Montana Supreme Court Says No Bad Faith When Carrier Refused to Pay Settlement Because Medicare Liens Were Not Resolved

November 21, 2016

Opinion Holds the Carrier Would Not Be Protected From Government Enforcement Action by Settlement Agreement That Places Responsibility for Lien on Plaintiff to Protect Medicare's Interests

When faced with a Medicare lien, carriers often use settlement agreements that state the plaintiff will take responsibility for resolving the lien and promising to indemnify the carrier from any governmental actions. Some carriers, however, refuse to settle unless the conditional payment issue is resolved. Pursuant to the Medicare Secondary Payer Law, an insurer can be liable for twice the amount of the Medicare lien if it does not "protect Medicare's interests."

In West v. United Services Automobile Association, No. DA 16-0097 (Mont. Nov. 9, 2016), the Montana Supreme Court held that an insurer could not be liable for bad faith for refusing to fund an agreed to settlement based on the carrier's position that the Medicare issues had to be resolved as part of the settlement. As a result, the court threw out a $1.46 million verdict against State Farm.

Plaintiff argued in favor of holding State Farm liable, claiming that plaintiff offered to take on the responsibility to resolve the Medicare lien itself and therefore State Farm should have funded the settlement. In shooting this argument down, the Court stated:

Contrary to West's argument, neither Lee's offer to indemnify nor his obligation pursuant to 32 C.F.R. 199.12(h)(3) to "cooperate" with the United States in any reimbursement action by the United States against USAA affects USAA's statutory obligation to reimburse TRICARE (a secondary payer under the Medicare statute), nor do they impact the United States' right to recover medical payments from USAA. Any agreement between Lee's counsel and USAA would not bind the government or exempt USAA from federal law.

It is nice to see the Montana Supreme Court hold for an insurer and reverse a judgment finding bad faith. Perhaps more importantly, carriers should take note that, at least in the view of Montana's highest court, placing the responsibility to "protect Medicare's interests" on the plaintiff does not provide a safe harbor against a governmental enforcement action for doubled damages. Many carriers, especially in smaller cases, often decide to settle with such a release and we've seen little to no negative effects from doing so. But if CMS gets better at enforcement and plaintiffs don't follow through, there could be repercussions for the settling insurer.