NJ Court Finds that Expenses Paid Pursuant to Med Pay Coverage Are Subject to Collateral Source Rule and Are Not Recoverable in a Subsequent Subrogation Action

This Law Division case involved a novel question as to whether costs and expenses paid pursuant to an insured’s Extended Medical Expense Coverage (“Med-Pay”) are subject to the collateral source rule and, hence, not recoverable in a subsequent subrogation action. Although there is case law on whether Personal Injury Protection (“PIP”) benefits can be subrogated, no reported decision had yet addressed whether the collateral source rule in N.J.S.A. 2A:15-97 precludes recoupment of Med-Pay payments by way of subrogation. In Mid-Century Insurance Co. v. Freeman, 2016 N.J. Super. Unpub. LEXIS 1127 (Law Div. May 16, 2016), the court found that Med-Pay payments are subject to the collateral source rule and, accordingly, cannot be recovered by way of subrogation.

In Mid-Century, the carrier sought a declaratory ruling that a cause of action existed under New Jersey law for the recovery of Med-Pay benefits through subrogation against the tortfeasor. The defendant carrier, New Jersey Indemnity, opposed the application, contending that the Med-Pay payments were subject to the collateral source rule.

The underlying facts of this case involved an injury suffered by Tanya Alvarado, an insured of Mid-Century, who was a passenger in a vehicle owned by Shore Service Co. when it was struck in the rear by a vehicle owned and operated by John Freeman, an insured of New Jersey Indemnity. Ms. Alvarado was a passenger in a taxicab, not an automobile, and, thus, was not eligible for PIP benefits. However, she was eligible for medical payments under the Med-Pay provisions of her automobile policy. Mid-Century paid $5,206 in medical payments on her behalf.

Mid-Century then filed an arbitration petition against New Jersey Indemnity to recover the $5,206 that it paid. New Jersey Indemnity asserted as an affirmative defense that New Jersey law bars recovery of Med-Pay payments. The arbitrator upheld their position and found that New Jersey law barred the claim.

In this declaratory judgment action, the court examined the statutory provisions in AICRA (N.J.S.A. 39:6A-1, et. seq.), as well as the Supreme Court’s reasoning in Perreira v. Rediger, 169 N.J. 399 (2001), in which the Court found that a health insurer that paid benefits to an insured had neither a common law, nor statutory subrogation right against the tortfeasor. Against this background, the Court found that the collateral source rule barred such a recovery for Med-Pay payments made.

The Court based its decision on two grounds. First, the origin of the insurer’s Med-Pay obligation is not found within the express mandate of the auto statute, N.J.S.A. 39:6A-1, et seq., but stems from the regulation, N.J.A.C. 11:3-7.3(b) and, thus, cannot be considered an action brought pursuant to N.J.S.A. 39:6A-1. Hence, because they are not required under the auto statute, their payment would make them subject to the terms of the collateral source rule of N.J.S.A. 2A:15-97. Second, the Med-Pay expenses can neither be characterized as workers’ compensation benefits, nor life insurance proceeds (exceptions under N.J.S.A. 2A-15-97) but, rather, do qualify as benefits under N.J.S.A. 2A:15-97. Thus, they enjoy no exception from the collateral source rule’s application. The court found such application to be consistent with the Supreme Court’s Perreira v. Rediger, 169 N.J. 399 (2001), that these Med-Pay expenses are not recoverable by way of subrogation. Accordingly, the Court ruled that the collateral source rule of N.J.S.A. 2A:15-97 bars Med-Pay subrogation actions and cannot be recovered against the tortfeasor.

Tags: Collateral Source Rule, Extended Medical Expense Coverage, Med-Pay, PIP, subrogation