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NC Legislature Delays Implementation of New Laws on Attorneys’ Fees and Evidence of Medical Expenses

By Thomas Nance

As we previously reported to you in July, the North Carolina legislature recently changed the Attorneys’ Fees Statute, NCGS §6-21.1, and created a new rule of evidence regarding the admissibility of medical bills in personal injury trials. These changes were originally supposed to go into effect and apply to lawsuits filed on or after October 1, 2011. This meant that plaintiffs and their lawyers had to file suit on any existing personal injury claims or property damage claims by no later than September 30, 2011, if they wanted the current law to apply to their case, instead of the new law.

The legislature has now amended the new law on attorneys’ fees and medical expenses. Now, the new law applies to causes of action arising after October 1, 2011, not lawsuits filed on or after October 1. This means that the new law only applies to accidents, injuries, and personal injury and property damage claims that actually occur on or after October 1. Any existing claims, and any accidents, injuries, damages and claims that occur between now and October 1, are not affected by the new laws.

Links to the original session law and the amendment are below:

http://www.ncleg.net/EnactedLegislation/SessionLaws/HTML/2011-2012/SL2011-283.html

http://www.ncleg.net/EnactedLegislation/SessionLaws/HTML/2011-2012/SL2011-317.html

Important Changes to the NC Rules of Evidence Regarding Medical Expenses

By Thomas Nance
tnance@deandgibson.com
July 18, 2011

North Carolina House Bill 542, recently signed into law by Governor Bev Purdue, makes several significant changes to North Carolina law, particularly in the area of personal injury litigation. Last week's newsletter article discussed the changes to the North Carolina Attorneys' Fees Statute. This week, I am discussing newly created Rule 414 of the North Carolina Rules of Evidence, relating to the admissibility of medical expenses at trial. A copy of the recently passed House Bill can be found here:

http://www.ncleg.net/EnactedLegislation/SessionLaws/HTML/2011-2012/SL2011-283.html

Rule 414 states that evidence of medical expenses is limited to evidence of the amounts actually paid to satisfy the bills, as well as the amount actually needed to satisfy any unpaid and outstanding bills. This is a significant change in the law and will have a significant effect on personal injury litigation in particular.

As many of you know, the face value of medical bills is very often much higher than the amount actually paid in satisfaction of those same medical bills. Medicare, Medicaid and private health insurers often pay substantially less than the face value of the bills, pursuant to prior agreements with health providers establishing much lower rates for healthcare services. In accordance with such agreements, healthcare providers accept these substantially reduced amounts as payment in full for the medical services provided and effectively write-off the balance of the face value of the bill. Under Rule 414, a Plaintiff's damages for medical expenses will now be limited to this lower amount of what was actually paid or is needed to actually pay the bill in full, not the full face value of the bill.

Prior to the creation of Rule 414, a party was allowed to introduce the full face value of the amount of medical bills as evidence of damages in personal injury cases. In fact, under existing North Carolina case law, if a Plaintiff introduced the full face value amount of the medical expenses into evidence at trial, the defendant was prohibited from introducing evidence that the amount actually paid or to be paid in satisfaction of the bills was less.

For example, a patient being treated at an emergency room following a car accident might receive medical bills totaling $1,000 from the hospital, physician, radiologist, etc. However, when the medical bills are turned over the patient's health insurer, that insurer may only pay $600 and the medical providers accept that amount as payment in full. At trial, under the current law, a Plaintiff can introduce evidence that he incurred $1,000 in medical bills at the emergency room and the Defendant is prohibited from introducing evidence that the bills were paid in full for $600.

The theory for this rule of not allowing Defendant's to show the difference between the amount billed and the amount paid based on the "Collateral Source Rule". This rule, found repeatedly in North Carolina case law, holds that a tortfeasor is not permitted to introduce evidence that a Plaintiff's medical bills had been paid or would be paid by some third party such as a health insurer. The theory is that a torfeasor or wrongdoer should not be able to benefit from the fact that the injured victim had the forethought to procure and pay for health insurance. A second reason for prohibiting such evidence, which reason is not discussed in the case law, is that if a jury knew that a Plaintiff's medical expenses had been paid by health insurance, they would be less likely to award Plaintiff such medical expenses as damages and the resulting verdict would be substantially lower.

On the other hand, as a result of the current law regarding evidence of medical expenses, juries are often given a false impression that a Plaintiff either paid or owed far more in medical expenses than was actually the case. This resulted in higher jury verdicts.

Now, under new Rule 414, a Plaintiff cannot simply introduce the face value of the bill as proof of damages. Plaintiff can only introduce the amount actually paid and/or the amount actually owed, if there is an outstanding balance. In the example above, the Plaintiff would have to introduce evidence that the bill was actually $600, not $1,000.

While $400 is a small difference in the example given above, you can imagine the difference in much larger cases, where a Plaintiff has $200,000 in medical expenses but Medicare pays the medicals bills in full for only $100,000. Suddenly, the value of Plaintiff's case is slashed.

The creation of Rule 414 likely does not change or eliminate the Collateral Source Rule. Nothing is Rule 414 says anything about introducing evidence that there was a difference between the amount billed and the amount paid or introducing evidence that the bills were paid by health insurance or any other third party. The Rule simply states that the Plaintiff's evidence of damages is limited to the amount paid or to be paid, not the full face value of the bill. I imagine the Rule was formulated in this way as a political compromise to require Plaintiff's to give accurate evidence of actual damages at trial, but at the same time allow Plaintiffs to conceal the fact that the bills were paid by health insurance.

Rule 414 becomes effective on October 1, 2011 and applies to all lawsuits filed on or after that date.

Big Changes to the NC Attorneys' Fees Statute

By Thomas Nance

The North Carolina Governor has just signed into law some major changes to the Attorneys' Fees Statute, NCGS §6-21.1. These changes become effective October 1, 2011 and apply to all cases filed after that date. The revised Statute includes some positive changes and some not so positive ones. Be prepared to see a lot of lawsuits being filed in September to get in under the wire before the revised Statute takes effect. A copy of the legislation that includes the revised Statute can be found at the following link:

http://www.ncleg.net/EnactedLegislation/SessionLaws/HTML/2011-2012/SL2011-283.html

DISUCSSION OF THE CURRENT VERSION OF THE STATUTE

For those not familiar with the Attorneys' Fees Statute, the current version of NCGS §6-21.1 allows a presiding Judge to award a prevailing Plaintiff his or her attorneys' fees from the Defendant in cases involving bodily injury, property damage, or claims by an insured against their insurance company. Under the current Statute, attorneys' fees could only be awarded in cases in which the damages recovered were $10,000 or less. In addition, the award of fees was discretionary and under case law interpreting the current version of the Statue, the trial Judge was required to consider a mix of factors in determining whether to award attorneys' fees. Those factors included considering the amount and timing of settlement offers and Offers of Judgment, comparing such offers to the amount of the final Judgment, considering the relative bargaining power of the parties, and any other factors the Court considered relevant.

Due to the subjective nature of many of the elements of the test, Plaintiffs' attorneys have often been awarded their fees even in cases where the Defendant's insurance company made appropriate offers of settlement before and after suit was filed that were more than what the jury returned in its verdict. Due to the language of the Statute and the cases that interpreted it, there has been nothing a Defendant or its insurer could do to absolutely prevent an award of attorneys' fees except to win the case outright or settle the case prior to trial. If a Plaintiff obtained a verdict of even one dollar, there was a possibility a Court would award attorneys' fees, no matter how much the Defendant had offered in settlement or when such offer was made.

Once the Court decided to award such fees, the trial Judge had wide discretion in how much to award, often awarding fees many times the amount of the jury verdict. It has not been uncommon to see cases in which a jury returned a verdict of only hundreds of dollars, followed by a Judge awarding attorneys' fees of more than $10,000, even where the Defendant may have offered to settle the case for $1,000, $2,000, $3,000, or more.

DISCUSSION OF THE NEW VERSION OF THE STATUTE

The revised Statute now applies to cases in which the damages recovered are $20,000 or less, as compared to $10,000 or less under the current version. The Statue now authorizes the trial Judge to award attorneys' fees only when it is shown that the amount of damages recovered is more than the highest offer of settlement made at least 90 days prior to trial. This is significant because under case law interpreting the current Statute, the Judge would consider the "Judgment finally obtained" as compared to any Offer of Judgment. The "Judgment finally obtained" included the amount of the verdict, plus costs, plus pre-judgment interest, plus Plaintiff counsel's contended attorneys' fees. Comparing this figure to the amount of the Offer of Judgment meant it was virtually impossible for the Offer of Judgment to be greater than "Judgment finally obtained", meaning the court frequently awarded attorneys' fees. Under the revised Statute, the Court now only considers the "amount of damages recovered" as compared to the highest settlement offer. While there is obviously no case law telling us what "amount of damages recovered" means, it seems likely that this language is intended to mean the jury's verdict and perhaps pre-judgment interest, but not costs and certainly not the attorneys' fees. Such language provides Defendants and their insurers a fighting chance to prevent an award of attorneys' fees by making a reasonable settlement offer.

The requirement that the settlement offer be made at least 90 days prior to trial is also significant. It encourages Defendants to make good settlement offers earlier rather than later. Settlement offers on the Courthouse steps won't be considered. It also encourages parties to have Court Ordered Mediation at least 90 days prior to trial. Otherwise, those settlement offers also won't be considered. Defense counsel should certainly be wary of Plaintiff's counsel trying to delay Mediation until a month or two before trial, as is commonplace currently.

In addition, under the revised Statute, the trial Judge must find that there was an unwarranted refusal by the Defendant to negotiate or pay the claim. This requirement is a part of the current Statute. However, due to the phrasing of the current statutory language, the case law has interpreted that the requirement only applies in actions where an insured is suing the insurance company directly. The revised Statute attempts to make clear that the requirement applies in all cases. One significant change, however, is that the phrase "insurance company" has been removed and the word "Defendant" has been inserted. This means that whereas, under the current Statute, there was a requirement that insurance be involved and that the insurance company's actions and settlement offers were being considered by the Court, now, under the revised Statute, insurance and insurance company actions are no longer a requirement for the Court to award attorneys' fees. In other words, it appears that the Statute has been expanded and now applies regardless of whether the Defendant has insurance. Plaintiffs can now recover attorneys' fees against uninsured Defendants directly, be they corporations or individuals.

One other significant change is that under the revised Statute, the amount of attorneys' fees that can be awarded is now capped at $10,000. While such a figure is still significant, particularly in very small cases, the cap at least prevents the more outrageous fee awards and Defendants and their insurers can now at least reasonably determine their exposure in order to properly evaluate the case.

Finally, the revised Statute requires that when a Judge does award attorneys' fees, the Judge must make written findings of fact as to the basis for determining that there was unwarranted refusal by the Defendant to negotiate or pay, the amount of the highest offer made, the amount of damages recovered, the amount of attorneys' fees awarded and the factual basis for such an award. This requirement for written findings will help Defendants in appealing what they perceive as an award of attorneys' fees that is unjust or contrary to law.

Recent Dean & Gibson Appellate Decisions

Jeremy Foster and Mike Gibson recently had two favorable trial court rulings affirmed by the North Carolina Court of Appeals.  Both are published decisions.

One Beacon Ins. Co. and Wire Bond v. United Mechanical Corp., 700 S.E.2d 121, N.C.App. (Oct. 19, 2010). (Topics - Contractual Indemnity, Vicarious Liability, Workers’ Compensation Exclusivity.)

This case was a subrogation action in which the insurer for a local manufacturer sought indemnity from a subcontractor whose employee was injured on the manufacturer’s premises.  The manufacturer had hired a general contractor to fabricate and install a ventilation system for the plant.  The general contractor then hired a subcontractor to perform part of the work, with the contract requiring the subcontractor to indemnify both the general contractor and the manufacturer for any damages caused by the subcontractor’s acts. Moments after the subcontractor’s employees arrived on the manufacturer’s premises, one of the workers stepped in an uncovered vat of molten zinc and sustained severe injuries to his leg.

The injured worker was able to recover Worker’s Compensation benefits from his employer, the subcontractor, and was also able to pursue a personal injury action against the manufacturer.  The manufacturer demanded that the subcontractor indemnify it for all damages incurred as a result of the accident.  The subcontractor denied that it had any duty to indemnify the manufacturer and did not participate in the settlement of their injured worker’s personal injury claim.  The insurer for the manufacturer ultimately settled the claim for $1.48 million.  The insurer then brought a subrogation action to collect this amount from the subcontractor. Mike Gibson and Jeb Foster prevailed in the defense of the subcontractor, obtaining summary judgment against the Plaintiffs.

At summary judgment and on appeal, Mike and Jeb raised a number of defenses including that 1) the indemnity provision of the contract between the general contractor and subcontractor was unenforceable under N.C.G.S. §22B-1, which bars clauses in construction contracts that require one party to indemnify another for its own negligent acts, 2) that the subcontractor’s payment of Worker’s Compensation benefits to the injured employee precluded any additional contribution from the subcontractor, and 3) that the manufacturer failed to allege facts showing that the manufacturer could be vicariously liable for the acts of the subcontractor.

The Court of Appeals affirmed summary judgment in the subcontractor’s favor and agreed that the insurer failed to advance any theory upon which the manufacturer could have been vicariously liable for the negligent acts of the subcontractor.  The Court declined to offer an opinion as to the enforceability of the contract under N.C.G.S. §22B-1 or whether the Worker’s Compensation Act would have prevented any further payment from the subcontractor. These remain open issues under North Carolina law.

Robert L. Gore, Jr. and Village Development v. Assurance Company of America, et al., N.C.App. (Dec. 7, 2010).  (Topics – Insurance Coverage, Non-Compliance with Terms, Waiver & Estoppel)

In a case of first impression, the North Carolina Court of Appeals affirmed summary judgment in favor of an insurer who issued a Builder’s Risk policy to a homebuilder who failed to comply with the reporting requirements of that policy.  The homebuilder had purchased a policy to insure his fluctuating inventory of real property.  The policy required that each property must be reported to the insurer at the time the property is first acquired, that the property must be continuously reported each month until the property is sold, that the appropriate monthly premiums must be paid and that any failure to comply with these requirements would result in a loss of coverage for the properties that had not been properly reported.

The builder first began construction on a property in 2005 but did not report the property to the insurer as a “new start” until 2006.  The builder then failed to file any reports or pay any premiums for nearly a year.  In 2007 he again reported the same property as a “new start.”  After the builder filed several reports in late 2007, the property was destroyed by fire.  The builder sought to recover for the loss and the insurer, represented by Mike and Jeb, denied coverage based on the failure to report the property when construction first began, the failure to continuously report the property and the failure to pay past premiums.

The home builder sued and argued that by accepting the reports and premiums in 2007, after not receiving any reports for nearly a year, that the insurer had waived any requirement that the property be continuously reported to the insurer.  The home builder also argued that because the insurer had in its own records that this particular property was previously reported as a “new start” in 2006, that it cannot argue that it was deceived by the builder’s misrepresentation that the property was a “new start” in 2007.  The Court of Appeals disagreed with both arguments.

While other states had previously addressed this precise issue, there was no controlling North Carolina law.  The Court of Appeals did consider case law from several other states, and ultimately held that while doctrine of waiver may be appropriate to prevent cancellation of a policy, “it is not available to broaden the coverage of a policy so as to protect the insured against risks not included therein or expressly excluded from coverage.”  The Court held that the reporting provisions were conditions of coverage, and not cancellation, and that the doctrines of waiver and estoppel therefore could not apply.

Mike Gibson is a Partner with Dean & Gibson and has been with the firm since 1989. Mike practices in the areas of general civil litigation, insurance coverage, construction litigation, trucking accidents and regulation, professional liability, and catastrophic injury and death.

Jeremy Foster is an associate with Dean & Gibson and has been with the firm since 2008.  Jeb practices primarily in the areas of general civil litigation, personal injury and wrongful death claims, insurance coverage and construction defect claims.

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