This is one of a series of articles under the by line “Butler on Bad Faith” originally published in Mealey’s Litigation Report: Insurance Bad Faith, Vol. 18, #14, p. 30 (November 16, 2004). © Copyright Butler 2004.
Many jurisdictions have hospital lien laws. These laws ensure payment to hospitals for the beneficial services they provide. Some jurisdictions liberally interpret these laws so that technical deficiencies in establishing or seeking enforcement do not defeat payment to the hospitals. Other jurisdictions are less likely to ignore such deficiencies.
Parties to a settlement must know when and how the lien becomes enforceable, what constitutes notice of the lien, and who is liable for the lien upon settlement of the claim, among other things. At least one court has held that an insurer’s actual knowledge that a hospital had treated an injured party was not sufficient to render the insurer liable for settling with the injured party but not also settling the hospital lien. In contrast, another court imposed liability upon an insurer for the full amount of a hospital lien where the insurer settled with only the injured party when the insurer knew or should have known of the “possible” existence of a hospital lien. Cases from several jurisdictions illustrate how hospital lien laws affect settlement and how these liens may expose an insured and insurer to excess liability if an insurer fails to properly account for a hospital lien when settling a claim.
In Florida, some counties have local ordinances that require parties to list lienholders as payees on settlement checks. In Dade County v. Pavon, a Florida appellate court explained that “it is apparent that the . . . insurance company comes within the provisions of the [ordinance] . . . and would be liable to the . . . [hospital] upon its lien unless there are intervening defenses.”(1) Thus, where the tortfeasor’s insurer settled under circumstances where it knew, or should have known, to list the lienholder as a payee, the insurer was estopped from avoiding liability for the hospital lien.(2) The ordinance served to put the insurer on notice of the possible existence of the lien and placed a duty upon the insurer to not settle until the existence of a hospital lien was determined and, if one existed, to protect the lien.(3)
Other Florida counties have similar ordinances.(4) Most Florida hospital lien laws provide that a hospital lien attaches when an injured person enters the hospital, and is perfected by filing the lien within the time frame provided in the law.(5) In Palm Springs General Hospital of Hialeah v. State Farm Mutual Insurance Company, the court determined that a hospital lien automatically attached based upon language in the ordinance that a lienholder “shall be entitled to” a lien.(6) The court reasoned that, because the amount of the hospital bill changes from day to day, the hospital was not required to timely amend the amount of the lien each time the hospital bill changed.(7) Rather, the hospital was only required to file the lien after a final accounting could be done, after the final discharge of the patient.(8)
Florida courts have held that hospital liens do not become invalid when the hospital fails to file them within the time frame specified in the local hospital lien law. Instead, a hospital is simply an unsecured creditor until the lien is filed.(9) The court in Public Health Trust of Dade County v. Carroll observed that hospital lien laws are to be liberally construed to secure their beneficial purposes.(10) Technical requirements should not be applied to defeat just hospital claims.(11) Thus, in Roster v. Public Health Trust of Dade County, the court noted that a patient could not complain about a hospital lien that was untimely filed.(12) Instead, the court affirmed the trial court’s ruling allowing the hospital to intervene and recover a money judgment, relying upon Carroll for the proposition that hospital lien ordinances are to be liberally applied in favor of the hospital.(13)
New York also construes its hospital lien laws broadly. In Groth v. New York, the court held that a hospital which had filed its first lien but failed to file an additional lien within five days after the discharge of the patient, as required by New York’s Lien Law, still had a valid lien.(14) The court noted that the hospital did not adversely affect anyone’s rights by failing to file an additional lien showing the total hospital charges.(15) The court observed that “[n]o attempt is made to establish a lien for anything other than the first amount claimed.”(16) Declaring the lien invalid would not be “construing the statute liberally to secure its beneficial purposes.”(17)
In a more recent case, Simmons v. Aiken,(18) the treating hospital and the Department of Social Services (DSS) claimed liens against recovery in a personal injury action. The appellate court reversed the lower court’s order vacating New York City Health and Hospitals Corporation’s lien, and directed the lower court to hold a hearing as to the validity and amount of the lien.(19)
The court discussed that DSS was faced with the problem of demonstrating that some portion of the recovery from the personal injury action was fairly allocable to reimbursement of the medical and hospital expenses that DSS had to bear.(20) The court observed that the lower court would have to make that determination, and the settlement documents or the language used by the attorneys in the settlement stipulation were self-serving, chosen “merely as a means to defeat DSS’ recovery.”(21) As to preparing for a hearing on the matter, the court opined that limited discovery, perhaps including examination of some attorneys, would be appropriate.(22)
The court then turned to New York City Health and Hospitals Corporation’s lien.(23) The hospital contended that Medicaid did not cover the infant with respect to the hospital’s separate lien for the infant’s care and treatment.
The court reasoned that it makes no difference to the injured party whether the hospital chooses to enforce its claim directly against the fund recovered in the personal injury action under New York’s Lien Law or if DSS reimburses it, which then in turn is entitled to reimbursement out of such proceeds, if the measure of recovery were the same in either case.(24) The court described that the hospital’s direct lien under Lien Law § 189 is for the entire reasonable value of its services, while DSS’ recovery is limited to so much of the settlement proceeds as represents reimbursement for medical and hospital expenses.(25) The court concluded that at a minimum, the hospital, having incurred expenses for which DSS should have reimbursed it, should be subrogated to the claim DSS would have had DSS reimbursed the hospital.(26) Basically, the court wanted to ensure that the hospital as well as the Department of Social Services received payment for their services in a fair manner.
In many states, hospital liens do not apply to wrongful death settlements. Courts in New York have held that medical expenses incurred as a result of the decedent’s accident and secured by a hospital lien under New York’s lien law are payable from the proceeds of a wrongful death action.(27) In In re Wood’s Estate, the court reasoned that, under New York’s Decedent’s Estate Law, the proceeds of the personal injury recovery, unlike the proceeds of the wrongful death recovery, form part of the estate of the deceased, which thus becomes liable for payment of these liens of the decedent.(28)
In comparison to Florida and New York, Nebraska takes a more constrained view of its hospital lien laws. In West Nebraska General Hospital v. Farmers Insurance Exchange,(29) the Court held that an insurer’s actual knowledge that the hospital had treated a claimant did not render it liable for settling with the claimant without satisfying the lien. The Court stated that a hospital lien attaches upon admission of the patient to the hospital for treatment.(30) The hospital lien is enforceable against the injured party upon attachment, regardless of whether the hospital complies with the statute’s notice provisions.(31) On the other hand, if the hospital seeks to enforce the lien against third parties, such as the tortfeasor’s insurer, the hospital must perfect its lien.(32)
In this case, Kenneth Schneider was in an automobile-motorcycle accident with Janae Kehm. Schneider was admitted to West Nebraska Hospital. During his eight weeks of treatment, he incurred $31,361.07 in medical bills. Farmers insured Ms. Kehm’s automobile. On June 22, 1987, Bobbie Willey, a claims representative of Farmers, and Peter Hoagland, the attorney representing Schneider, reached an agreement to settle Schneider’s claims for the policy limits of $50,000. The following morning, Hoagland picked up the settlement draft from Farmers’ office. At the time that settlement occurred, Willey knew of Schneider’s treatment at West Nebraska and of the full amount of his medical bills.
On June 22, 1987, the same date that settlement was reached, West Nebraska’s attorney mailed a letter claiming a lien in the amount of $4,412.05 to Farmers. Willey received the letter from the hospital on July 1. Farmers paid the full amount claimed in the June 22nd lien in early July 1987. Subsequently, on July 16th, the hospital sent Farmers a “supplemental hospital lien” claiming the balance due of $26,959.02.
The Court discussed § 52—401 of Nebraska’s hospital lien statute that provides that when the injured party “claims damages from the party causing the injury,” the statute gives the hospital a “lien upon any sum awarded the injured persons in judgment or obtained by settlement or compromise on the amount due.”(33) The Court interpreted that the lien transferred a portion of the settlement to West Nebraska for the value of the services West Nebraska provided to Schneider, less a reasonable portion of the costs recovery, including attorneys’ fees.(34)
The Court then noted that direct actions against liability insurance carriers based on the negligence of the insured are not permitted in Nebraska.(35) Therefore, the Court concluded that Schneider could not sue Farmers directly for his injuries.(36) The Court reasoned that if the lien statute were interpreted to transfer part of Schneider’s interest to West Nebraska, then West Nebraska could not sue Farmers directly either.(37)
The Court opined that the first sentence of the statute gave the hospital a lien on any amounts the injured party received from judgment or settlement of his claims.(38) The second sentence required the hospital to perfect the lien by giving the tortfeasor notice of its existence prior to any such settlement or judgment.(39) The Court stated that, if the legislature intended the hospital lien created in the first sentence of § 52-401 to be enforceable against insurance companies, it would have required the hospital to provide them notice as well, as have many other states.(40)
The Court noted that insurance companies are not completely shielded from liability under its holding.(41) Upon perfection of a lien by a hospital, a duty arises on the part of the tortfeasor’s insurer not to impair the hospital’s rights under that lien.(42) If such an insurer settles directly with the injured party despite a perfected hospital lien, it has breached that duty and is liable directly to the hospital.(43)
The Supreme Court of Nebraska concluded that a hospital must substantially comply with the notice requirements of § 52-401 to perfect a hospital lien.(44) The Court refrained from drawing a bright-line test regarding what constitutes substantial statutory compliance in any given case.(45) In this case, however, it was clear to the Court that the hospital did not substantially comply with the statute’s notice provisions.(46)
Some jurisdictions reduce the amount of a hospital lien and require payment of attorney’s fees out of the settlement funds before disbursing them.(47) Other jurisdictions uphold the full amount of the claim and will enforce a lien for its full value. Under Illinois’ Hospital Lien Act, a trial court has discretion to reduce the amount of the lien but only if the total amount of liens filed exceeds the settlement amount by one-third.(48) In other words, this policy ensures that hospitals get paid the full value of their claims most of the time; however, in rare circumstances, where the liens exceed the amount of settlement by a certain percentage, a hospital may have to take a reduced amount. This ensures that the injured party receives something from the settlement. Illinois, for the most part, liberally construes liens in favor of hospitals. This is illustrated by the following two cases.
In Memedovic v. Chicago Transit Authority, the court held that a claim of a hospital lien filed more than five years after the services were rendered was not untimely because the hospital filed it prior to the distribution of the proceeds of the patient’s personal injury action.(49) The hospital lien came into existence only when there was property on hand to which it could attach, and it was therefore created when the jury awarded monetary damages to the patient.(50)
In In re Estate of Cooper,(51) Cardinal Glennon Hospital of St. Louis treated Larry Cooper, a minor, for injuries he sustained in a traffic accident. Cooper’s guardian settled his personal injury claim with Allstate, which paid a lump sum to cover Cooper’s attorney fees, and created a fund to provide for the balance of Cooper’s claim through an annuity. The hospital sought to enforce its lien against the estate of Cooper to cover the costs of his treatment. The trial court ruled that enforcement was “‘premature in that there [were] no assets presently in the possession of the estate against which the lien [could] be enforced.'”(52)
The Supreme Court of Illinois expressed concerns about the appropriate time for enforcement of the hospital lien in a structured settlement scenario.(53) The Court observed that the trial court’s deferred enforcement of the hospital’s lien ignored the purpose of the Hospital Lien Act.(54) Preventing the hospital from collecting the full amount of its lien until the year 2010 did not further the policy of treating those accident victims who were unable to pay.(55) Accordingly, the Supreme Court remanded the case to the trial court, ordering the court to enforce the hospital lien against the estate.(56) The Court observed: “This probably will entail liquidating the annuity, paying the hospital, and then purchasing another annuity with the balance.”(57)
Lastly, the Court noted that the attorneys for the estate did not get paid through an annuity, but received their fees immediately upon settlement.(58) Considering that, the Court opined that it was not proper for the structured settlement to accommodate attorney fees while ignoring a valid hospital lien.(59) The Court then admonished: “Our ruling should obviate this problem in future structured settlements.”(60)
Indiana provides that attorney fees will be paid first out of settlement funds and hospital liens “must be reduced on a pro rata basis to the extent that will permit the patient to receive twenty percent (20%) of the original settlement proceeds of the settlement amount.”(61)
In Tankersley v. Parkview Hospital, Inc.,(62) Walter Phillips was injured in an automobile accident. Parkview Hospital treated him from May 16, 1998 to June 4, 1998. While hospitalized, Phillips hired attorney Tim Isaacs to handle his personal injury claim. Isaacs later told Phillips that he might not be able to handle the case because of a conflict of interest.
The hospital filed a claim for payment with Sagamore Insurance Company, Phillips’ health insurer, which Sagamore denied. On July 2, 1998, Parkview then filed a hospital lien in the Alan County Recorder’s office against Phillips for outstanding unpaid bills. On July 6, 1998, Parkview served Phillips, the tortfeasor and his insurance company, and attorney Isaacs with notice of the lien.
Unbeknownst to Parkview, Phillips had changed lawyers in the meantime. He retained attorney Kevin Tankersley on July 1, 1998. When Tankersley took over the case for Phillips, he attempted to gather the entire file from the former attorney. Despite repeated attempts, Tankersley never recovered the entire file, including the portions of the file containing notice of the lien. Because he did not know of the hospital lien statute, Tankersley did not research the Alan County Recorder’s office for any outstanding liens.
On July 23, 1999, Tankersley settled Phillips’ personal injury claim against the tortfeasor with the tortfeasor’s insurer, Mid-Century Insurance Company, for $35,000. The proceeds went to Tankersley, who retained his contingency fee of $8,000 and distributed the remainder to Phillips. No one paid the hospital lien and Phillips had outstanding medical bills that exceeded $80,000. At the time of settlement, Tankersley did not have actual knowledge of the hospital lien.
After settlement, Parkview sued Tankersley, Phillips, and Mid-Century. Phillips eventually discharged his debt through bankruptcy. Mid-Century settled with Parkview for $15,000 and was dismissed from the action. The trial court subsequently granted Parkview’s Motion for Partial Summary Judgment against attorney Tankersley on the issue of liability. The Court of Appeals reversed, holding that Parkview failed to perfect its lien, and that Tankersley did not have actual or constructive notice of the lien.(63)
The Court discussed Indiana’s Hospital Lien Act, which affords a hospital the right to impose a lien against any settlement paid to a patient or to cover charges for treatment rendered to a patient.(64) To perfect the lien, the hospital must file a statement containing the patient’s name, dates of treatment, amount of the claim, and the names and addresses of one who is claimed by the patient or the patient’s legal representative who will be liable for damages that arise from the injury in the county where the hospital is located.(65)
In reaching its decision that Tankersley had constructive knowledge and that the lien was effective against him, Indiana’s high court looked at the plain meaning of the statute, which requires hospitals to give notice to the current attorney, not subsequent or future legal representatives.(66) The Court remanded the case to the trial court to determine the distribution of funds between Tankersley, Parkview Hospital and Phillips in compliance with § 32—8—26—4 of Indiana’s Code, which provides that attorney’s fees will be paid first and the liens “must be reduced on a pro rata basis to the extent that will permit the patient to receive 20% of the original settlement proceeds of the settlement amount.”(67)
In North Carolina Baptist Hospitals, Inc. v. Crowson, the appellate court examined whether sections 44—49 and 44—50 of the North Carolina General Statutes prohibit an attorney from disbursing funds recovered from the settlement of a personal injury lawsuit in a non-proportional manner where there are multiple medical service providers holding equally valid liens upon such settlement funds and there are insufficient funds to compensate all lienholders.(68) The court concluded that the statutes do not require a pro rata disbursement of funds.(69)
Section 44—49 of the North Carolina General Statutes creates a lien upon any sums recovered as damages for personal injury in any civil action in the state. The lien is in favor of “any person, corporation, state entity, municipal corporation or county to whom the person so recovering . . . may indebted for any drugs, medical supplies, ambulance services, services rendered by any . . . hospital, or hospital attention or services rendered in connection with the injury in compensation for which the damages have been recovered.”
In Crowson, North Carolina Baptist Hospital sued Jim Crowson alleging that he had violated sections 44—49 and 44—50 by failing to disburse to the hospital certain funds that Mr. Crowson held in his capacity as an attorney. The hospital argued that it provided medical services to his client, Christopher Reid, who had been injured in an automobile accident. His total costs for treatment amounted to $38,234.85. Reid retained Mr. Crowson to represent him in a personal injury suit to recover damages for the injuries he incurred as a result of the automobile accident.
In November 1997, the hospital provided Mr. Crowson with written notice of the lien pursuant to § 44—49. The lien covered the value of those medical services provided to Reid as a result of the accident.
On February 15, 1999, Mr. Crowson informed the hospital that although Reid had reached a settlement of his personal injury suit, the funds were insufficient to compensate North Carolina Baptist Hospital. This was because Reid also owed money to two other creditors with valid medical service provider liens, Wake Forest University Physicians and the Forsyth County Ambulance Service. When Crowson received the settlement proceeds, he paid the Forsyth County Ambulance Service its balance in full and paid Wake Forest University Physician its balance almost in its entirety. Upon the payment of these two debts, no other monies remained to compensate the hospital.
The appeals court held that because Sections 44—49 and 44—50 did not require defendant to distribute the funds at issue in a pro rata manner, the trial court properly concluded that the attorney for Reid was not liable to the hospital for monies owed.(70) The Crowson court acknowledged that because sections 44—49 and 44—50 provide extraordinary remedies in derogation of the common law, they must be strictly construed.(71) This case shows that when multiple providers are lined up for payment, the hospital may not necessarily receive its fair share or any share at all toward its lien.
In a rare reported case involving bad faith and the payment of a hospital lien, the Supreme Court of California found bad faith when the insurer withheld payment of medical benefits pending further investigation before settlement.
In Silberg v. California Life Insurance Company,(72) a carrier issued a policy providing for payment of medical and hospital care resulting from the insured’s injuries. The policy contained an exclusion for losses caused by injuries for which compensation was payable under any workmen’s compensation law. When the insured was injured in an accident of a disputed industrial nature, the insurer refused to make payments pending resolution of the insured’s claim for workers’ compensation benefits. Two years later a compromise was reached in which there was a partial allowance of a hospital’s claim of lien.
Plaintiff sued his insurer alleging two causes of action. Plaintiff sought a declaration that defendant insurer was liable under the policy. Plaintiff’s second cause of action sought damages for physical and mental distress. Plaintiff alleged that defendant was guilty of fraud, bad faith and malicious and oppressive conduct, and he was entitled to both compensatory and punitive damages.
The Supreme Court of California held that the insurer had exercised bad faith in withholding payment of medical benefits pending resolution of the industrial nature of the injury.(73) It reasoned that the insurer could have simply paid the hospital charges.(74) If, at a later time, workers’ compensation covered the injury, the insurer who paid the hospital lien could then assert a lien in the workers’ compensation proceeding to recover the payments it had made and it would have been entitled to payment from the proceeds of the award.(75) Instead, the Court observed that the insurer did not explain why it failed to adopt this course in order to vindicate the promise made in the application that the policy was intended to protect the insured against medical bills which could result in financial ruin.(76)
In conclusion, the Court discussed that, although the evidence was in conflict on the issue of whether it was customary in the insurance industry to make payments under the policy in these circumstances and the order granting a new trial that declared there was insufficient evidence of such a custom, the failure to establish common practice in this regard could not absolve the insurer.(77) Under these circumstances, the Court observed that the insurer’s failure to afford relief to its insured against the very eventuality insured against by the policy amounts to a violation as a matter of law of its duty of good faith and fair dealing implied in every policy.(7)
A brief review of decisions from several jurisdictions shows that the effect of hospital lien laws upon settlements differs widely in different states. Some jurisdictions liberally construe hospital lien laws in favor of hospitals, while other jurisdictions use stricter construction of such hospital lien laws. Some statutes impose a duty upon the injured party and that party’s attorney to ensure that hospital liens are paid while other jurisdictions impose liability upon the tortfeasor and the tortfeasor’s insurer to ensure that the hospital liens are satisfied in the settlement of a claim. Settling a claim and failing to account for a hospital lien may cause significant problems for the parties involved in a settlement.
Attorneys involved in personal injury settlements should be well-versed on a particular jurisdiction’s hospital lien laws. A tortfeasor and his insurer may be liable to a hospital for impairment of the lien if the hospital is not paid out of the settlement proceeds after the insurer settles with only the claimant. If the hospital lien matches or exceeds the policy limits, the hospital may have a claim against the settling tortfeasor to satisfy its lien and pay for its attorney’s fees and costs, exposing the insured tortfeasor to excess liability. The insurer may then be liable to the hospital for the policy limits, even if they were already exhausted. An awareness of these considerations can help to avoid bad faith on the part of the insurer.