Illinois Fund Doctrine

Illinois Fund Doctrine Illinois Association of Defense Trial Counsel By: Michael Todd Scott State Farm Insurance Company, Bloomington The Illinois Fund Doctrine, Can It Be Avoided? I. Introduction Since the Illinois Supreme Court handed down the Scholtens decision in 1996, there has been a lot of discussion about the common law fund doctrine. This press about the fund doctrine may lead your insurance clients to ask questions about how the doctrine works and how, as an insurance company, they can avoid application of the fund doctrine. Thus, the issue addressed by this article is how courts in Illinois apply the fund doctrine when an attorney for an insured collects money that under the insurance contract is subject to the subrogation rights of the insurance company. The article will begin by discussing the definition of the fund doctrine and will look at the tests that need to be met before the doctrine will be applied. The article will then look at the some cases in Illinois that have applied the fund doctrine. Finally, the article will discuss what steps an insurance company should take to avoid having to pay attorney s fees under the fund doctrine. II. A. The Fund Doctrine The fund doctrine is an equitable concept which provides that an attorney who performs services in creating a fund is entitled to be compensated out of the entire fund by all those who benefit from the creation of the fund. See, Smith v. Marzolf, 400 N.E.2d 949 (Ill.App.3d Dist. 1980); Wheaton v. Department of Public Aid, 416 N.E.2d 780 (Ill.App. 2d Dist. 1981); Dunn, Brady, Goebel, etc. v. State Farm Ins., 426 N.E.2d 315 (Ill.App. 4th Dist. 1981); Powell v. Inghram, 453 N.E.2d 1163 (Ill.App.3d Dist. 1983); Tenney v. American Family Mut. Ins. Co., 470 N.E.2d 6 (Ill.App. 4th Dist. 1984); Perez v. Kujawa, 602 N.E.2d 40 (Ill.App. 5th Dist. 1992); Brase v. Loempker, 642 N.E.2d 202 (Ill.App. 5th Dist. 1994). The fund doctrine was first recognized by the Illinois Supreme Court in Baier v. State Farm Ins. Co., 261 N.E.2d 1100 (Ill. 1977). The court, in Baier held that an attorney whose services, through representation of his client, resulted in recovery of a subrogation claim by his client s insurer was entitled to attorney s fees from the insurer. The court stated: [W]here a fund has been created as the result of legal services performed by an attorney for his client, and a subrogee of the client, who has done nothing to aid in creating the fund, seeks to benefit therefrom, the attorney is entitled to a fee from the subrogee in proportion to the benefit received by the subrogee. Id. Thus, in order for an attorney (or a person who employed the attorney and paid the attorney s fee) to recover fees from a subrogee under the fund doctrine a three part test must be met. Under this three part test the plaintiff must show: (1) that the fund was created as a result of legal services performed by an attorney (either the plaintiff or an attorney hired by the plaintiff), (2) that the subrogee did not participate in the creation of the fund, and (3) that the subrogee benefitted out of the fund that was created. See, Dunn, Brady, Goebel, etc., supra; Perez v. Kujawa, supra; Smith v. Marzolf, supra; McGee v. Robert Wayne Oldham & Mississippi Ave., Inc., 642 N.E.2d 196 (Ill.App. 5th Dist. 1994); Brase v. Loempker, supra; Tenney v. American Family Mut. Ins. Co., supra; Powell v. Inghram, supra. Furthermore, courts in Illinois have held that a plaintiff may not recover attorney s fees under the fund doctrine when the services have been rendered for an unwilling recipient. See, Beaton & Assoc., Ltd. v. Joslyn Mfg. & Supply, 512 N.E.2d 1286 (Ill.App. 1st Dist. 1987); Tenney v. American Family Mut. Ins. Co., supra.; Page 1 of 6

Brase v. Loempker, supra; McGee v. Robert Wayne Oldham & Mississippi Ave., Inc., supra.; Perez v. Kujawa, supra. Finally, courts have held that the fund doctrine should be applied only in cases where the subrogee is an insurance carrier and there is an express agreement between the insured and insurer subrogating the insurer to any claim the insured has against a third party tortfeasor. See, Boehm and Weinstein, Chtd. v. City of Chicago, 379 N.E.2d 4 (Ill.App. 1st Dist. 1978); Powell v. Inghram, supra; Tenney v. American Family Mut. Ins. Co., Supra. The best way to understand how the Illinois courts apply the three part test is to look at some of the cases applying the test. B. Illinois Cases Applying the Fund Doctrine In Sobczak v. Whitten, 393 N.E.2d 1080 (Ill.App. 5th Dist. 1979), GEICO argued that the fund doctrine was inapplicable because liability was clear and payment by the defendant was certain. In Sobczak, the injury to the plaintiff occurred on August 22, 1976. On September 22, 1976 the complaint was filed. Although liability was contested in the defendant s answer, the defendant planned to settle from the inception of the suit. The court held, though, that because negotiations by the plaintiff s attorney were required to cause a settlement to occur that an award of attorney s fees was proper under the fund doctrine. In Smith v. Marzolf (1980), supra, plaintiff was injured in an automobile accident in September of 1974. Aetna, the plaintiff s insurer, paid the plaintiff s medical expenses under the plaintiff s medical payments coverage. The plaintiff then filed suit against the defendant and Aetna was allowed to intervene for the purpose of protecting its subrogation rights under the policy. A jury verdict of $130,000 was awarded and the plaintiff requested attorney s fees from Aetna on its part of the judgement. Aetna argued that the fund doctrine should not be applied because it had given considerable help to plaintiff in the final resolution of the case and thus contributed to the creation of the fund. The court held that because Aetna s sole participation in the trial was limited to protect its subrogation rights Aetna did not contribute to the creation of the fund and therefore an award of attorney s fees under the fund doctrine was appropriate. In Dunn, Brady, Goebel, etc. (1981), supra, Lane, who was insured by State Farm, was injured in an automobile accident on June 19, 1975. State Farm paid the insured $28,000 in medical payments under the insured s policy. In July of 1975, the insured hired the plaintiff law firm to represent him in a personal injury lawsuit against the driver of the other automobile. In September of 1975, State Farm sent Commercial, the other driver s insurer, a notice of a subrogation lien. Commercial accepted liability in November of 1975 and informed State Farm that it would honor its lien. In January of 1976 plaintiff asked State Farm if it could represent State Farm on its subrogation claim. State Farm refused telling plaintiff that it would handle its claim directly with Commercial. In April of 1976, Commercial began making payments to State Farm in satisfaction of the lien. In June of 1976, plaintiff filed suit against the driver of the other automobile. In August of 1977, Commercial paid the remainder of State Farm s lien and State Farm issued Commercial a release. The plaintiff subsequently reached a settlement with Commercial and the suit was dismissed in September of 1977. Plaintiff then requested attorney s fees from State Farm. State Farm argued that the fund doctrine was inapplicable because its own actions, not those of plaintiff, were responsible for the subrogation claim being settled. The court held that because Commercial acknowledged and agreed to honor State Farm s subrogation claims irrespective of the personal injury claim and the fact that State Farm expended direct and substantial time and energy in pursuing its subrogation claim directly with Commercial that an award of attorney s fees under the fund doctrine was inapplicable. In Powell v. Inghram (1983), supra, plaintiff was injured in an automobile accident on May 18, 1977. On May 11, 1979, plaintiff signed and submitted a claim for medical expenses to Country Mutual, the plaintiff s insurer. Subsequently, Country Mutual sent Allstate, the defendant s insurer, a notice of lien. Country Mutual also sent a letter to plaintiff s attorney which stated: [W]e are not employing you to recover our subrogation money paid under the medical benefits of the policy, but merely notifying you of our subrogation rights so you might protect our interests in the event settlement is reached with Allstate. Country Mutual did not participate Page 2 of 6

in the settlement and refused to pay attorney s fees. The court held that an award of attorney s fees was proper under the fund doctrine because Country Mutual refused to employ plaintiff s attorney while at the same time sought to benefit from his services in obtaining a settlement fund. In Tenney v. American Family Mut. Ins. Co. (1984), supra, a vehicle driven by Robin Moore was struck on May 13, 1981 by a vehicle driven by Barbara Spencer. Defendant Moore s insurer paid his medical expenses under its medical payments coverage and notified him that it had a subrogation claim against Spencer to the extent of the medical payments. Defendant also told Moore that it would deal directly with Spencer s insurer regarding the subrogation claim. On January 14, 1982, Moore hired the plaintiff to represent him in a personal injury suit against Spencer. On February 25, 1982, defendant notified plaintiff by letter that he was not to collect the subrogation claim. A settlement was reached in November of 1982 and plaintiff requested attorney s fees from defendant. The defendant in Tenney, American Family, argued that the fund doctrine was inapplicable because: (1) plaintiff was notified that he was not representing the defendant, (2) plaintiff forced its services on defendant and (3) defendant assisted in the creation of the fund. The court rejected the defendant s third argument stating that the record showed that it was through plaintiff s negotiation that the suit was settled. The court, though, found the defendant s first two arguments persuasive and held that the fund doctrine was inapplicable to this case. The court reasoned that this case differed from Powell v. Inghram, supra, for several reasons. First, the attorney in Powell had filed suit and had been in the case for ten months before the insurance company indicated that he would not be retained as counsel. The attorney in the present case filed suit nine moths after receiving notification from the insurance company. Secondly, the court reasoned that the plaintiff could have filed suit on behalf of his client for damages minus the insurer s subrogation claim. The letter sent by the insurer to the plaintiff s attorney in this case came to be known as a Tenney letter. In Perez v. Kujawa (1992), supra, plaintiff was involved in an automobile accident with the defendant in February 1987. Plaintiff was insured for medical payments coverage by Insurance Company of Illinois (ICI). Plaintiff originally hired an attorney, Strojny, to file suit against the defendant. ICI sent Strojny a certified letter that stated: ICI will represent its own subrogation interest as to medical payments advanced... This company, therefore, neither solicits your services to represent it in this regard nor will it recognize any lien upon the subrogation amount claimed under the fund doctrine for services gratuitously given. ICI also notified defendant s carrier, State Farm, of its subrogated claim. Subsequently, plaintiff hired a different attorney. On April 23, 1987, the new attorney, Concannon, filed suit on plaintiff s behalf against defendant. ICI, when it learned that Perez had retained a new attorney, again sent notice that it would represent its own subrogation claim. The court in Perez v. Kujawa held that under the facts at hand, the fund doctrine did not justify an award of attorney s fees. The court used the reasoning of Tenney, supra and stated that because ICI sent a letter to the insured and the insured s attorney notifying them of ICI s subrogation lien and its disclaimer of any intention to employ the insured s attorney, and the fact that Concannon filed suit after this letter was sent was enough to make the fund doctrine inapplicable. The court distinguished Powell v. Inghram, supra, because the insurer in Powell requested the attorney to protect its interest. In the present case, ICI unequivocally advised plaintiff and his attorney of its intention to pursue its own subrogation lien and its disclaimer of any intention of employing plaintiff s attorney. Also, in Powell the insurer did not notify the attorney until ten months after plaintiff had filed suit, while in the present case ICI promptly notified plaintiff s attorneys. The court, however, did state: We do not interpret Tenney to preclude application of the fund doctrine whenever an insurer notifies its insured or an attorney representing its insured of its intention to pursue its own subrogation interests. Nor Page 3 of 6

do we so hold. Rather, under the circumstances of this case, as in Tenney, it would be inequitable to apply the fund doctrine. In McGee v. Robert Wayne Oldham & Mississippi Ave., Inc. (1994), supra, plaintiff was involved in an automobile accident on April 4, 1991 with a car driven by the defendant Oldham. Before the accident Oldham had been drinking at a saloon owned by the other defendant, Mississippi Ave., Inc. Plaintiff was insured by American with a policy that contained medical payments coverage. On April 19, 1991, plaintiff retained an attorney to represent him against the defendants. Suit was filed on May 13, 1991. Subsequently, plaintiff filed a claim for medical payments with American. On September 17, 1991, American notified Safeco, defendant s insurer, of its subrogation claim. Furthermore, American sent letters to Safeco on November 27, 1991, March 5, 1992 and May 4, 1992, requesting status updates on whether Safeco expected the matter to be settled soon. On July 9, 1992, American wrote to plaintiff s attorney advising him of American s subrogation lien and notifying him that American intended to represent its own interests. On October 26, 1992, Safeco sent American a letter stating that it would honor American s subrogation lien and that it was presently negotiating a settlement with plaintiff s attorney. On December 9, 1992, a settlement was reached between Safeco and plaintiff s attorney. On January 8, 1993, after the settlement was reached, American entered its appearance. The court held that under the facts in McGee v. Robert Wayne Oldham & Mississippi Ave., Inc. the fund doctrine was applicable and attorney s fees should be awarded. The court reasoned the fund doctrine was applicable because: (1) American did not notify plaintiff s attorney of its intention to represent its own interest until fourteen months after suit was filed; (2) American did not participate in the creation of the fund, evidenced by American s passive position in the litigation and its letters to Safeco requesting information on when the suit would be settled, and (3) American did not enter its appearance until one month after a settlement was reached. Furthermore, the court stated that: an insurance company s mere writing of a letter to plaintiff s attorney expressing its desire to represent its own interest, without more, is not enough to overcome the fund doctrine. We believe equity requires more. What is necessary is for the subrogee to show some participation in the creation of the fund reflecting more than a desire to protect its subrogation rights. Finally, in Brase v. Loempker, supra, plaintiff was involved in an automobile accident on April 4, 1992 with defendant. Plaintiff was insured by Country Mutual and defendant was insured by State Farm. Country Mutual paid plaintiff s medical bills pursuant to its medical payments coverage. On May 15 and May 22, 1992, Country Mutual sent letters to State Farm stating: please keep our subrogation rights in mind when settling your claim with [plaintiff]. On June 2, 1992, Country Mutual wrote plaintiff s attorney informing him of its intention to pursue its own subrogation rights. On June 15, 1992, suit was filed. The trial court, relying on Tenney ruled that Country Mutual would not have to pay attorney s fees because there was no reason why plaintiff s counsel could not have filed suit on behalf on his client for damages without including the subrogation claim. The appellate court revered the trial court and held that under the facts in Brase v. Loempker that the fund doctrine was applicable and that Country Mutual should pay attorney s fees. The court stated that Tenney is not to be interpreted to preclude application of the fund doctrine whenever an insured notifies its insured, or an attorney representing its insured, of its intention to pursue its own subrogation interests. The court held instead that each case must be judged on its own unique facts. The court then reasoned that the fact that Country Mutual made an express disclaimer of employment to plaintiff s attorney while at the same time asking State Farm to protect its subrogation rights when settling with the plaintiff showed that it was the plaintiff s attorney who was negotiating with State Farm and not Country Mutual. The court noted that Country Mutual refused to file for arbitration, reasoning that this also showed that Country Mutual was not involved in negotiations with State Farm. Furthermore, the court specifically rejected the trial court s reliance on Tenney stating: Page 4 of 6

We, however, do not believe that plaintiff could have split the medical payments made by Country Mutual from the rest of the damages without weakening the plaintiff s case. Medical payments in such a suit indicate much more than the amount owed to doctors and hospitals. They tend to establish or lend credence to... claims for pain and suffering and lost wages. We agree with plaintiff s attorney that the Tenney letter, along with County Mutual s refusal to arbitrate... and the letters to State Farm asking State Farm to protect Country Mutual s subrogation rights, left plaintiff in an unenviable position. Plaintiff s choices were to split his cause of action against the tortfeasor, to bear the entire cost of collection, and/or to wait out the two-year limitations period on the arbitration agreement... in order to bring Country Mutual to settlement. By boxing the insured into such a position, Country Mutual was not being fair to its own insured.... In the instant case Country Mutual s refusal to arbitrate, combined with its refusal to assist plaintiff while at the same time asking State Farm to keep Country Mutual s subrogation rights in mind when settling with [plaintiff], constitutes bad faith. More recently in Scholtens v. Schneider, 671 N.E.2d 657 (Ill. 1996) and in Blackburn v. Sundstrand Corp., 115 F.3d 493 (7 th Cir. 1997), both the Illinois Supreme Court and the United States Court of Appeals for the Seventh Circuit have held that the common fund doctrine was not pre-empted by ERISA. Likewise, in Young v. Mory, 1998 Ill.App. LEXIS 55 (1998), the Appellate Court of Illinois, Fifth District has held that regulations under SERS do not override the common fund doctrine. III. Conclusion In conclusion, the fund doctrine is an equitable concept which provides that an attorney who performs services in creating a fund is entitled to be compensated out of the entire fund by all those who benefit from the creation of the fund. Furthermore, courts have held that the fund doctrine should be applied only in cases where the subrogee is an insurance carrier and there is an express agreement between the insured and insurer subrogating the insurer to any claim the insured has against a third party tortfeasor. For a plaintiff to collect attorney s fees under the fund doctrine a three part test must be met. The plaintiff must show: (1) that the fund was created as a result of legal services performed by an attorney (either the plaintiff or an attorney hired by the plaintiff), (2) that the subrogee did not participate in the creation of the fund, and (3) that the subrogee benefitted out of the fund that was created. Finally, courts in Illinois have held that a plaintiff may not recover attorney s fees under the fund doctrine when the services have been rendered for an unwilling recipient. In applying the three part test, one will notice that in almost all situations part one, that the fund was created as a result of legal services performed by an attorney, and part three, that the subrogee benefitted out of the fund that was created, will be met. Thus, in order to avoid having to pay attorney s fees under the fund doctrine, an insurance company must focus on part two, that the subrogee did not participate in the creation of the fund. Furthermore, an insurer must also rely on the holdings that state that a plaintiff may not recover attorney s fees under the fund doctrine when the services have been rendered for an unwilling recipient. The question then becomes what exactly must an insurance company do to meet these requirements. First, an insurance company must always send a Tenney letter to both the insured and the insured s attorney. This letter must contain notice of the insurer s subrogation claim; notice that the insurer will represent its own subrogation interest as to medical payments advanced; notice that the insurer will deal directly with the other insurer (if applicable), and notice that the insurer neither solicits the insured s attorney s services to represent it in the matter nor will it recognize any lien upon the subrogation amount claimed under the fund doctrine. This letter must be sent immediately to both the insured and the insured s attorney and must always be sent before suit is filed or settlement negotiations begin. It is important to remember, though, that the courts in Illinois have held that Tenney is not to be interpreted to preclude application of the fund doctrine whenever an insurer merely notifies its insured, or an attorney representing its insured, of its intention to pursue its own subrogation interests. Thus, an insurance company must take additional steps to avoid application of the fund doctrine. Page 5 of 6

Second, an insurance company must participate in the creation of the fund. This means that the insurer must either take steps to settle the subrogation claim with the other insurer (or with the defendant) prior to litigation or participate in the litigation with the insured. Under the decision in Brase v. Loempker, an insurer who waits to arbitrate the subrogation claim with the other insurer and, in effect, forces the insured to either split his cause of action against the tortfeasor, to bear the entire cost of collection alone, and/or to wait out the limitation period on the arbitration agreement, is engaged in bad faith. Thus, when an insurer has a subrogation claim that involves another insurance company, it should follow one of two routes: (1) if the other insurer will not take responsibility, it should request arbitration immediately instead of waiting for the insured s litigation or settlement negotiations to be complete; (2) if the other insurer assumes responsibility, it should make sure that the other insurer makes payment immediately instead of waiting for the insured s settlement negotiations to be complete. If an insurance company follows these steps it may be able to avoid the application of the fund doctrine. Page 6 of 6