Attorneys who handle personal injury cases, either on the plaintiff or defense side, are often faced with lien claims. Liens can have a major impact on the case. For example, for the plaintiff, a potential lien can make the difference in whether it makes sense to pursue a case. It can also impact counsel's ability to settle the case, or determine whether the client walks away satisfied. For defense counsel, understanding liens will help counsel evaluate the potential for settlement, and know the steps necessary to protect the client from liability for failing to properly address a lien. There are numerous other ethical and liability issues that can come up.
This article provides an overview of personal injury liens including identifying the major lien types, discussing how these liens are established, and summarizing some key concepts that every attorney working in this area should know.
What Is a Lien?
A lien is a legal claim against property, either real or personal, as security for payment on a debt or obligation. Gray v. Horne, 48 Cal. App. 2d 372 (1941). Civil Code Section 2872 defines a lien as: "[A] charge imposed in some mode other than by a transfer in trust upon specific property by which it is made security for the performance of an act." Code of Civil Procedure Section 1180 contains a similar definition. In the context of personal injury cases, a lien is generally a claim by someone other than the plaintiff or defendant against a settlement or judgment to secure a debt or right to reimbursement.
What are the Major Lien Types?
Personal injury liens generally fall into two major categories: contractual liens and statutory liens. There is authority for "equitable" liens in the context of personal injury cases; however, these are rarely if ever recognized.
The two most common contractual liens are: (a) medical care liens and (b) health insurance liens. With medical care liens, the medical professional provides care to the injured client. In exchange for agreeing to delay payment for the care, the patient grants the provider a lien against any third-party recovery. With insurance liens, the insured and insurer agree the insurer will be reimbursed out of a third-party recovery. This reimbursement obligation is included in most, if not all, health insurance plans.
The other major type of personal injury lien is the statutory lien. These liens are derived from various statutes and differ in many respects from each other and also from the typical contractual lien. Common statutory liens include: (1) hospital liens for "emergency and ongoing medical" care (Civil Code Section 3045.1 et seq.), (2) county medical care liens (Government Code Section 23004.1 et. seq.), (3) workers' compensation liens (Labor Code Sections 3856, 3860), and (4) Medi-Cal liens (Wel. & Inst. Code Section 14124.72). While Medicare has a "recovery claim" in personal injury cases with respect to any third-party recovery, technically this right does not include the right to assert a "lien."
How Is a Personal Injury Lien Established?
A lien may arise by contract or "by operation of law." Civil Code Section 2881.
As discussed above, some liens are created by a contract. The client signs an agreement granting another the right to assert a lien against any third-party recovery. With medical care liens, the attorney representing the patient may be asked to sign the lien agreement. In fact, sometimes the medical professional will not provide care for the client unless the attorney signs an agreement. These agreements usually obligate the attorney to make sure the lien is paid out of any third-party recovery, to notify the provider if the attorney withdraws or is terminated, and to communicate with the provider regarding the status of the third-party case. Medical care liens are often done where the client is otherwise unable to pay for the care (e.g., where the client is either not insured or the care is not covered, and the client does not have sufficient funds to pay).
As for liens established "by operation of law," the statutory lien is the most common. Just as it sounds, these liens are established by statute. You should consult the statute directly to know your rights and obligations. Generally, these come up where a client receives some benefit or service mandated or provided by statute that is not otherwise covered by private insurance. Because these liens are statutory, common law rules and contractual terms generally do not apply.
Debt v. Right to Reimbursement. Some liens are based on an underlying debt. For example, if your client obtains treatment for injuries sustained in an accident, the treater will generate a bill. If the bill is not paid at the time of care, your client has incurred a debt. This debt may be secured by a lien.
Other liens are based on a "right to reimbursement." The lienholder has no rights at all unless the injured party makes a third-party recovery. For instance, when a health insurer pays medical expenses, the insurer often reserves the right to be reimbursed from the proceeds of any settlement. The right to reimbursement is conditioned on the third-party recovery.
This distinction can be important. With debt-based liens, satisfying the lien does not necessarily satisfy the debt. For example, if the debt exceeds the amount of the lien (such as when the lien is limited by statute), clearing the lien will not eliminate the debt. Also, the client's debt is not contingent on the outcome of the third-party claim. If your client fails to secure a recovery (e.g., loses at trial), or the recovery is less than the debt, the debt remains. For example, if your client runs up a significant medical bill secured by a lien but then fails to do well at trial (or in settlement), the client could be saddled with a significant debt on top of a disappointing outcome in the third-party case.
Subrogation. While liens involve a claim against a third-party recovery, subrogation is a distinct concept. In subrogation, the entity that covered the loss has the right to go directly against the responsible third party. This benefit provider "steps into the shoes" of the injured party for purposes of pursuing reimbursement. See Hodge v. Kirkpatrick Dev., Inc., 130 Cal. App. 4th 540, 548 (2005); see also Plut v. Fireman's Fund Ins. Co., 85 Cal. App. 4th 98, 104 (2000) ("'Subrogation is the insurer's right to be put in the position of the insured, in order to recover from third parties who are legally responsible to the insured for a loss paid by the insurer. [Citation]'.").
Courts generally recognize two forms of subrogation: (1) equitable or legal subrogation and (2) contractual or conventional subrogation. See Knight v. Alefosio, 158 Cal. App. 3d 716, 723 (1984). The former arises by law, while the latter is created by an agreement. Id.
Subrogation rights are often established by statute. See, e.g., Government Code Section 23004.1 (providing county health care providers subrogation rights); Labor Code Sections 3852, 3856 (establishing workers' compensation employer/insurer subrogation rights); Welf & Inst. Code Section 14124.71 (Medi-Cal subrogation rights). In many cases, the benefit provider can pursue reimbursement either through subrogation or by simply asserting a lien.
There are a couple reasons why subrogation rights can be important. First, generally, the entity that holds subrogation rights has more leverage in seeking reimbursement. If the entity seeking reimbursement cannot reach an agreement with the plaintiff in the plaintiff's third-party case, that entity can pursue its own direct claim for reimbursement. Second, as a practical matter, where an entity has subrogation rights, defendants will not settle the personal injury case without the subrogee involved. Otherwise, the defendant remains potentially liable for additional damages. For example, in work place injury cases, where the injured worker received workers' compensation, the defendant may not want to settle with the worker alone, concerned that the employer might pursue its own third-party subrogation claim. This can frustrate or slow down the settlement process.
Duty to Communicate with Lienholder. In most cases, the personal injury claimant/plaintiff will have a duty to communicate with potential lienholders. For example, where a plaintiff's care was paid for by Medi-Cal, plaintiff's counsel must notify the state director of Health Care Services of any legal proceedings against a third party and of any settlement to allow the director to perfect a lien for the benefits paid. See Welf. & Inst.C. Sections 14124.73(a), 14124.76, 14124.79. Where a plaintiff has received benefits under the Victims of Crime Program (Gov. Code Section 13950 et seq.), plaintiff's counsel must notify the Victim Compensation and Government Claims Board of any legal proceedings or settlement. See Gov. Code Section 13963. Where the client received workers' compensation benefits, the client/client's attorney must notify the employer (or employer's insurer) "forthwith" upon filing a third-party action (Labor Code Section 3853), and provide notice before settling with a third-party tortfeasor in time for the employer to protect its lien (either by intervening in the employee's action or bringing a separate action against the tortfeasor). See Labor Code Section 3860(a). With Medicare, the defendants and their liability insurers must notify the Centers for Medicare & Medicaid Services of any third-party litigation involving a Medicare beneficiary. See 42 U.S.C. Section 1395y(b)(7)(B). A liability insurer (including a self-insurer) must also report if the claim is resolved through a settlement, judgment, award or other payment. 42 U.S.C. Section 1395y(b)(8). In addition, some contractual lien agreements require the client (or the attorney) to provide notice of a third-party claim, recovery or both.
A claimant is not always required to give notice of a third-party claim or settlement. For example, Medicare beneficiaries are not required to give notice of a third-party claim. They are, however, required to reimburse Medicare within 60 days of receiving proceeds from a third-party settlement or judgment. 42 U.S.C. Section 1395y(b)(2)(B); 42 C.F.R. Sections 411.24(g), (h), (i), 411.26. Nor is there a statutory notice requirement in the case of county health care liens or hospital "emergency care" liens. Likewise, some contractual liens do not require the beneficiary to provide notice of a third-party claim.
You should be aware that there is an ethical component to these communication requirements. The lawyer may have an ethical duty to involve a prospective lienholder, regardless of the client's obligations or wishes. See, e.g., Matter of Riley, 3 Cal. State Bar Ct. Rptr. 91 (Rev. Dept. 1994) (attorney found in violation of several ethical standards for failing to properly communicate with various lienholders). In addition, the failure to address liens can expose the attorney or client to civil liability. See, e.g., Levin v. Gulf Insurance Group, 69 Cal. App. 4th 1282 (1999); Pearlmutter v. Alexander, 97 Cal. App. 3d Supp. 16 (1979); Siciliano v. Fireman's Fund Ins. Co., 62 Cal. App. 3d 745 (1976).
Made Whole Rule. The made-whole rule is a common law rule that limits an insurer's reimbursement rights. The rule precludes an insurer from recovering third-party funds paid to the insured until the insured has been fully compensated for his or her damages. 21st Century Ins. Co. v. Superior Court, 47 Cal. 4th 511, 519 (2009); Plut v. Fireman's Fund Ins. Co., 85 Cal. App. 4th 98, 102, 104 (2000); Sapiano v. Williamsburg Nat. Ins. Co., 28 Cal. App. 4th 533, 536 (1994).
The rule typically comes up where a plaintiff recovers less than his or her full damages. For example, if the plaintiff incurs $100,000 in medical care expenses but only recovers $100,000 in a third-party claim, paying back the full cost of care would leave the plaintiff with nothing. Even if the plaintiff recovers more than the amount of medical expense (e.g., $150,000), the plaintiff still might not be truly "made whole" if required to fully reimburse the lienholder. The non-medical expense damages may be many times what is left after paying full reimbursement. Note also that attorney fees and costs are not taken into consideration when evaluating whether a plaintiff has been "made whole." Allstate Insurance Co. v. Superior Court (Delanzo), 151 Cal. App. 4th 1512 (2007).
The main thing to know about the "made-whole" rule is that it does not apply in most cases. It seems to only apply in the context of reimbursement claims by private health insurers or health care providers and even then, only in limited circumstances. For example, it has never been successfully invoked in the case of hospital liens, county health care liens, or Medicare recovery claims. It has been expressly rejected in the context of workers' compensation. Duncan v. Wal-Mart Stores, Inc., 18 Cal. App. 5th 460, 474-75 (2017). And even in the case of private health insurers and medical providers, those entities have the right to contractually exempt themselves from the rule, and often do. See, e.g., Progressive West Ins. Co. v. Superior Court, 135 Cal. App. 4th 263, 281 (2005) (recognizing right of med-pay insurer to exempt itself from "made whole rule"); US Airways, Inc. v. McCutchen, 569 U.S. 88, 94-95 (2013) (same in context of ERISA-governed group health insurance plan); Samura v. Kaiser Foundation Health Plan, Inc., 17 Cal. App. 4th 1284, 1289-90 (1993) (upholding exemption contained in Kaiser health plan).
The news for plaintiffs is not all bad. For example, with Medi-Cal, there is a statutory equivalent of the made whole rule. The director of the Department of Health Care Services can only seek reimbursement from that portion of the settlement, judgment or award that represents payment for medical expenses. See Welf. & Inst.C. Section 14124.76(a). Also, some private health insurers have either not exempted themselves from the rule or not done so effectively. See Progressive West, 135 Cal. App. 4th at 281 (insurer cannot exempt itself from the rule unless the language attempting to do so is "clear.").
Common Fund Doctrine. Another rule that can impact lien claims is known as the "common fund doctrine." Under this doctrine, an insurer asserting a right to reimbursement can be required to contribute to the costs associated with pursuing the third-party recovery. An insurer that does not participate in the underlying action can be required to pay a pro rata share of the insured's attorney fees and costs. Progressive West, 135 Cal. App. 4th at 275. This "contribution" is enforced by reducing the amount of reimbursement claim.
Note that the "common fund doctrine" is a common law doctrine that generally does not apply to statutory liens. See, e.g., City and County of San Francisco v. Sweet, 12 Cal. 4th 105 (1995) (finding the county is not obligated to contribute to attorney fees and costs in the context of county health care liens). However, in some instances, the doctrine has been extended to statutory liens through a statutory equivalent. See, e.g., Welf. & Inst. Code Section 14124.72(d) (requiring Medi-Cal to reduce its lien 25 percent to contribute to attorney fees, along with a proportionate share of the costs of recovery); Lab Code Sections 3856, 3860 (requiring employers to contribute to the plaintiff's reasonable attorney fees in worker's compensation reimbursement liens). Also, just as with the "made-whole rule," even in those scenarios where the doctrine would otherwise apply, an insurer can potentially exempt itself under the insuring agreement. See, e.g., US Airways, 569 U.S. 88.
There are other limitations regarding lien rights. For example, with workers' compensation, the employer's right to reimbursement is reduced by the degree to which the employer (or co-employee) contributed to the worker's civil damages. Associated Const. & Engineering Co. v. Work. Comp. App. Bd., 22 Cal. 3d 829 (1978). With Medi-Cal, the director cannot recover more than the beneficiary recovers after deducting attorney fees and litigation costs paid for by the beneficiary from the settlement, judgment, or award. Welf. & Inst.C. Section 14124.78. With hospital liens, the lien cannot be asserted against more than one-half of the damages recovered (other than a "common carrier" regulated by the Public Utilities Commission or Interstate Commerce Commission). Civil Code Sections 3045.4, 3045.6. Also, some liens -- like hospital liens -- cannot be asserted against first party coverages like uninsured/underinsured motorist coverage. See Weston Reid LLC v. American Ins. Group, Inc., 174 Cal. App. 4th 940, 948-51 (2009).
There are other less frequent issues that come up in the context of personal injury liens. For example, in some cases, a lienholder can assign its lien claim to one party or the other or to a third party. The lien is generally purchased by one of these stakeholders. You should know the pros and cons of purchasing a lien, and how the assignment of a lien can impact a potential settlement or trial. Also, in certain circumstances, a plaintiff has the option of "settling around" a lien claimant. For example, this is done with some frequency in cases involving workers' compensation liens. You should understand when this might be a good option, and familiarize yourself with the fairly complicated steps necessary to execute such a settlement.
Dealing with liens is one of the most important aspects of the modern personal injury practice. It can also be one of the most perplexing. To protect yourself and your client, you should develop a broad understanding of the types of liens in these cases, the different features, and the steps necessary to properly address liens. You should understand your legal and ethical obligations, and make sure your client does too. With this understanding, you can design a systematic approach that will guide you through most if not all lien scenarios, without worrying that you've made a mistake or missed something important.