In one of last year’s most questionable court decisions, a sharply-divided Illinois Court of Appeals has held that the Common Fund Doctrine applies to Med Pay set-offs. In Scheppler v. Pyle, 2013 IL App. (3d) 110380-U (Ill. App. 2013), Peggy Scheppler (Country Mutual) was involved in an accident with Tom Pyle (American Family). Country Mutual had $50,000 Med Pay limits and $250,000 UM/UIM limits, and its terms gave Country Mutual the right to set off its UM/UIM liability by (1) Med Pay benefits it made, and (2) any amount recovered by the insured in a third-party recovery. American Family had $100,000 liability limits, which were paid to Scheppler. Country Mutual paid Scheppler $50,000 in Med Pay benefits and waived subrogation on that amount. Instead, Country Mutual took its contractual set-off under the policy, reducing the UIM benefits it paid to Scheppler by $150,000 ($50,000 because of Med Pay benefits it paid and $100,000 due to the third-party recovery).
Scheppler’s attorneys claimed one-third of the $100,000 “common fund” they created and one-third of the $50,000 Med Pay set-off, as a common fund fee, even though Country Mutual had waived subrogation as to the latter. Although they hadn’t benefited “out of” the common fund with regard to the Med Pay set-off, Scheppler’s attorneys argued that until the settlement fund was created, Country Mutual’s obligation to pay UIM benefits would not have been established and it would not have to take the $150,000 set-off it took on the UIM benefits it owed Scheppler. The Court of Appeals agreed. With regard to the Med Pay set-off, it somehow came to the conclusion that Country Mutual benefited from the fund because, until the fund was created, it could not be determined whether Country Mutual had any UIM liability. Recovering the $100,000 established a recovery of less than Country Mutual’s $250,000 policy limit. If the third-party recovery was more than the UIM limits, there would have been no UIM payments to set-off and Country Mutual would have had to subrogate against the larger recovery and would have owed Scheppler’s attorneys common fund fees (or had to pay its own attorneys). So, the Court argued that Country Mutual shouldn’t be able to avoid these litigation costs merely because it had a contractual right of set-off and ordered Country Mutual to pay the attorneys $16,666 – one-third of the Med Pay set-off it took. It misapplied the holding from Scholtens v. Schneider, 671 N.W.2d 657 (Ill. 1996), which said that “the obligation to pay fees under the common fund doctrine…is independent of any insurance contract or subrogation agreement.” However, that case dealt with applying the Common Fund Doctrine where the insurer benefited “out of” the fund despite policy language disclaiming the Common Fund Doctrine.
Justice Vicki Wright strongly dissented from the Scheppler decision arguing that Scheppler’s attorneys were the ones unjustly enriched, because the Court should have apportioned the attorney’s fees between Country Mutual and Scheppler. Instead, she noted that the Common Fund Doctrine was misapplied to increase the amount counsel will receive for performing the same work that benefited both parties without splitting the fees between the parties. Scheppler, supra. The majority completely missed the fact that Country Mutual was not benefited “out of” of the fund. Instead, the Court did its best It’s a Wonderful Life impression, rationalizing that without the settlement there would have been no determination that UIM benefits were owed at all and there would have been nothing to set-off the Med Pay benefits against.
The Scheppler decision is yet another example of judges bending over backwards to assist trial lawyers. It is clear that Country Mutual did not benefit from or receive any money out of the third-party recovery. It’s right to set-off its UIM liability by the amount of Med Pay benefits it paid was strictly contractual and established by the terms of the policy – nothing Scheppler’s attorneys did allowed Country Mutual to take this set-off. To speculate that Country Mutual’s obligation to pay UIM benefits would not have arisen but for the $100,000 liability limits settlement is akin to looking into the future as in It’s a Wonderful Life and rewards Scheppler’s attorneys for making a small, as opposed to a large, third-party recovery. It makes no sense.
If you should have any questions regarding this article or subrogation in general, please contact Gary Wickert at email@example.com.