Wilson v. State Farm Mutual: No Bad Faith where Insurer Refuses to Pay Limits until Medicare Lien Amount is Determined

Posted date in Jason D. Lazarus, J.D., LL.M., MSCC Medicare Secondary Payer Act

In Wilson v. State Farm Mutual, a Kentucky federal district court was forced to address the issue of whether an insurer’s decision to await Medicare’s determination of a conditional payment amount before paying settlement proceeds amounted to bad faith.  The court found it was not bad faith.  Wilson was injured in an automobile accident in a vehicle insured by State Farm.  The driver of the other vehicle who was at fault was uninsured.  State Farm settled with Wilson for the policy limits of $50,000 for uninsured benefits.  Wilson incurred significant medical bills as a result of the accident and a portion of those bills was paid by Medicare.

After an agreement to settle was reached, State Farm attempted to determine the amount of the Medicare conditional payment and requested permission to negotiate with Medicare directly.  Wilson refused the request and instead asked State Farm to deposit the full policy limits in escrow from which the Medicare conditional payment would be reimbursed once the final demand was ascertained from the MSPRC.  Wilson also agreed to hold State Farm harmless from any claim by Medicare.  State Farm would not agree to this and instead suggested including Medicare as a payee on the settlement check which Wilson rejected.  After Wilson rejected having Medicare be included as a payee on the check, State Farm decided to wait for a final demand from Medicare on the repayment of the conditional payment then issue separate checks to Medicare and Wilson. 

While waiting for Medicare to issue their final demand, Wilson filed an action for bad faith.  The theory was that it was bad faith to delay payment of the $50,000 more than thirty days merely to “protect Defendant from later liability to Medicare.”  Two months after filing the bad faith action, Medicare provided the final repayment amount for the Medicare conditional payment.  The following day, State Farm paid both Medicare and Wilson. 

In addressing the question of bad faith, the court first laid out the factors for bad faith in Kentucky.  “To have acted in bad faith, an insurance company must (1) have an obligation to pay the claim at issue; (2) not have a reasonable basis for failing to pay the claim; and (3) know that it lacked a reasonable basis to delay payment or act in reckless disregard to the existence of that basis.”  The court recognized that the central part of the dispute centered on whether State Farm had a reasonable basis to delay payment.  The Wilson court did recognize that Wilson had the “primary responsibility to repay Medicare” under 42 C.F.R. § 411.24(h).  Nevertheless, the court pointed out that State Farm was “absolutely liable to Medicare should Plaintiff not satisfy the Medicare lien from his settlement funds” under 42 C.F.R. §411.24 (i)(1) (stating "If Medicare is not reimbursed . . ., the primary payer must reimburse Medicare even though it has already reimbursed the beneficiary or other party.").  Furthermore, the court stated that “State Farm may have an obligation to protect Medicare's lien under the Medicare Secondary Payer Act and its corresponding regulations” citing 42 U.S.C. § 1395y(b)(2) and 42 CFR § 411.24(i)(1).  “For State Farm to consider these obligations seems responsible.”

Curiously, the Wilson court pointed to cases where it was found reasonable to include Medicare as payee on a settlement check but ignored more recent cases to the contrary.  Ultimately the court held that “where the Medicare lien is determinable, State Farm had sound reasons to try to determine the amount of it and take reasonable precautions to protect itself from overpayment.”  “Moreover, for State Farm to suggest including Medicare as a co-payee was certainly reasonable.”

The problem with the decision is that it gives insurers in Kentucky the freedom to hold all of the settlement proceeds back while waiting on what can be a significantly delayed response from the MSPRC.  Issuance of a final demand letter can be a lengthy process if the proper legwork isn’t done in advance of settlement.  Since there is no bad faith claim in Kentucky under these circumstances, there is no “hammer” to force an insurer to pay prior to a demand from Medicare.  This results in needed funds being held even though they may not be damages for past medical.  So what is the lesson from Wilson?  One lesson is to get the process of resolving Medicare conditional payments started early on prior to settlement by putting the COBC on notice and providing the necessary documents to Medicare.  Prior to mediation request a conditional payment letter so you know the amount Medicare is claiming and audit it for unrelated care.  At least that puts you in a position to resolve the issue quickly once a settlement is reached with the insurer.