What is Subrogation and the “Mahler Reduction?

what is subrogation?

What is subrogation?

Subrogation is an equitable legal doctrine that means one person has a right of repayment from another person. If that sounds complicated, it can be. Many attorneys and legal scholars struggle to understand it, but subrogation is very familiar to insurance companies.

To help understand subrogation, let’s use a common situation involving car insurance. Most drivers have personal injury protection (PIP) coverage in their car insurance policy. PIP coverage requires your insurance company to pay your medical expenses up to your PIP limit (e.g., $10,000, $20,000, etc.) if you’re involved in a car accident, regardless of who caused the accident. So, if someone crashes into your car, your PIP coverage will pay your ER visit and doctor appointments up to the limits of your PIP coverage. If you end up filing a personal injury lawsuit against the other driver for your injuries and receive a settlement, is it fair for your insurance company to expect you to repay it from the settlement money for the medical expenses it paid on your behalf but were caused by the other driver’s negligence? Yes, otherwise you would recover twice, and that wouldn’t be fair. Equitable doctrines like subrogation are all about doing what is fair.

It is for fairness reasons that Washington State law gives your insurance company a subrogation right (that is, a right of reimbursement) against any money you receive from a settlement or jury verdict of your personal injury claim. This brings up the Mahler reduction. The Mahler reduction is important any time you receive money for personal injuries from a settlement or jury verdict after your insurance company has paid medical expenses on your behalf.

Mahler v. Szucs, et al.

In 1998, the Washington State Supreme Court decided Mahler v. Szucs, a case that forever changed certain subrogation rights in this state. In Mahler, Dr. George Szucs pulled into traffic from a driveway and hit Elaine Mahler’s car. Mrs. Mahler sustained neck, back, knee, and hip injuries from the accident. Since Mrs. Mahler had PIP coverage, she submitted her medical bills to her insurance carrier, State Farm, for payment. State Farm paid some of the medical expenses and declined others after a physician determined that some of her medical treatments were unnecessary.

Mrs. Mahler decided to hire an attorney and sue Dr. Szucs for negligence. Importantly, State Farm did not assist Mrs. Mahler in prosecuting her personal injury claim against Dr. Szucs. Eventually, Dr. Szucs’s insurance company agreed to pay a settlement amount. Mrs. Mahler’s attorney then wrote State Farm a letter stating that the case had settled, and that State Farm should reduce the amount it was owed for paying Mrs. Mahler’s PIP benefits by an amount equal to what it cost Mrs. Mahler to litigate the case to settlement. State Farm refused, claiming it never agreed to assist Mrs. Mahler prosecute her claim and therefore would not accept a reduction in its subrogation right. That was the wrong answer.

After several appeals, the Washington State Supreme Court accepted the case and decided that because Mrs. Mahler was forced to hire an attorney to recover a settlement against Dr. Szucs, State Farm benefitted from her attorney’s efforts. So, in fairness, the court decided that both Mrs. Mahler and State Farm should pay their pro rata portion of the legal fees needed to bring about the settlement. The court reached this decision by reasoning it would be “grossly inequitable” for State Farm to receive its entire subrogation interest when its insured, Mrs. Mahler, incurred the legal expense of recovering the settlement. The court decided that State Farm’s subrogation interest must be reduced to account for its share in the legal fees needed to recover the settlement. This became known as the Mahler reduction.

It is important to note that the Mahler reduction only applies to insurance carriers claiming a subrogation right, as in the case when your insurance carrier makes PIP payments on your behalf after an accident. It does not apply to bills you receive from your doctor’s office. It is also important to understand that the Mahler reduction uses a mathematical formula to determine the pro rata amount. The formula can be summarized as follows: (attorney fees + legal costs) x (PIP benefits paid ÷ Total Settlement/Verdict) = amount to be withheld from payment to insurer as its pro rata share of legal expenses.

Get The Help You Need in the Tri-Cities at Aultman Law

Not all attorneys fully understand the Mahler reduction or how it works. If you’re injured, hire an attorney experienced in handling personal injury matters. If you’re an insurance carrier, it is equally important to hire competent outside panel counsel to safeguard your and your insured’s interests.

Aultman Law is a small law firm with big law firm experience! Our law firm’s practice areas are personal injury law, business litigation, construction defect, and insurance defense. At Aultman Law, experience is the difference. Attorney Jeff Aultman has 18 years of experience resolving personal injury matters. Aultman Law has an excellent track record, unparalleled customer service, and transparent fees. If you need legal assistance in Benton, Franklin, or surrounding counties, contact my office today.

More Posts

a person signs a liability waiver

What is a Liability Waiver?

Most people have signed liability waivers in their lives without knowing it. They are usually presented to consumers for signature just before renting skis, snowmobiles,