In this episode of On Subrogation: Common Fund Doctrine, insurance attorney Jason Sullivan unpacks the concept of a common fund in the context of subrogation settlements, including what common funds are, how they work, and when it is or isn’t fair to expect a subrogating carrier to share in pro rata costs and expenses.

Who Owes Who What? Considering the Common Fund Doctrine

What is the Common Fund Doctrine? This doctrine requires that if a party pursues a claim, and via litigation there is a fund of money created where others may have a claim, all parties are required to share in the pro rata costs and expenses of pursuing said claim.

Take the example of a class action lawsuit. Say 3000 people have joined a class action suit against a medical device company that caused egregious harm to patients with one of their products. There is a $10 million judgment awarded. The medical device company creates a common fund per the judgment.

However, whatever legal costs and other expenses associated with pursuing that award, such as attorney and court fees, must be paid. All parties – meaning those 3000 people – must share in their portion of those expenses. Say there is $7 million left over after expenses are paid. This is the reduced award amount that is then split between the 3000 claimants.

Common Funds in the Context of Medpay & PIP Subrogation

The most frequent setting where the Common Fund Doctrine arises in subrogation is Medpay and PIP claims. Your insured will have a personal injury claim, go through negotiations and settle the claim with a fund of money to pay the lienholders. 

In this case, the subrogating insurance carrier is the lienholder. Common Fund Doctrine requires that the carrier first has their share of the settlement award reduced by their share of the costs of pursing the settlement.

However, this is another facet of law that differs by state jurisdictions. Some states have adopted the doctrine by statute, some by case law, and others have not adopted it at all. So if you are subrogating a claim that needs reduced based on the Common Fund Doctrine, first determine what the specific laws of that jurisdiction are.

Guidelines for Handling a Common Fund Argument in Your Recovery Pursuit

When dealing with statutes, the process is fairly clear, because it is formulaic. However, case law may not be as clear-cut of a situation. Jason advises on best practices for dealing with a common fund argument in the course of a subrogation lawsuit:

1. Was a common fund created?
2. Was there active participation by the carrier? 

• If the carrier tried to pursue their own claim via intercompany arbitration, litigation, etc, that is active participation. They should not have to share in the cost of someone else’s pursuit of their own recovery – in this case, their insured.

3. Was the math done correctly? 

• Consider a carrier with $5000 of Medpay exposure. Their insured is in a severe accident that results in extreme medical bills. That $5000 policy is almost immediately spent. Expenses incurred by the insured that do not directly relate to the Medpay claim payout, such as expert testimony from a surgeon, are not the responsibility of the carrier.
• Consider the cost of an accident reconstructionist in a subrogation action for a motor vehicle accident. The expert is there to determine liability, which both the insured and the insurer need to defend their claims. In this case, the Common Fund Doctrine is more likely to apply.

Because most states have adopted statutes surrounding how the Common Fund Doctrine applies in subrogation lawsuits, many times there is no defense to it, and the subrogating party just has to deal with the fact their award is reduced by their share of the cost of pursuing it.

For More On Subrogation…

Looking for more information on how to best navigate your clients’ subrogation claims? Check out our YouTube channel and podcast library for more of our On Subrogation series, a free educational resource for subrogation professionals where Rathbone Group attorneys break down important legal topics in easy-to-understand ways.Can’t find what you’re looking for? Email us at [email protected] or [email protected] to see your question answered in a future episode.