Colorado Subrogation Law Transformed

When you are injured in an accident where someone else is at fault you will frequently receive insurance payments to help compensate your for your loss. The insurance company then has a right called "subrogation" to sue the person who was at fault to recover the money it owes or has paid to you.

This is only fair. There is no reason that someone whose carelessness causes a personal injury should get off the hook because the person that they hurt had insurance. And, it isn't fair for someone who is injured to get a double recovery. The at fault person's conduct does do financial harm to the insurance company, and it should be entitled to recover for that injury if it is possible to do so.

The trouble is that the existence of a subrogation right can make it exceedingly hard for someone who is underinsured to recover the rest of their loss in court from the person who was at fault.

When a personal injury lawyer for someone who has insurance coverage brings a lawsuit against the person who is at fault for a personal injury, the personal injury lawyer has to reach a deal with the insurance company over how the proceeds to the lawsuit will be divided between the lawyer, the insurance company and the injured party.

In reality, insurance companies are frequently reluctant to reach any kind of agreement without time consuming and expensive haggling over the terms of the deal, and often expect the injured person to bear the full cost of the lawyer, despite the fact that the insurance company's subrogation right means that it will receive most of the proceeds at trial.

The possibility that a subrogation right may allow an insurance company to pay its insured with someone else's money also encourages some insurance company to postpone paying benefits (in part, in the hope that a legal determination in the court case will find that the injured person's injuries will less great than what the insurance company would have paid).

Well, that is how it used to work. The reality has radically changed now. In this year's legislative session, Colorado passed HB 10-1168, whose principal State Senate sponsor was, I am proud to say, Pat Steadman, my own state senator. It took effect on Wednesday, and is codified at Section 10-1-135 of the Colorado Revised Statutes.

The result is a huge victory to accident victims, who were being harmed by obscure rules governing the relationship between insurance companies, accident victims and at fault parties that furthermore, articulates a clear, simple general principle to govern these situations which still produces fair results.

In a nutshell, it provides that an insurance company's subrogation right isn't ripe until the injured person is made whole and is limited to the amount actually paid (or the amount that would be paid by a normal health insurance policy in the case of medical services, whichever is less). If it takes a lawsuit by the injured person to make the injured person whole, the insurance company must pay a share of the injured person's share of attorneys' fees equal to its share of the recovery.

The insurer is also forbidden from delaying payment because a third party could be responsible.

There are important details regarding definitions, dispute resolution, exceptions, and other matters (which are largely logically consistent with the broad general principle), but the bottom line is that the law greatly strengthens the hand of personal injury victims in the tort litigation process.

This law makes settling cases with parties at fault where the injured party hasn't been fully compensated by an insurance company much easier, and prevents insurance companies from getting more than their fair share in negotiations over their subrogation rights.

It is also a victory for personal injury victims that may end up costing insurance companies very little, or even makes them better off. Insurance companies actually bring subrogation lawsuits in only a minority of cases where they could. The administrative burden involved in reaching agreement on subrogation rights between insurance companies and personal injury victims costs insurance companies money and prevents a lot of meritorious lawsuits trying to increase the size of the pie by suing parties that are at fault from going forward. Insurance companies that don't recover as much as they should from at fault parties can simply increase the rates that they pay to their insureds to make up the difference, leaving them indifferent, an option not available to injured people.

Politically, this issue was invisible, but economically and practically, this is the biggest change in the reality of tort law in Colorado since the demise of no fault car insurance.