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How the Paulson Plan Will Affect Personal Injury Claims

It’s hidden away, but one key plank of Treasury Secretary Henry Paulson’s plan to save the economy is the introduction of federal regulation of the insurance industry. That could be potentially disastrous to many personal injury claims.

Currently, the insurance industry is regulated by the states. Many states have adopted rules or laws that protect the states’ citizens from abuses by insurance companies. For example, here in Texas, the Insurance Code regulates how insurance companies can negotiate first party claims — those brought by a policy holder directly against his or her own insurance company. Here, the Insurance Code sets out timelines for when an insurance company can respond to claims and protects consumers against specified unfair practices in the negotiation and settlement of claims. In the personal injury context, these limits usually only apply in underinsured/uninsured motorist claims. The regulations also apply to any other claims brought by consumers against their insurance companies for failing to pay claims, including claims against life insurance and homeowners’ insurance companies. In other states, their regulations often apply to the typical third party personal injury claims.

Texas law also has regulations, established by years of case law, relating to subrogation claims. Specifically, Texas has adopted the common fund doctrines and the made whole rule that provide some measure of protection for consumers when their insurance company has a subrogation clause. These rules provide that an insurance company can’t just take all the money recovered in a claim. Under the made whole doctrine, if the defendant doesn’t have enough coverage to make the plaintiff whole, then the plaintiff is entitled to recover before he has to reimburse the insurance company. And under the common fund doctrine, the subrogation amount is reduced to reflect that the insurance company pays its portion of attorneys’ fees and expenses incurred in obtaining the money from the defendant.

The danger of Secretary Paulson’s plan is that any federal regulation would preempt the state laws that currently protect consumers. Observers can already see the potential results when looking at the Employee Retirement Income Security Act. ERISA, as it is known, was passed in 1973, and it was designed to protect employees who received benefits as part of their jobs. But now, the insurance industry uses it as a sword. For example, when a personal injury victim has health insurance through his or her job, insurance companies argue that ERISA preempts any state regulation that protects consumers from overreaching subrogation clauses. In Texas, that means that insurance companies argue that ERISA preempts state law regarding the common fund doctrine and made whole doctrines, and that personal injury victims must reimburse insurance companies for the whole amount of their claim instead of partial reimbursement. We now often spend more time fighting with insurance companies over subrogation claims than fighting about the underlying case.

If the federal government expands its regulation of the insurance industry, these problems will only multiply. Now, the federal government could put in any legislation that they are not preempting state regulations, but given this administration’s history on trying to use preemption as a way to prevent lawsuits, the odds of that happening are slim and none.

For more on Secretary Paulson’s plan, read here:

For more of my thoughts on subrogation, read here:

  • A Subrogation Primer
  • Texas Supreme Court Votes Against Personal Injury Claimants
  • Personal Injury Subrogation, continued

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