Insurance Subrogation Liens: The Common Fund Doctrine in Illinois

January 9, 2012
By John J. Malm on January 9, 2012 5:14 PM |

The common fund doctrine serves to limit an insurance company's recovery of insurance liens from a Plaintiff's settlement. The common fund doctrine is an exception to the American rule on attorney's fees. Typically, each party is responsible for their own attorney's fees unless there is a statute or an agreement between the parties to the contrary. However, the common fund doctrine allows an attorney to collect a reasonable fee from a fund created through the attorney's efforts. The rationale is to prevent the unjust enrichment of other parties, such as an insurance company, through the lawyer's hard work, without paying their fair share.

Commonly, this doctrine is applied in cases involving car accidents, pedestrian accidents, and bicycle accidents in which the plaintiff's insurance company has paid for medical expenses for the plaintiff's injuries and is seeking repayment from the at-fault defendant's insurance company. For the common fund doctrine to apply, the attorney must create the fund through legal services, the subrogee or claimant must not have participated in bringing about the creation of the fund, and the subrogee received a benefit from the common fund. However, the doctrine will not apply when the subrogee expresses a prompt, clear, and unequivocal desire to pursue its own subrogation claim against the defendant's insurance company.

In Illinois, this prompt, clear, and unequivocal desire is expressed in a Tenney letter. Tenney v. American Family Mutual Insurance Co., 128 Ill.App.3d 121 (1984). Courts have required that this letter be unequivocal and prompt. A mere token protest against application of the doctrine does not suffice. If the insurance company makes any kind of request of the Plaintiff's attorney to protect their rights, even if they state there is no intention of employing the attorney, the common fund doctrine will be applied because the insurer is benefitting from the legal services of the attorney. Any delay in informing the Plaintiff of the claim may result in application of the doctrine. The courts seem to require notice to be sent prior to the filing of a claim against the defendant. The insurance company must merely know that the Plaintiff has a potential claim, and need not wait for the Plaintiff to retain counsel.

Illinois courts have also found that the doctrine does not apply when the Plaintiff's attorney knows that the insurance company is an unwilling participant. However, a mere letter may not be sufficient if the insurance company takes no action other than to protect its subrogation rights. The insurance company must make a bona fide effort to participate in the litigation.

In a recent Illinois case, the Second District found that the common fund doctrine applied when the Plaintiff's insurance company failed to notify the Plaintiff of its intent to pursue its subrogation claim on its own, even though it had filed an arbitration claim against the Defendant's insurance company and never filed a lien against the Plaintiff's claim. Wajnberg v. Wunglueck, 2011 IL App (2d) 110190. In finding against the insurance company, the court noted that the insurer had notice of the possible claim well before the Plaintiff filed suit, as demonstrated by a letter to the Defendant's insurer requesting they protect the Plaintiff's insurer's rights to subrogation. However, notice was never sent directly to the Plaintiff or the Plaintiff's attorney. Instead, the Plaintiff first learned of the arbitration when the Defendant's insurer provided the Plaintiff with a copy of the letter approximately six months after the lawsuit was filed.

Plaintiff and Defendant came to a settlement of $40,000.00 which both sides believed included the Plaintiff's insurer's subrogation claim. The Plaintiff then sought to adjudicate liens. Because the insurer failed to show up for the hearing, the court reduced the lien to zero. Nine days later, the insurer finally took action and filed a motion to vacate the order, which was granted. However, upon Plaintiff's motion, the trial court later vacated its second order and reduced the insurer's lien by one third pursuant to the common fund doctrine.

Litigation can be complicated, especially when you are injured and questions about liens are involved. If you have been injured, it is important to seek the advice of an experienced attorney. Proper lien resolution is important in personal injury claims.