When a No-Fault Release Fails to Protect an Insurer from a Medical Provider’s Claims

In a recently published opinion, the Michigan Court of Appeals held that a release signed by an insured did not discharge a no-fault insurer’s liability where the insurer has received separate claims from a medical provider.

In Covenant Medical Center v State Farm, State Farm’s insured (who was not a party to the litigation) was injured in a 2011 motor vehicle accident. The plaintiff, Covenant Medical Center, provided medical services to the insured and later billed State Farm for the services, sending bills in July, August, and October of 2012. Later, the underlying insured settled with State Farm and executed a release of all claims incurred through January 10, 2013, which included the time period during which Covenant Medical Center rendered its services.

Covenant — apparently unhappy with the settlement terms entered into by the underlying insured — then sued State Farm for payment of its bills. State Farm responded with a motion for summary disposition, arguing that the claims were barred by the settlement and the release signed by the insured as part of that settlement. The trial court agreed, granting summary disposition for State Farm.

On appeal, however, the Court of Appeals reversed, holding Section 500.3112 of the Michigan No-Fault Act precluded summary disposition for State Farm, relying on the following statutory language:

Payment by an insurer in good faith of personal protection insurance benefits, to or for the benefit of a person who it believes is entitled to the benefits, discharges the insurer’s liability to the extent of the payments unless the insurer has been notified in writing of the claim of some other person.

The Court held that “the plain text of the statute provides that if the insurer has notice in writing of a third party’s claim, then the insurer cannot discharge its liability to the third party simply by settling with its insured.” Thus, where an insurer settles with its insured, the settlement is not “in good faith” if the insurer is “aware of a third party’s right and seeks to extinguish it without providing notice to the affected third party.” Because Covenant Medical Center had submitted bills to State Farm in writing, the Court held that State Farm’s settlement with its insured did not discharge its liability to Covenant Medical Center.

The Court’s holding will have a dramatic impact on how insurers litigate and settle no-fault claims in Michigan. The longstanding practice has been for an individual insured to “claim” the bills of the insured’s various medical providers as part of his or her no-fault claim, unless a medical provider separately sued for payment of its bills or disclaimed the insured’s ability to represent their bill in the underlying litigation. When the insurer and its insured settled a no-fault claim in the normal course, the insured (or his or her attorney) would then pay the outstanding medical bills out of the settlement amount.

This common practice has been turned on its head by the Court of Appeals’ holding. In order to properly protect a settlement, insurers and their counsel must be diligent in seeking circuit court approval of all PIP settlements in accordance with MCL 500.3112:

If there is doubt about the proper person to receive the benefits or the proper apportionment among the persons entitled thereto, the insurer, the claimant or any other interested person may apply to the circuit court for an appropriate order. The court may designate the payees and make an equitable apportionment, taking into account the relationship of the payees to the injured person and other factors as the court considers appropriate.

While MCL 500.3112 does not explicitly protect no-fault insurers from additional liability even when Court approval of a settlement and distribution is sought, the Court of Appeals strongly suggested that following this procedure would have insulated State Farm — and therefore other insurers — from further liability. Good practice also dictates that insurers notify all medical providers from whom the insurer has received claims of the pending settlement.

This procedure will undoubtedly hamper quick settlements. On its face, the opinion stands for the proposition that in order to settle a no-fault claim, the insurer can only protect itself if it notifies each and every medical provider that has submitted bills during the life of the claim of an impending settlement.

The opinion also raises numerous practical difficulties in settling no-fault claims. For example, MCL 500.3112 provides that an insurer may apply to a circuit court for approval of the settlement. But what if a claim is not in suit or the case is pending in a district court? The Court of Appeals opinion simply does not address this issue.

In addition, the Court does not address what it means to have been “notified in writing of the claim of some other person.” Is it enough for the medical provider to simply submit their bills to the insurer, or does the provider need to send something in addition to the bills? If all that is required is submission of bills, then the holding seems to conflict with binding precedent in Perkovic v Zurich American Insurance Company, in which a medical provider’s bills were held to be insufficient to constitute written notice of a claim.

While there has been no indication yet of an appeal to the Michigan Supreme Court, we will continue to monitor developments in this case. If you have any questions, please feel free to contact any of our insurance defense attorneys.

Michael Schwartz is a commercial litigator, helping his clients resolve disputes with creativity and pragmatic, business-focused thinking.