Associated Hospital Service of Philadelphia v. Pustilnik
| Decision Date | 19 January 1979 |
| Docket Number | Appellant in No. 1136.,Alan PUSTILNIK |
| Citation | 262 Pa.Super. 600,396 A.2d 1332 |
| Parties | ASSOCIATED HOSPITAL SERVICE OF PHILADELPHIA, Appellant in No. 1223, v. |
| Court | Pennsylvania Superior Court |
Argued Sept. 21, 1977. [Copyrighted Material Omitted]
Barry J. Goldstein, Philadelphia, for appellant at No. 1136 and for appellee at No. 1223.
Raymond T. Cullen, Philadelphia, for appellant at No. 1223 and for appellee at No. 1136.
Before WATKINS, President Judge, and JACOBS, HOFFMAN, CERCONE PRICE, VAN der VOORT and SPAETH, JJ.
This case arises on cross appeals in an equity action. The issues raised involve the right of subrogation.
On May 27 1968, Alan Pustilnik was injured when he was struck by a SEPTA subway car in Philadelphia. As a result of the accident, Pustilnik was hospitalized on three separate occasions. Medical bills accruing from these hospitalizations totalled $30,200.87, but Pustilnik was given a credit of $18,960.18 against this amount under the terms of his subscription agreement with Associated Hospital Service of Philadelphia (Blue Cross).
Soon after the accident, Pustilnik instituted suit against SEPTA. During pendency of this suit, Blue Cross notified Pustilnik and his attorney, Malcolm Waldron, of its subrogation interest in any recovery ultimately obtained from SEPTA. Blue Cross also invited Waldron to represent its interest in the suit in return for 25% Of any recovery as an attorney's fee, or 331/3% If the case went to trial. Waldron rejected this offer, demanding 50% Of any recovery as a prerequisite for his representation of Blue Cross' interests. Blue Cross did not agree to pay this fee, but nevertheless continued to advise Waldron of its increasing subrogation interest as a result of Pustilnik's second and third hospitalizations.
Pustilnik's suit against SEPTA went to trial in May 1971. After the fifth day of trial, but before a verdict was returned, the parties settled the suit. Pustilnik agreed to take $235,000 in return for his release relieving SEPTA from additional liability. Upon learning of the settlement, Blue Cross, which did not participate in the trial, immediately alerted SEPTA and the trial judge of its subrogation claim. Eventually, when Pustilnik and Blue Cross were unable to agree on the size of Blue Cross' interest, the trial judge placed $30,000 of the settlement monies into an escrow fund. Thereafter, Blue Cross brought the present action in equity to obtain an adjudication governing the disbursement of the escrowed monies.
Trial was held in November 1975. At the close of the evidence, the court ruled that Blue Cross was entitled to subrogation for the amounts it spent on Pustilnik's behalf, but that it had not proved that it had paid $18,960.18, the amount credited against Pustilnik's hospital bills. The court found that although Blue Cross might have paid this sum, its proof failed to show with reasonable certainty that it had expended more than $16,721.64. The court therefore ruled that Blue Cross' subrogation recovery should be limited to this amount. The court further ruled that this amount was subject to the following additional deductions. First, finding that Pustilnik's $235,000 settlement was less than the full value of his personal injury claim, the court reduced Blue Cross' recovery by 50%. Next, the court reduced Blue Cross' recovery by another 40% To reflect its proportionate share of Waldron's attorney's fee. Finally, the court imposed a reduction of $120 to cover Blue Cross' share of the litigation expenses incurred by Waldron in the suit against SEPTA. Judgment was accordingly entered for Blue Cross in the amount of $4,889.49. Both parties filed exceptions to the court's adjudication, which were dismissed by an opinion and order dated February 15, 1977. Pustilnik and Blue Cross cross-appealed (in Nos. 1136 and 1223 October Term, 1977) to this court. The appeals have been consolidated, and will now be decided together.
-Pustilnik's Appeal-
Pustilnik's principal argument is that Blue Cross erred in bringing its action in equity. [1] Included in Pustilnik's subscription agreement with Blue Cross was a provision setting forth Blue Cross' right to subrogation in any recovery obtained by Pustilnik from a third party on account of his injuries. [2] Pustilnik argues that this provision gave Blue Cross an adequate remedy at law. [3] We do not find these arguments persuasive.
In Potoczny v. Vallejo, 170 Pa.Super. 377, 380-81, 85 A.2d 675, 677 (1952), this court said:
The doctrine of subrogation is based "on considerations of equity and good conscience . . . to promote justice . . . (and) is granted as a means of placing the ultimate burden of the debt upon the person who should bear it." It is not a matter of contract nor of privity. It "may be invoked in favor of persons who are legally obligated to make good a loss caused by the negligent or tortious act of another." "It is a device adopted by equity to compel the ultimate discharge of an obligation by him who in good conscience ought to pay it."
(Footnotes and citations omitted.)
See also Fell v. Johnston, 154 Pa.Super. 470, 36 A.2d 227 (1943); Commonwealth, for use, v. Baldwin Brothers Co., 122 Pa.Super. 403, 186 A. 242 (1936). A right to subrogation may be contractually declared, but even then the right is to be regarded as based on equitable principles, since the right of subrogation exists wholly apart from the contractual provision. Roberts v. Fireman's Insurance Co. of Newark, New Jersey, 376 Pa. 99, 101 A.2d 747 (1954); First National Bank of Ashley v. Reily, 165 Pa.Super. 168, 67 A.2d 679 (1949); 83 C.J.S. Subrogation § 3b () (footnotes omitted). Because Blue Cross' subrogation right existed in equity whether or not that right was recognized in its subscription agreement with Pustilnik, equity could hear Blue Cross' claim. By including a subrogation provision in the agreement, Blue Cross reserved the option to sue in assumpsit to secure subrogation, See Roberts v. Fireman's Insurance Co. of Newark, New Jersey, supra, but it did not forfeit its right to sue in equity. Older cases implying that an equitable action in subrogation will not lie when there is an adequate remedy at law are inapposite. See P.L.E., Subrogation § 2 (1958). In Vogue Co. v. John C. Winston Co., 76 Pa.Super. 158 (1921), this court indicated, in Dictum, that the plaintiff's subrogation was improperly pursued since he possessed a valid breach of warranty claim that would make whole his loss. Here, the only claim Blue Cross possessed was one for subrogation. Since subrogation is an equitable remedy, whether or not contractually declared, Blue Cross' action properly lay in equity. [4]
-Blue Cross' Appeal-
Blue Cross argues that it was entitled to $18,960.18, less a one third attorney's fee for Waldron, leaving a total recovery of $12,640.12. Blue Cross admits that it failed to prove at trial that it paid $18,960.18 on Pustilnik's behalf, but it justified this failure on the ground that its manner of providing medical coverage makes such an exact calculation impossible.
Unlike profit-making insurance carriers, Blue Cross contracts directly with hospitals to provide services to its subscribers. [5] When a hospital under contract with Blue Cross provides services to a subscriber, it credits the subscriber's bill to the extent that it is covered by the subscriber's agreement with Blue Cross. Blue Cross then makes a partial, interim payment to the hospital on the basis of the hospital's bill to the subscriber. Final payment, however, is postponed until Blue Cross conducts its annual audit of the hospital's operations. At that time, all the hospital's costs are totalled, as well as all its charges to Blue Cross. If Blue Cross determines that some of the hospital's costs were unnecessary or resulted from waste, it deducts an appropriate amount from its yearly bill, and pays only the reduced amount. Because of this reimbursement system, which is based on generalized auditing procedures, Blue Cross was unable to isolate the exact amount it paid on account of Pustilnik's hospitalizations.
The trial court reasoned that "no subrogation can rise any higher than what the person paid out," and since Blue Cross did not show that it actually paid out the total amount credited on Pustilnik's bills, it was entitled only to a lesser sum. To illustrate the equity of its holding, the trial court used the following hypothetical example:
Let us suppose an insurance carrier under its collision policy estimated the damage to a policyholder's car as $500.00 but only paid out $400.00 to a friendly repair shop to fix the car. Should such carrier be able to recover $500.00 because that was the value of the benefits rather than the $400.00 it actually paid out? We think not.
Slip opinion at 11.
The trial court's example does not accurately reflect the facts of the present case; it assumes that it was Blue Cross that initially "estimated the damage." However, it was Pustilnik, in his suit against SEPTA, who alleged that the face amount of his hospital bills stated the amount of special damages he had suffered as a result of the accident. Therefore, we do not have, as the trial court supposed, a situation where a subrogee sues a tortfeasor for the fair value of the services it provided the subrogor, even though it procured those services at less than fair value. Instead, we have a situation where the subrogor after recovering from a tortfeasor an amount alleged...
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