Litigation is expensive. It is the long-standing “American Rule” that each party must pay its own attorney’s fees and expenses regardless of the outcome. In contrast, the “English Rule” means that the losing party has to pay the litigation costs for both parties, while the prevailing party pays nothing. There are several exceptions to the American Rule but none as nebulous as the common fund doctrine, or equitable fund. If you are managing litigation, you need to be aware of the implications of this fee-shifting tactic. Each jurisdiction employs various versions of the rule, so consult local counsel on the particulars.
At its core, the common fund doctrine stands for the idea that a litigant who works to create or preserve a fund from which others can recover is entitled to be compensated for that work in fees and expenses. The principle is an equitable one designed to ensure those benefiting from that fund pay their share of the cost incurred to obtain the benefit. It is most often applied in subrogation situations where a plaintiff files suit against multiple defendants, obtains a recovery, and then looks to the subrogation claimants to pay a share of the fees.
Common fund and subrogation claims intersect in a number of different ways, both in commercial and personal lines policies. For simplicity, let’s look at an example from an automobile policy. Your insured is injured in a car accident and receives medical payments of $5,000 under the policy. The insured also sues the driver that caused the accident for lost wages, pain and suffering, and additional medical expenses. Your insured incurs fees and expenses in the litigation and obtains a judgment from the other driver for $100,000. You, as the insurer, possess a subrogation claim against the at-fault driver for $5,000. The common fund claim stands for the proposition that you should pay a pro-rata share of the fees and expenses for collecting from the at-fault driver. In this case, you may collect the $5,000, less one-third of the fees (assuming a contingency fee arrangement). You would only be entitled to two-thirds of the $5,000.
While on its face this may seem equitable, there is a great deal of unfairness with this over-simplistic application. Many courts have a “meaningful participation” exception that prevents application of the doctrine when one of the claimants actually undertakes part of the work to obtain the recovery. The amount of work they must do varies depending on the jurisdiction you are in. Because the common fund doctrine is rooted in equity, any argument to prevent its application should appeal to the overall fairness of the result. Many times, if the at-fault party is insured, you and the other company may have binding arbitration agreements on subrogation. In other words, you wouldn’t need your insured’s lawyer to do any work to collect because it has already been agreed in the inter-company agreement.
You also should look at what additional work the plaintiff’s lawyer does in creating the fund as opposed to a situation where 100 percent of the recovery goes to the plaintiff. Usually, they do no additional work to create the fund that would not have been done without the subrogation claim. Is it really equitable for them to benefit from your company’s foresight in obtaining agreements through the policy with your insured or through inter-company arbitration?
In addition to challenging the equitable nature of the result under the common fund doctrine, it is wise to investigate the basis for the amount of the claim. Request a copy of the plaintiff’s attorney’s fee agreement, itemized expenses, and time spent on the case. As is often the situation in contingency fee cases where both liability and damages are clear, very little time may have been spent to obtain a big recovery. You, as the insurer, actually may have done more work in evaluating the claim than the plaintiff’s lawyer.
Finally, it is always prudent to put any carrier holding a potential source of recovery (the liability carrier for example) on notice that you intend on collecting the full amount of your subrogation claim. Express your expectation that you be compensated directly. Once the plaintiff has possession of the fund, it is much more difficult to obtain 100 percent of your claim if the common fund doctrine is at issue.