Subrogation in Texas

Subrogation is the taking on of the legal rights of someone whose debts or expenses have been paid by another. Subrogation most commonly occurs when an insurance company that has paid you then takes the legal rights you have against a third party and takes the recovery from a third party to pay it back for what it has paid to its claimant. The problem arises when the third party does not have adequate assets or insurance to make the injured party whole.
The Texas Supreme Court recently ignored 30 years of precedent and 30 years of the way things were actually done in Texas and decided that insurance companies can enforce their subrogation rights without regard to the fact that the injured person has not been made whole or perhaps in some cases, received any compensation whatever. Fortis v. Cantu, -- S.W.3d ----, 2007 WL 1861000, 50 Tex. Sup. Ct. J. 965, Tex., June 29, 2007 (NO. 05-0791

For instance, I use my health insurance to pay the $20,000 hospital bill I incur when someone runs over me. It turns out that person has just 20,000 in liability insurance. Now, the Supreme Court has held that my carrier, to whom I have paid premiums all these years, gets the money they have paid back and I get nothing for my lost wages, loss of physical ability, pain, suffering and mental anguish. What was I paying my premiums for?

Approximately 30 years ago, health insurance carriers, automobile insurers and other casualty companies began aggressively pursuing subrogation in all types of contracts of insurance. Previously, while many companies had contractual subrogation rights, for a variety of reasons, few enforced them. As implementation and enforcement of these subrogation clauses increased, the Courts looked to other states and adopted two equitable doctrines for the benefit of insureds.

In those cases where the person causing the injury did not have adequate insurance or assets to make the injured party whole, the Courts for years have refused to allow enforcement of subrogation reasoning that the insured should be "made whole", unburdened by the subrogation rights of an insurance company. Our Supreme Court has predictably now sided with the insurance companies.

Health insurance contracts are contracts of adhesion. That simply means that insureds clearly have no opportunity to negotiate arms length agreements with respect to subrogation. Attorneys who practice in the personal injury field explain subrogation to clients on a daily basis and virtually all clients are shocked that the clause is in their health insurance and none of them had the opportunity to negotiate that part of their coverage. The made whole doctrine was implemented to put the needs of the injured claimant first because the health insurer has been paid premiums to take the risk that it may have to pay damages and because the health insurer can spread the risk of loss over a large group.

Subrogation, if it arises as a result of an arms length agreement between two parties of equal negotiating power and does not result in the insured being left without a meaningful remedy against a negligent third party, can be an appropriate contractual arrangement. However, when it arises in the context of a contract of adhesion (one party has no real opportunity to negotiate, i.e. the insured) where the insured can't negotiate and for the most part is not even aware of the rights lost, there is nothing fair about subrogation.

A Legislative return to the "made whole" and "common fund" doctrines would be the right thing to do for the citizens of Texas. You should contact your representative in Texas and encourage fairness in this process.