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Game-Changer: Michigan Court of Appeals Holds an Insurer Cannot Discharge its Liability by Settling with an Insured Where it has Notice of a Third-Party’s Claim

By: Olga Khessina

On October 22, 2015, the Michigan Court of Appeals released a published, binding opinion that has significant ramifications on the way insurers and counsel handle and settle lawsuits involving claims for personal protection insurance benefits. In Covenant Medical Center, Inc v State Farm Mut Auto Ins Co, ____ Mich App ____ (2015), the Michigan Court of Appeals reversed a trial court’s granting of a Motion for Summary Disposition filed by the defendant insurer based on a prior Release, holding that because the insurer had written notice of the medical provider’s claim, and did not provide notice of the pending settlement with its insured to the medical provider, the insurer could not discharge its liability to the medical provider by settling solely with the insured.

 

In 2011, Jack Stockford, a State Farm insured, purported to have sustained injuries in a motor vehicle accident. A dispute arose as to his entitlement to personal protection insurance benefits and Mr. Stockford filed a lawsuit seeking the same on May 23, 2013. Following the initiation of Mr. Stockford’s action, Covenant Medical Center (hereinafter “Covenant”) submitted claims to State Farm for services purportedly rendered to Mr. Stockford in 2012. State Farm, having received said claims between July and October 2012, denied the same in writing in November 2012.

 

State Farm and Mr. Stockford ultimately settled his claim for personal protection insurance benefits for $59,000.00, and Mr. Stockford’s action was dismissed with prejudice on April 17, 2013. As part of the settlement, Mr. Stockford executed a Release, releasing his claims for all personal protection insurance benefits through January 10, 2013. He further agreed to “indemnify, defend and hold harmless” State Farm, from any liens including Covenant. 

 

Shortly after Mr. Stockford’s action was dismissed with prejudice, Covenant filed its own action seeking payment for services purportedly rendered to Mr. Stockford prior to January 10, 2013. State Farm subsequently filed a Motion for Summary Disposition, arguing the Release executed by Mr. Stockford barred Covenant’s action; the trial court agreed and granted the motion.

 

On appeal, the Michigan Supreme Court reversed the trial court, holding State Farm’s settlement with Mr. Stockford was not made in “good faith,” necessary to discharge any liability to Covenant. The Court relied on MCL 500.3112, which provides:

 

Personal protection insurance benefits are payable to or for the benefit of an injured person or, in the case of his death, to or for the benefit of his dependents. Payment by an insurer in good faith of personal protection insurance benefits, to or for the benefit of a person who it believes is entitled to the benefits, discharges the insurer’s liability to the extent of the payments unless the insurer has been notified in writing of the claim of some other person. If there is doubt about the proper person to receive the benefits or the proper apportionment among the persons entitled thereto, the insurer, the claimant or any other interested person may apply to the circuit court for an appropriate order.  The court may designate the payees and make an equitable apportionment, taking into account the relationship of the payees to the injured person and other factors as the court considers appropriate.

In applying the foregoing provision of the No-Fault Act, the Court of Appeals held State Farm was required to provide notice of the pending settlement with Mr. Stockford to Covenant;

 

(T)he statute requires that the insurer apply to the circuit court for an appropriate order directing how the no-fault benefits should be allocated. That was not done in this case. Accordingly, pursuant to the plain language of the statute, because State Farm had notice in writing of Covenant Medical’s claim, State Farm’s payment to Stockford did not discharge its liability to Covenant Medical.

The decision presents a number of practical challenges to the settlement of non-provider suits seeking personal protection insurance benefits as, more often than not, Plaintiffs fail to claim all outstanding bills during case evaluation or settlement negotiations. Where written notice of a claim has been received from a medical provider, an insurer can no longer rely on a settlement with an insured to erase any potential liability for the claim. As such, the decision reaffirms the importance of the claim representative and attorney being fully aware of each notice of claim received by the insured. 

 

Practice Tip(s): The full ramifications of Covenant have yet to be ascertained, and the decision is surely to be challenged. However, at this time, to best limit any future exposure at the time of settlement, whether by case evaluation or other means, we recommend filing a motion, requesting the Court approve the settlement and/or designate any payees and apportion the settlement proceeds appropriately. It is of key importance that each party from whom written notice of a claim has been received, including, arguably, attendant care and replacement service providers, be given proper notice of the pending hearing on the motion so they may attend, present arguments to the Court as to why proceeds ought to be apportioned in their favor, or object to the same.

 

            Further, during settlement negotiations, it will become increasingly important that attorneys representing the insurers in PIP actions receive updated claim files throughout the ligation process so that it may be determined if any claims exist of which Plaintiff may not be aware