The Common Fund Doctrine: An Uncommonly Used Precept in Personal Injury Cases
Article by Robert J. Thompson, Attorney at Law Law Office of Robert J. Thompson, PC 119 West First Street, PO Box 1016 Dixon, Illinois 61021 Phone 815-284-7705 http://robertjthompson.net email - firstname.lastname@example.org
Since Tenney v. American Family Mutual Insurance was decided by the fourth district in 1984, the common fund doctrine has undergone many changes and applications in Illinois. This article will discuss how attorneys can use the doctrine to get a full fee in settlements while procuring more money for their own clients.
Though most attorneys in personal injury cases are successful in reaching a satisfactory settlement for their client, there are some who do so without considering the benefits offered by the common fund doctrine.
Applying the concepts discussed in this article, attorneys will be better prepared to go the distance on personal injury settlement negotiations. The common fund doctrine is based upon the equitable principle that an attorney who performs services in creating a fund in a personal injury case should, in equity and good conscience, be allowed compensation out of the whole fund from those who seek to benefit from its creation. Aside from lawyers and clients, the chief beneficiary of the fund is usually the plaintiffs' insurance company, which obtains reimbursement of medical payments provided under the insureds' med-pay provisions.
The fund doctrine was created for situations in which the subrogee is an insurance carrier and there is an express subrogation agreement between the insured and the insurer, subrogating the insurer to any claim the insured has against a third party tortfeasor. This agreement requires that the insured reimburse its insurer for payments that are the responsibility of a third party tortfeasor. While many Illinois courts have applied the fund doctrine to automobile insurance subrogation, no reported decisions address the doctrine's applicability to a group health insurer or an employee benefits plan other than through ERISA and SURS. However, the Texas Court of Appeals has applied the fund to a self-insurer's benefit plan,' and Illinois courts will likely soon be asked to apply the doctrine in this and similar contexts.
II. Common Fund Doctrine Requirements
In Baier v State Farm Insurance Company, the Illinois Supreme Court adopted the requirements for the "fund doctrine" as a theory of recovery for attorney's fees and a pro rata share of the costs in insurance subrogation matters.' Those requirements would later be delineated by the third district in Powell v Inghram as follows:
1) The fund must be created as the result of legal services performed by an attorney; 2) the subrogee must not participate in the creation of the fund; 3) the subrogee must benefit from the fund.'
In Tenney v American Family Mutual Insurance, the fourth district added to the requirements above that an attorney is not entitled to recover for services that have been knowingly rendered for an unwilling insurance company recipient.
A. Tenney v American Family Mutual Insurance
Tenney was an automobile accident case where the plaintiff's insurer, American Family Insurance, advised the plaintiff by letter of its subrogated lien to the extent of medical payments advanced pursuant to its contract, and declared its intention to deal directly with the defendant's insurance company on the subrogation claim Four months after the first "Tenney letter" was sent to the plaintiff, American Family sent a letter expressly notifying Harold Tenney, the plaintiff's attorney, that he was not to collect on the subrogation claim. Tenney replied that he was aware of their subrogation rights and acknowledged that they were denying responsibility. Nine months later he filed suit on the plaintiff's behalf and the parties settled the claim out of court.
Tenney filed suit against American Family for legal fees; however, the court held that the fund doctrine did not apply under the circumstances because Tenney knew soon after he began representing the plaintiff that the carrier did not want him to collect on its subrogation claim and would not pay him if he did so. The court added that "we find no reason why plaintiff could not have filed suit on behalf of his client for damages minus the insurer's subrogation claim."
This reasoning — that medical bills paid by the plaintiff's insurer should be excluded from the plaintiff's lawsuit — would later be severely criticized by the fifth district in Brase v Loempker, discussed below. Note in reviewing the following cases distinguishing Tenney that American Family did nothing to create the settlement fund and that Tenney himself acknowledged the insurer's denial of responsibility for his representation.
B. Powell v Inghram
Powell v Inghram" is the eading case holding the opposite of Tenney. In Powell, the plaintiff signed a subrogation agreement with her insurance company before retaining counsel requiring her to repay the insurer for recoveries received by judgment or settlement. The plaintiff later hired an attorney who filed suit several months before corresponding with the insurance company. Ten months later, a claim was submitted to the plaintiff's insurance company for medical expenses, at which time the company notified the plaintiff's attorney of its subrogation lien and disclaimed any intention of employing the attorney to collect the lien. The insurer, however, requested the attorney to "protect [its] interests" in the event of a settlement.
The court granted attorney's fees in favor of the plaintiff's attorney, in part because the insurance company refused to hire the plaintiff's attorney while seeking to benefit from his services through the attorney's "protection" of the insurance company's interests." The court's holding was based upon the rationale that the fund was created as a result of the services rendered by the plaintiff's attorney, the insurer did not participate in the creation of the fund, and the insurer benefitted from the fund by receiving reimbursement of money already paid out. However, the court pointed out that it was not interpreting Tenney to preclude application of the fund doctrine whenever an insurer merely notifies its insured or an attorney representing its insured of its intention to pursue its own subrogation interest." The facts of Perez were simply more similar to Tenney than to Powell and the insurance company letter in Perez was strongly worded. It stated as follows:
[The insurance company] will represent its own subrogation interests as to medical payments advanced or to be advanced to the insureds. This Company, therefore, neither solicits your services to represent it in this regard nor will it recognize any lien upon the subrogation amount claimed under the "Fund Doctrine" for services gratuitously given.
This letter, the court stated, preserved the insurance company's right to file suit for its subrogation interests.
III. The Progeny of Tenney and Powell
Since Tenney and Powell, many questions have arisen about the exact conditions under which an attorney is entitled to fees on a subrogation recovery given any set of facts. It is clear under Tenney and Powell that an insurance company must at a minimum comply with the following rules or the fund doctrine will favor the insured's attorney:
1) The insurer must correspond with the insured's attorney and not just the insured, 2) the correspondence must notify the attorney of the insurer's intentionto represent and pursue its own interest (Tenney) and not merely seek "protection" of its interest (Powell), and, 3) the insurer must correspond with the attorney prior to the lawsuit being filed.
If the plaintiff's insurer complies with these requirements, the following analysis helps determine the rights of both parties.
A. The "More Similar to" Cases
The first district in Perez v Kujawa held that where an insurance company unequivocally advises plaintiffs and their attorneys of its intention to pursue its own subrogation lien and does so before the attorneys file lawsuits on the injury claims, then the attorneys are not resembled Powell than Tenney. In Meyers v Hablutze1, and McGee v Oldham, the attorneys had filed suit before the insurance company sent its subrogation notice and the court in each instance made particular note of the similarities each case had with the Powell decision. As for whether an attorney must file a lawsuit before receiving a Tenney letter to invoke the fund doctrine against the plaintiff's insurer, the answer is no; in fact, filing suit may not make a difference even if the insurance company joins in the lawsuit, files an interpleader counterclaim, or participates in settlement negotiations. The analysis below is based upon weighing the equities and varies according to which party helped create the fund from which the subrogee is reimbursed and what type of subrogation activities the insurer undertakes. In fact, the reasoning in Tenney has been progressively restricted through recent decisions while Powell has been expanded.
B. Smith v Marzolf
In Smith v Marzolf," a forerunner of Tenney and Powell still relied upon by courts today, the third district found that the plaintiff's attorney was entitled to fees for creating the fund to reimburse subrogee Aetna's interests in the litigation." Despite Aetna becoming a party to the litigation as an intervener to protect its subrogation rights, the trial judge was affirmed in stating that Aetna's efforts were "at most, protective moves on Aetna's part to protect Aetna's lien. They did not aid in the creation of the fund."' The court found no showing that Aetna was active in the litigation against the defendant and noted that Aetna did not seek in its petition to intervene to be an active participant, only to "protect subrogation and lien interests."' The court also held that Aetnawas not entitled to advance notice that fees would be assessed against it if it did not join in the action against the defendant.
Although Smith v Marzolf was decided four years before Tenney, it has no negative history and has been followed recently in McGee v Oldham' and Taylor v State Universities Retirement System.
C. McGee v Oldham
In McGee v Oldham the court distinguished Tenney and awarded fees under the fund doctrine to an attorney who was notified by the plaintiff's insurer, after the lawsuit was filed and discovery completed, that it wanted to represent its own interests." The court found the facts more similar to Powell than Tenney, even though the insurance company was an "unwilling participant."" Limiting Tenney further, the court stated that "an insurance company's mere writing of a letter to the plaintiff's attorney expressing its desire to represent its own interest, without more, is not enough to overcome the fund doctrine." The subrogee is required to participate in the creation of the fund by showing more than a wish to protect its subrogation rights.
D. Brase v Loempker
The greatest expansion of Powell and narrowing of Tenney came in Brase v Loempker." There, the fifth district found that mailing a letter of intention to pursue a subrogation interest does not automatically invoke Tenney in favor of an insurance company, even if the correspondence precedes the filing of a lawsuit." Though the insurance company sent several Tenney letters - three to defendant's insurer and two to plaintiff's attorney - prior to the lawsuit, the court held that basic to both Powell and the case at hand was that the plaintiff's insurance company sought to benefit from the services of the plaintiff's attorney while doing nothing to assist him in negotiations or preparation for trial." The court reasoned that each case must be judged on its own facts.
In Brase, the' plaintiff's insurance company sent the defendant's insurer three letters, and the plaintiff's attorney two letters, before the lawsuit informing them that it wanted its subrogation claims deleted from any negotiations and that it would deal directly with the defendant's insurance company on subrogation." Just before filing suit, the plaintiff's attorney wrote to the defendant's insurance company stating in pertinent part that "[f]or the purpose of protecting and perfecting our attorney's lien herein, please be advised that we claim a percentage of any sum recovered herein, whether same be by compromise or suit." After the lawsuit was filed, the defendant's insurance company tendered an offer to settle with the plaintiff's insurance company for 80 percent of the medical paid, but the offer was refused.
Discovery proceeded and depositions were taken, with the plaintiff incurring over $400 in expenses. The plaintiff's insurer did not share in the work or the costs, and the case finally reached a settlement with the stipulation that the defendant be released from all liability in connection with the plaintiff's claims, including the subrogation claim of plaintiff's insurer. Criticizing the reasoning the court stated as follows: We...do not believe that plaintiff could have split the medical payments...from the rest of the damages without weakening plaintiff's case. Medical payments in such a suit indicate much more than the amount owed to doctors and hospitals. They tend to establish or lend credence to, inter alia, claims for pain and suffering and lost wages.
The court's rationale in awarding fees also considered that the plaintiff's insurer had made an express disclaimer of employment to the plaintiff's attorney but later asked the defendant's carrier, State Farm, to keep its subrogation rights in mind when settling with the plaintiff's attorney. The court found this to show that the plaintiff's attorney was involved in settlement negotiations and created the settlement fund. While the plaintiff's insurer may have had some negotiation with State Farm, it had turned down its settlement offer and let the plaintiff's attorney proceed unassisted with the litigation. Thus, the plaintiff's attorney was awarded one-third of the medical recovery for his fees plus a pro rata share of the expenses.
IV. Costs and Client Benefit
As is demonstrated above, attorneys can recover their fees and a share of the costs on their files from an insurer holding a subrogation interest. While recovery of costs may not be significant in smaller cases, it should be kept in mind when negotiating fees with the subrogee or when a file has high costs. Most importantly, attorneys should consider how implementing the fund doctrine provides a better recovery for their clients. For example, consider a case that settles for $30,000 for total release of all claims can net an additional $1,600 for the client.
V. Applying the Fund Doctrine
A. The insurers must send a subrogation letter to its insured's attorney before the filing of the lawsuit and must state the insurance company's unequivocal desire to represent itself and not merely to protect itself or have the attorney protect its interest.
B. The insurer must engage in conduct that helps create the settlement or trial award fund. As shown above, this requires more than merely asserting a lien, or even entering the lawsuit as an intervenor and then doing nothing but "protecting its interest." If the plaintiff's insurer follows these steps, the plaintiff's attorney should respond accordingly and seek fees in the following manner:
i). If a letter of protection or "protect our interests" letter is sent out, Smith v Marzolf stands for the proposition that you need not send the insurer notice that you are advancing fees. However, Applying Tenney and Powell, and their case law progeny, an insurer/subrogee should follow these steps to protect its interest: a letter notifying the insurance company that you will be perfecting your lien by claiming a percentage of any recovery may increase the likelihood of obtaining a full fee later.
ii). If a proper subrogation letter is sent under Tenney before the litigation, send a letter back to the insurance company pursuant to Brase stating that "for the purpose of protecting and perfecting our attorney's lien herein, please be advised that we claim a percentage of any sum recovered herein, whether same be by compromise or suit." You may also wish to advise the company that you will seek a fee on the entire settlement amount if it fails to actively participate in creating a settlement fund and cover its pro rata share of the costs. This may encourage the insurer to approve your representation.
iii). If the approach suggested in “ii" above is followed and the insurance company has taken an active role in satisfying its subrogation interest, Tenney and Perez indicate that you should negotiate with the exclusion of the medical and provide the insurance company with your intentions to do so pursuant to their demand to represent their own interests.
iv). If the suggestion in "ii” above is followed and you then file a lawsuit, claim medical damages as usual and then write the insurance company demanding that they join the lawsuit and prosecute, not just protect, the claim for medical damages; otherwise, you will seek fees and costs, through compromise or suit, if you create the fund out of which reimbursement is made.
Attorneys do not often need to file a lawsuit for their fees under the fund doctrine because insurance companies are usually willing to negotiate on the fee. However, if the case involves large damages and many hours to complete, attorneys should pursue their fees and costs aggressively. Attorneys should also remember that the defendant's insurer will likely have a Tenney letter of its own on file from the subrogee. If so, it is important to request two separate checks: one payable to attorney, client, and subrogee for the med-pay; and one payable to attorney and client for the rest of the settlement. This allows the defendant's insurer to protect itself on the subrogee's interest. If the defendant's insurer does not have a Tenney letter or if they are willing, one check payable to attorney and client for the whole amount would be more efficient.
Even with case law favoring the attorney and the client, there is no bright line rule for when attorneys' fees should be granted under the common fund doctrine. It is up to the court to consider the equities and to decide which party created the fund, or whether the insurance company merely sat on its hands. Basic to these cases is deciding whether the insurance company is seeking to benefit from the services of plaintiff's attorney while doing nothing to assist the attorney in negotiations, discovery, or preparation for trial. The court also looks to see whether the plaintiff's insurance company joins as a plaintiff in the lawsuit or files an interpleader counterclaim and participates in the settlement negotiations.
Each case is judged solely on its own facts and, ideally, equitable principles are applied. Understanding and applying the concepts of the fund doctrine outlined above should be an appropriate first step to better settlements and well-satisfied clients.
Illinois Workers' compensation laws aim to protect the injured sometimes fail employees
to believe that when a cement mixer working with heavy equipment daily
gets denied workers' comp for an on-the-job injury. That was the case
In the workers' compensation claim of Sparano v. City of Chicago. Mr.
Sparano, a cement mixer, injured his left knee while getting out of his
truck at work. He injured himself while stepping out of his truck.
When his first foot hit the ground, in a working area no less, it
slipped on debris. The worker recovered his balance and got both feet
out of the truck and was standing to close the door behind him. When
he did, the claimant twisted his knee in the process of closing his
According to the Illinois Workers' Compensation Commission, the
preponderance of the credible evidence support the findings that the
worker did injure his left knee while closing the door of his truck.
The Commission determined that the act of turning to close the truck
door does not expose the worker to a risk greater than that to which the
general public is exposed on a daily basis, even though the claimant
was doing work-related activities at the time!
This decision is a big set-back for Illinois Workers, as if the State
weren't already unfriendly toward labor. Workers beware! If you get
injured, make sure that the conditions under which you were working do
not exist in your day-to-day world or you may be out of vital benefits
under the Act.
WHILE ON PROBATION YOU ARE INSTRUCTED TO OBSERVE THE FOLLOWING RULES
1. The Lee County Probation Office is open Monday through Friday from 8:00 a.m. until 12:00 and 1:00 to 4:30 p.m. Your reporting time is restricted to weekdays during these times. Exceptions can be made if your are working and your employer writes a letter to your probation officer verifying your employment, stating the hours you work and stating that he does not want you to take time from work.
2. Each time you report you must bring verification of income and residence. EXAMPLE: Income: check, check stub, letter from employer/ Residence: rent receipt, bills, mail
3. If you are late for an appointment and fail to notify your probation officer it will be considered a missed appointment.
4. It is your responsibility to contact your probation officer to reschedule a missed appointment.
5. If you call the office and your probation officer is not available to talk with you, ALWAYS leave your name, phone number and a short message.
6. Each time you move, you need to notify your probation officer within 72 hours.
7. If you arrested while on probation, notify your probation officer immediately.
8. A travel permit is needed each time up leave the State. If you wish to go outside of Illinois, it is necessary for you to make an appointment with your probation officer who needs to know where and when you are going before the permit is issued.
9. If you request that your probation supervision be transferred to another State, you will be subject to a fee of $125.00. This fee must be paid in full prior to the request of transfer from Lee County. There is no refund of this fee if the transfer is denied from the receiving State.
10. If you have been drinking and come to the office with an odor of alcohol on your breath it will be considered a missed appointment.
11. Payments (court costs, fines, Public Defender Fees, Probation Service Fees, Restitution) are paid to the Lee County Clerk's Office 309 S. Galena Ave, Suite 320 Dixon, IL 61021
CASE NUMBERS MUST BE INCLUDED WITH EACH PAYMENT IT IS IMPORTANT THAT YOU KEEP ALL THE RECEIPTS AS PROOF OF PAYMENT
I have read the above rules and understand them. I have received and read a copy of my Court Order and understand the conditions of the Order.