute his request for sanctions, claimant cites testimony of James McCluskey (McCluskey), a vice president of the State Fund, as evidence of the unreasonableness of the State Fund's subrogation position. According to petitioner's brief at pages 3 and 4, McCluskey testified at a deposition that:
(1) the subrogation statute (§39-71-414, MCA) does not apply; (McCluskey depo [sic], pgs. 28, 29)
(2) because the subrogation statute does not apply the concept of "made whole" is irrelevant; (McCluskey depo [sic], pg. 28)
(3) that in third party cases arising out of professional health care malpractice that the State Fund has an "equitable" subrogation lien which allows it to take all of a third party settlement, less ...

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