In the Wake of Covenant – Shah v. State Farm

On May 8, 2018, the Michigan Court of Appeals released an important published decision in Jawad Shah v. State Farm Mutual Automobile Ins. Co., _____ Mich. App. _____ No. 340370. (May 8, 2018), which, for the moment at least, has cleared up some of the issues left unresolved in the wake of Covenant.  

In this new published decision by the Michigan Court of Appeals an injured party (Jawad Shah) and several intervening providers filed suit against State Farm for No-fault benefits.  In relying on Roger Williams Ins. Co. v. Carrington, 43 Mich 252; 5 NW2d 303 (1880), the court of appeals concluded that “enforcing the anti-assignment clause in these circumstances to prohibit an assignment of an accrued claim after the loss has occurred is against Michigan public policy…” and also held that an individual cannot assign rights beyond those he has at the time an assignment is entered into, i.e., that the 1 year back rule will apply at the time the assignment is executed for those actions filed before the assignment is signed.

As background to the Shah decision, it’s worth remembering that on May 25, 2017, the Michigan Supreme Court released its decision in Covenant Medical Center v State Farm, Docket No.152758 _____ Mich ____ (2017).  In its decision, the Michigan Supreme Court ruled that medical providers do not have an independent statutory right to file suit against a no-fault insurance carrier to recover payment of medical expenses incurred by their patients.  During oral arguments, one of the supreme court justices frequently stated that the Providers could simply sue their patients to recover the balances, but left open assignments as an avenue of recovery.

But let’s step back for a moment and ask a simple question: Why does all this matter?  Couldn’t the providers just give their bills to the injured party’s attorney like they did 20 years ago?  Or alternatively, couldn’t they just sue the patient directly?  The short answer is “yes,” of course they could, but it seems axiomatic that if we assume these providers are (mostly) rational actors, given the fact that these providers had undertaken the decision to directly sue the insurance companies before the Covenant decision was released, they must have been seeing higher returns on their investment than when they attempted to collect from the insurance company indirectly, i.e. by suing the patient.  Thus, presumably, these same providers likely believe that an assignment, when upheld, will function in much the same way as pre-covenant lawsuit, i.e. they will provide a higher recovery than if they try to recover directly from the patient.

And this makes sense. Generally speaking, the No-fault act requires full payment of all reasonable and necessary claims related to a motor vehicle accident. And the no-fault act pays at a higher rate than Medicaid, Medicare, or Private health insurance.  Further, collecting from an injured party’s attorney can be difficult as the provider may have little or no bargaining power, and collecting from the patient is often even worse; the patient could easily be out of work and a mere stone’s throw from bankruptcy -something which can discharge all of their debt. No-fault insurers, on the other hand, are presumed to be quite financially sound.

So, with providers having a strong incentive to increase their return on investments from their services to patients, and insurance companies having the strong and opposite incentive to prevent what they would call over-billing (or even fraud in some circumstances), the battles rages on in Michigan’s lower courts.  

In the immediate aftermath of Covenant, Defendant Insurance Companies across the state began immediately filing motions to dismiss provider suits for various reasons, in some cases arguing that Covenant completely barred any action by a provider. However, providers and their attorneys saw hope in footnote 40 of the Covenant decision, which stated:

As a result, courts across the state were split into essentially two different camps.  In one camp, those judges who believed the spirit of Covenant was more absolute, namely, that Providers lacked any standing to sue, and that assignments were entirely invalid regardless of the circumstances.  Another, and seemingly larger camp, believed that assignments were valid (given the often cited footnote). However, that second camp was itself split in many different ways on how to handle assignments.  Was an anti-assignment clause in an insurance contract valid? If so, was it valid against just the signatory to the contract or against every claimant to the policy?  Was a suit filed before an assignment was procured protected for the purposes of a statute of limitations claim? Can one accident result in a cause of action being split into multiple claims or even in multiple courts?  

With the Shah decision, at least some of those questions are now answered (at least until the court of appeals changes their mind or the supreme court weighs in again).  Now, in the no-fault context anti-assignment clauses are unenforceable as a matter of public policy.  Additionally, a provider won’t be able to protect their statute of limitations by filing suit and then later obtaining an assignment.  

But this doesn’t mean the arguments over assignments will end.  An insurance company can still question the validity of an assignment.  Is a signature valid? Does the patient have a guardian?  Is the language of an assignment proper?  Does it waive future benefits? Does it unequivocally give up the patient’s right to sue, or is it revocable?  Can the patient and providers file multiple lawsuits in different courts as different causes of action, or must they all be combined into a single action in a single court? These questions must still be asked and will be answered in different ways by different courts.

Further, with the Shah decision based upon an 1880s Supreme Court decision with a very different set of facts and a very different supreme court, you can almost guarantee State Farm won’t shy away from taking this decision to Michigan’s highest court.  In essence, nothing is certain in the long run.

But for now, at least, those providers which require every patient to sign these agreements will be pleased; and they will even more fervently pursue their bills against Michigan’s no-fault insurers.

-John T Schroder