TEXAS LAW LIMITS HEALTH SUBROGATION: H.B. 1869 Enacts New Chapter 140 In Response To Fortis Benefits

We have long known that Democrats, financially-fueled by the trial lawyers’ lobby, are no fans of subrogation. Surprisingly, even Republicans continue to battle the subrogation bogeyman, an indication that subrogation education and lobbying of our legislators should be a priority in our industry. The most recent example is in Texas, where Republican legislators sponsored, and the Republican governor is about to sign, H.B. 1869, which creates a brand new Chapter 140 in the Texas Civil Practice and Remedies Code. The new law becomes effective January 1, 2014 and it applies to insurance companies and health plans seeking reimbursement from third-party recoveries. It might well apply to Med Pay subrogation as well. While this new law constitutes a step backwards for subrogation, things could have been a lot worse. The subrogation lobby in Texas literally pulled a partial victory from the jaws of defeat, pushing at the last moment for a compromise bill which replaced an earlier version of the bill that would have devastated health subrogation in Texas.

The compromise bill makes several changes to health insurance subrogation and is said to be a “legislative compromise” between the Fortis Benefits case and the Made Whole Doctrine. In Fortis Benefits v. Cantu, 234 S.W.3d 642 (Tex.2007) (Fortis Benefits was represented by NASP member Loren Smith and the NASP amicus brief was written and filed by Gary Wickert), the Texas Supreme Court held that the Made Whole Doctrine does not apply where the plan/policy itself provides for a clear and specific right of subrogation. Section 140.004 confirms that a policy or plan may still contractually provide for rights of subrogation and reimbursement. However, new Section 140.005 creates a formula for calculating health subrogation recoveries:


(a) If an injured covered individual is entitled by law to seek a recovery from the third-party tortfeasor for benefits paid or provided by a subrogee as described by Section 140.004, then all payors are entitled to recover as provided by Subsection (b) or (c).

(b) This subsection applies when a covered individual is not represented by an attorney in obtaining a recovery. All payors’ share under Subsection (a) of a covered individual’s recovery is an amount that is equal to the lesser of:

(1) One-half (1/2) of the covered individual’s gross recovery; or

(2) The total cost of benefits paid, provided, or assumed by the payor as a direct result of the tortious conduct of the third party.

(c) This subsection applies when a covered individual is represented by an attorney in obtaining a recovery. All payors’ share under Subsection (a) of a covered individual’s recovery is an amount that is equal to the lesser of:

(1) One-half (1/2) of the covered individual’s gross recovery less attorney’s fees and procurement costs as provided by Section 140.007; or

(2) The total cost of benefits paid, provided, or assumed by the payor as a direct result of the tortious conduct of the third party less attorney’s fees and procurement costs as provided by Section 140.007.

(d) A common law doctrine that requires an injured party to be made whole before a subrogee makes a recovery does not apply to the recovery of a payor under this section.

The key to effective and complete subrogation under this new statute is now whether or not the subrogated carrier/plan engages subrogation counsel to enforce its subrogation rights or merely relies on the plaintiff’s attorney to do the heavy lifting. The carrier/plan is now limited to the lesser of half of the gross third-party recovery or the amount of its subrogation interest, whichever is less. The new § 140.007 also codifies the Common Fund Doctrine in health subrogation, with some twists, and it reads as follows:


(a) Except as provided by Subsection (c), a payor of benefits whose interest is not actively represented by an attorney in an action to recover for a personal injury to a covered individual shall pay to an attorney representing the covered individual a fee in an amount determined under an agreement entered into between the attorney and the payor plus a pro rata share of expenses incurred in connection with the recovery.

(b) Except as provided by Subsection (c), in the absence of an agreement described by Subsection (a), the court shall award to the attorney, payable out of the payor’s share of the total gross recovery, a reasonable fee for recovery of the payor’s share, not to exceed one-third of the payor’s recovery.

(c) If an attorney representing the payor’s interest actively participates in obtaining a recovery, the court shall award and apportion between the covered individual’s and the payor’s attorneys a fee payable out of the payor’s subrogation recovery. In apportioning the award, the court shall consider the benefit accruing to the payor as a result of each attorney’s service. The total attorney’s fees may not exceed one-third of the payor’s recovery.

This section provides that if the carrier/plan engages subrogation counsel to “actively participate” in the third-party recovery efforts, its lien will be protected from further reduction by attorney’s fees and expenses under new § 140.007, to the extent of the benefit accruing to the plan as a result of each attorney’s service. This language mirrors the attorneys’ fees section of the Texas Workers’ Compensation Subrogation Statute and means that a carrier/plan is not helpless from having its subrogation interest scavenged by trial lawyers. The language will be particularly helpful where the plaintiff’s counsel’s efforts are directed at attempting to destroy your subrogation rights. It is also now more important than ever to have subrogation counsel involved in your health insurance recovery efforts in the Lone Star State because the new bill requires the carrier/plan to prove that the medical payments made were related to the “tortious conduct of the third party.” Proving up a medical lien under a health care policy or plan is more difficult than proving up the lien under worker’s compensation, and presents more opportunities for the plaintiff’s attorney to defeat your interests. This is because under workers’ compensation, all of the medical paid should be related. Under a health care policy, the plaintiff may have had arguably unrelated treatment paid under the policy/plan, which the plaintiff’s counsel undoubtedly will argue should not be included in the lien.

The previous draft of the bill provided for limiting the subrogation interest of the policy/plan to as little as 15% of the recovery and provided trial lawyers with a weapon of mass subrogation destruction. Simply by alleging the existence of “recognized injustice” (subrogation is seemingly always an injustice to trial lawyers), the subrogation interest could be limited to a paltry 5% of the third-party recovery. Many thanks go to those who lobbied on behalf of subrogation for avoiding the devastatingly bad previous draft of the bill.

The new law provides the above statutory formula for a “balanced” division of the monetary recovery between the injured party and his or her health insurer in those cases where there is not enough money to fully compensate the injured party. The compromise bill passed in large part because some larger health insurers in Texas agreed to a compromise that allows for a reduction on every subrogation claim for health benefits, without consideration of the amount of the settlement. Texans for Lawsuit Reform pushed this bill under the belief that if it did not go through, all of the tort reform that has been passed in Texas would come under attack and might be reversed. The plaintiffs’ bar convinced them that they were so squeezed by all of the tort reform (most recently the “paid versus incurred” bill that only allowed for recovery of the paid amounts, not the billed amounts) that the plaintiff bar was either about to stop handling car accident cases because they just couldn’t make any money, or would wage all out war to reverse the reforms passed. Apparently the defense bar was concerned as well (no car wrecks filed, no car wrecks to defend). They compared this to what happened when the medical malpractice tort reform passed back in 2006. That bill was so tough that medical malpractice suits are rarely seen in Texas anymore, and all of those attorneys had to find other work. So it seems that there was more political motivation to the bill than a simple anti-subrogation jihad.

It is important to note that the new Chapter 140 does not destroy the holding in Fortis Benefits. The statute was definitely enacted in response to the Supreme Court’s decision in that case, but it states that the carrier can still contract for a better subrogation right that existed under the Made Whole Doctrine prior to Fortis Benefits. Even after the enactment of the new statute, the carrier needs a good subrogation clause in its policy/plan in order to avoid the harsh effects of the common law Made Whole Doctrine. Fortis Benefits still provides guidance on that issue. Also, the new statute applies only to policies/plans providing health benefits, so the Fortis Benefits opinion is untouched as to other types of subrogation, most notably property damage claims.

Applicability of New Statute

A looming question as to applicability of the new law remains. Does it apply only to health insurance subrogation (i.e., self-funded or insured employee welfare benefits plans, occupational accident plans, etc.) or does it also apply to other policies, such as automobile insurance policies which provide Med Pay benefits? The answer is not clear from the statute but you can bet your first-born child that it will be argued by trial lawyers to be applied as broadly as possible. Section 140.002 reads as follows:


(a) This chapter applies to an issuer of a health benefit plan that provides benefits for medical or surgical expenses incurred as a result of a health condition, accident, or sickness, a disability benefit plan, or an employee welfare benefit plan, including an individual, group, blanket, or franchise insurance policy or insurance agreement, a group hospital service contract, or an individual or group evidence of coverage or similar coverage document, including:

(1) an insurance company;

(2) a group hospital service corporation operating under Chapter 842, Insurance Code;

(3) a fraternal benefit society operating under Chapter 885, Insurance Code;

(4) a stipulated premium insurance company operating under Chapter 884, Insurance Code;

(5) a reciprocal exchange operating under Chapter 942, Insurance Code;

(6) a health maintenance organization operating under Chapter 843, Insurance Code;

(7) a multiple employer welfare arrangement that holds a certificate of authority under Chapter 846, Insurance Code; or

(8) an approved nonprofit health corporation that holds a certificate of authority under Chapter 844, Insurance Code.

(b) Notwithstanding Section 172.014, Local Government Code, or any other law, this chapter applies to a risk pool providing health and accident coverage under Chapter 172, Local Government Code.

(c) Notwithstanding any provision in Chapter 1551, 1575, 1579, or 1601, Insurance Code, or any other law, this chapter applies to an issuer of:

(1) a basic coverage plan under Chapter 1551, Insurance Code;

(2) a basic plan under Chapter 1575, Insurance Code;

(3) a primary care coverage plan under Chapter 1579, Insurance Code; and

(4) basic coverage under Chapter 1601, Insurance Code. (d) Notwithstanding any other law, this chapter applies to any self-funded issuer of a plan that provides a benefit described by Subsection (a).

(e) This chapter applies to any policy, evidence of coverage, or contract under which a benefit described by Subsection (a) is provided and:

(1) that is delivered, issued for delivery, or entered into in this state; or

(2) under which an individual or group in this state is entitled to benefits.

A “health benefit plan” is routinely described by other states to mean “an accident and health insurance policy or certificate.” See N.C. § 58-3-225. However, in Texas, other statutes have defined “Health benefit plan” to mean “a group, blanket, or franchise insurance policy, a certificate issued under a group policy, a group hospital service contract, or a group subscriber contract or evidence of coverage issued by a Health Maintenance Organization (HMO) that provides benefits for health care services.” The term does not include accident-only insurance coverage or a combination of accident-only and disability income insurance coverage. See Tex. Ins. Code Ann. § 1501.002. However, the language in § 1501.002 is narrower than in Chapter 140 and it is best to be prepared for the inevitable argument that the new law applies to Med Pay subrogation as well.


The most important aspect of the bill in terms of its practical effect on the day-to-day handling of subrogation claims in Texas is that now, subrogation counsel should be involved in almost all health and medical insurance subrogation cases. If handled correctly, this new statute doesn’t necessarily have to be a negative. It is still possible to make nearly a full recovery in many circumstances. However, not only is every subrogation claim going to be fought vigorously with the new law, but without “active participation” in the case by the subrogated plan/insurer, common fund-type attorney’s fees will be owed. The new statute will probably apply to any subrogation interest which “attaches” prior to the effective date of the statute, January 1, 2014. This will usually mean the date of the accident. However, if your first check/payment for benefits is made prior to the effective date, you might be able to argue it is not applicable.

For information regarding the handling of health insurance subrogation in Texas or anywhere in the United States, please contact Ryan Woody at rwoody@mwl-law.com.

Gary L. Wickert

Gary L. Wickert is an insurance trial lawyer and partner with the law firm of Matthiesen, Wickert & Lehrer, S.C. Gary has nearly four decades of litigation experience and is regarded as one of the world’s leading experts on insurance subrogation. He is the author of several subrogation books and legal treatises and a national and international speaker and lecturer on subrogation and motivational topics.