Subrogating Hawaii: Navigating the Subrogation Trade Winds In ‘The Middle of Nowhere’

Hawaii. There is no place like it on earth. It is the most remote population center on the face of the planet, 2,400 miles from the nearest anything. It has the most diverse population on earth, with no racial or ethnic group constituting a majority and a continuing effort underway to create a separate region for those who identify as native Hawaiians. Settled by Polynesians as early as 300 A.D., and later visited by the English explorer James Cook in 1778, its inhabitants today speak not only English, but also Hawaiian – a language with only 12 letters in its alphabet (Vowels: A, E, I, O, U; Consonants: H, K, L, M, N, P, W). In addition to letters, Hawaiian includes the glottal stop which sounds like the “uh” in “huh-uh” and is represented by the apostrophe (known as an Okina) in the proper spelling “Hawai’i.” It is the widest state in the country, stretching 1,500 miles from the island of Hawaii to the island of Niihau, and home to the self-proclaimed “wettest spot on earth” – Mount Waialeale on the garden island of Kauai. It is the proud home of the tallest mountain on earth – Mauna Kea – rising 33,496 feet above the sea floor, nearly a mile taller than Mt. Everest. There is so much unique about our 50th state that it is only fitting that subrogation there be both unique and challenging as well. Understanding Hawaii and its people will help you understand why subrogation must be handled just a little differently in this remote location.

Subrogation professionals have had difficulty locating aggressive and responsive subrogation counsel covering the State of Hawaii. The reasons for this are many. The state is home to a very small and close-knit legal community. Many lawyers who call Honolulu home already represent a number of insurance carriers and worry about conflicts. Litigating in Hawaii means that East Coast litigation mindsets and expectations must give way to an underlying attitude that life is not totally about work. Those living and working in Hawaii enjoy a mutually laid-back style of interaction and this includes litigation. Patience, in addition to the other necessary personal qualities for successful and cost-effective subrogation must be practiced in large measure. This lifestyle is referred to locally as “Huna.” Huna is a Hawaiian philosophy of living which focuses on the powers of mind and the forces of nature, and how they interact. It is a very old philosophy associated with Polynesia. There are seven basic principles of Huna, which makes it a belief system and not merely a system of life techniques. Huna is simply a way of dealing with or viewing reality, and because of its simplicity Huna is easy to remember and easy to apply effectively. Even the word “Aloha”, used in both greetings and farewells, holds within itself all one needs to know to interact in the natural world, according to many Hawaii residents.

Prejudice and bias against Mainlanders exist and insurance professionals must be aware of this. Cooperating with local attorneys is a lot like paddling a canoe. “Va’a” is Hawaiian for “canoe” and Kama’aina (residents) and visitors alike all kokua (help) in working together for smooth paddling. Rocking the boat is often counter-productive. It is critical to understand culture norms, expectations, and ways of business to have consistent success subrogating matters that involve more than mainland issues. Our philosophy in Hawai’i is the same and has made us so successful in subrogating matters involving Asian companies. It is important to understand and respect cultural differences and acknowledge that using the approach with which you are most accustomed is not what is important. What matters is the result. As much as we’d like to think that subrogating in Hawaii is no different than subrogating in Dubuque, Iowa, there are real, tangible differences, legally and culturally. Knowing those differences and engaging subrogation counsel who knows how to use them to your advantage is critical when you are engaged in litigation thousands of miles from Mainland, U.S.A.

Subrogation professionals must know more than the word “Aloha”, unfortunately, and subrogation law in Hawaii reflects the lifestyle and culture of the Aloha State in many respects. The following is an overview of some important subrogation law in the State of Hawaii.

Workers’ Compensation Subrogation

Workers’ compensation subrogation in Hawaii appears to be quite normal on the surface. Practitioners have a reasonably-drafted § 386-8 to guide them. No third-party settlement by the employee is valid without the written consent of the carrier or employer, and no release signed is valid without this consent. The carrier may initiate the filing of a third-party action nine months after the cause of action accrues. Any recovery is divided according to a rigid formula: (1) Attorneys’ fees and expenses come off the top; (2) Compensation carrier is reimbursed less a pro-rata share of the employee’s attorneys’ fees; and (3) the balance is paid to the employee. A future credit is obtainable, but not without the approval of a single executive known as the Director of Labor. Unanswered or unclear is whether the carrier can subrogate against UM/UIM benefits, medical malpractices recoveries, or awards for legal malpractice. Because most workers’ compensation carriers are headquartered on the Mainland, prejudice against the subrogation interest can be encountered, especially when a native Hawaiian is the injured victim.

It is often advantageous for a subrogated compensation carrier to file suit in the name of the actual domestic employer, as it has more appeal to local juries and some judges. But, beware. A delay in filing an intervention in Hawaii could subject the carrier to attorneys’ fees and costs that it otherwise might have been able to avoid. Obtaining subrogation counsel quickly may allow the carrier to avoid payment of such fees and expenses, provided he or she is active in participating in the litigation.

The right of the carrier to a future credit or offset is memorialized in one sentence contained in § 386-8. But, there is a catch – the Director of Labor retains discretion and jurisdiction to determine whether or not the carrier has an obligation to make further or future compensation payments. Who you know matters. When a third-party action is filed, an obscure Hawaii Administrative Rule (H.A.R. § 12-10-31) gives the Department of Labor considerable say-so in the outcome of a third-party lawsuit.

Workers’ compensation subrogation is also complicated by the fact that heavy traffic on Oahu leads to many work-related car accidents and Hawaii subrogation is complicated by a confusing version of no-fault liability insurance laws. Hawaii is also one of only five states which provides for non-occupational disability benefits through Disability Benefit Laws. The others states are California, New Jersey, New York and Rhode Island. Such Disability Benefit Laws provide for payment of cash benefits to employees who have become disabled as a result of a non-occupational injury or illness.

Personal injury and wrongful death third-party actions based on negligence, medical malpractice, or product liability must be brought within two years. Nonetheless, Hawaii has an exception to this statute of limitations when a suit arises out of a motor vehicle accident. In the case of an auto accident, the lawsuit may be filed: (1) two years after the date of the motor vehicle accident upon which the claim is based; (2) two years after the date of the last payment of motor vehicle insurance or optional additional benefits; or (3) two years after the date of the last payment of workers’ compensation or public assistance benefits arising from the motor vehicle accident. Haw. Rev. Stat. § 431:10C-315 (1998).

Automobile Insurance Subrogation

The State of Hawaii recognizes and enforces both contractual subrogation and equitable subrogation. Beneficial Hawaii, Inc. v. Kida, 30 P.3d 895 (Haw. 2001); Grain Dealers Mut. Ins. Co. v. Pacific Ins. Co., 768 P.2d 226 (Haw. 1989). In subrogation actions in Hawaii, the burden of proof is on the party claiming subrogation to show that it is entitled to it. First Ins. Co. of Hawaii, Ltd. v. Jackson, 681 P.2d 569 (Haw. 1984). Hawaii law provides that an insurer who pays a claim to an insured for damages caused by a third party is entitled to be subrogated to the insured’s rights against such third party, irrespective of the nature of the contract, and even though the policy contains no stipulations to that effect. State Farm Fire & Cas. Co. v. Pacific Rent-All, Inc., 978 P.2d 753 (Haw. 1999).

Hawaii also has its own subrogation statute, specifically setting forth the manner in which subrogation claims may be protected in the event of litigation. Haw. Rev. Stat. § 663-10 (2002). Section 663-10, which also doubles as their Collateral Source Statute, directs the court, prior to judgment, to determine the validity of subrogation or lien claims for payments made from collateral sources. It was enacted to prevent double recoveries by allowing collateral source payors to recover payments made to an injured party for costs and expenses arising out of the injury that was the subject of the civil action in tort. Ing v. Acceptance Ins. Co., 874 P.2d 1091 (Haw. 1994). Any dispute with regard to subrogation rights or liens may, by agreement, be submitted to binding arbitration in lieu of litigation. The statute also stipulates that “timely notice of a third-party claim under this statute means a reasonable time after any written claim or demand for damages, settlement recovery, or insurance proceeds made on behalf of the plaintiff or injured party.” Haw. Rev. Stat. § 663-10 (2002).

As a no-fault state, every insured person injured during the operation, maintenance, or use of a motor vehicle in Hawaii has a right to Personal Injury Protection (PIP) benefits. Haw. Rev. Stat. § 431:10C-303(a)(2). Unlike full tort states, Hawaii’s no-fault laws set monetary and verbal thresholds that need to be met before an injured party can pursue a tortfeasor in a lawsuit. Haw. Rev. Stat. § 431:10C-102 governs the abolition of tort liability under Hawaii’s no-fault system and sets thresholds of: (1) $5,000 in PIP benefits (medical expenses); (2) death; (3) permanent loss of use of a part or function of the body; or (4) permanent and serious disfigurement apply to tort actions brought as a result of bodily injury, sickness, or disease arising out of the ownership, operation, maintenance or use of a motor vehicle must be met in order to sue the tortfeasor. Haw. Rev. Stat. § 431:10C-306. When a person makes a third-party tort recovery arising out of an auto accident, Hawai’i implements something called a “Covered Loss Deductible” (“CLD”) which reduces any award by the amount of PIP benefits paid. It is designed to discourage “frivolous” lawsuits. Haw. Rev. Stat. § 431:10C-301.5.

The CLD works in the following manner:

1. In cases where the damages associated with an automobile accident are less than $5,000, the insured is precluded from suing the negligent party in an automobile accident. This is necessary in order to keep the small claims out of litigation.
2. In cases where the insured has incurred medical expenses between $5,000 and $10,000, the result of the litigation will have subtracted from the award the amount of medical expenses incurred. This precludes the insured from receiving funds for medical expenses for which are covered under their own policy.
3. In cases where the insured has incurred medical expenses of $10,000 or more, any award obtained through any means of litigation will be reduced by $10,000. Weite v. Momohara, 240 P.3d 899 (Haw. App. 2010).

The purpose of the statute is to preclude an insured from receiving a double recovery for medical expenses that have been paid under the PIP coverage by reducing the recovery of damages for bodily injury. Id.

If PIP pays out $10,000, the CLD reduces any damages owed by the defendant by $10,000. Attorney’s fees and costs come off the top, the CLD is subtracted, and the plaintiff is left with the balance. The unfairness of this law, of course, is that the tortfeasor – the one responsible for the accident in the first place – is the one who benefits from it, at the expense of both the insured and the insured’s automobile carrier.

PIP subrogation in Hawaii is in limbo – sort of. For many years, § 431:10C-307 gave PIP carriers a right of subrogation. In 1989, the Hawaii Legislature amended the statute to delete the words “Right of Subrogation.” Act 83, S.B. No. 905. Therefore, the new statute merely grants a PIP insurer the right to be “reimbursed” for (not subrogated to) 50 perce of the amount of no-fault benefits it has paid which are duplicated in a third-party recovery, up to the maximum limit defined in § 431:10C-103. The burden to prove duplication, of course, is on the subrogated carrier.

Minnesota and Hawaii don’t have a lot in common. However, the Minnesota Court of Appeals – of all places – recently laid down some rather novel and earth-shattering law with regard to PIP subrogation in a case which interpreted Hawaii law. In American Family Mutual Ins. Co. v. American Automobile Ass’n d/b/a Auto Club Ins. Ass’n, 2013 WL 656493 (Minn. 2013)., the court single-handedly resurrected common law PIP subrogation in the Aloha State. It held that the plain language of § 431:10C–307 does not eliminate a no-fault insurer’s common law (equitable) subrogation rights. The CLD Statute is interpreted by trial lawyers and the Hawaii Association for Justice as requiring up to a $10,000 deduction from any personal injury settlement or judgment, effectively eliminating any PIP subrogation or reimbursement rights, because the portion of the recovery “duplicating” PIP benefits is effectively removed from the recovery.

Trial lawyers in Hawaii will tell you that there is an “uneasy peace” between liability carriers and PIP carriers with regard to PIP subrogation. The uncertainty and potential cost-ineffectiveness of PIP subrogation, combined with the fact that doctors prefer the reimbursement rates from health plans over those of PIP or Medicare, means that Hawai’i sees relatively little PIP subrogation. But, when it does arise, you must be prepared.

It can be argued that a PIP carrier is entitled either to: (1) reimbursement of only $5,000 maximum (50 percent of the maximum aggregate limit); or (2) 50 percent of whatever limits the policy happens to provide by way of additional coverage. However, that is only the beginning of the confusion. Yet, there is some disagreement as to whether the CLD removes only up to the $10,000 maximum limit from the recovery or removes a larger amount in cases where the PIP carrier carried additional coverage in excess of the $10,000 aggregate limit.

Technically, reimbursement of PIP benefits under § 431:10C-307 has not been eliminated and is still permissible. However, if the maximum reimbursement is limited to 50 percent of the $10,000 maximum limit defined by statute. The best PIP reimbursement argument is that there is simply no legal authority eliminating their right of reimbursement under § 431:10C-307, notwithstanding the CLD Statute. All trial lawyers can do is argue that it is “unfair” that their recovery has been reduced by the amount of PIP benefits paid, so they shouldn’t have to further reduce their recovery by reimbursing the PIP carrier the benefits it has paid.

Hawaii requires that an insured be “made whole” before an uninsured motorist (“UM”) carrier may require the insurer to reimburse the UM carrier after receiving a tort recovery from an UM or party jointly liable with the uninsured tortfeasor. AIG Hawaii Ins. Co., Inc. v. Rutledge, 955 P.2d 1069 (Haw. App. 1998). However, Hawaii has not specifically applied the Made Whole Doctrine in a traditional non-UM subrogation case.

Statutes of Limitations

Personal injury and wrongful death actions based on negligence, medical malpractice, or product liability must be brought within two years of the date the cause of action accrues. Haw. Rev. Stat. § 657-7 (2000). Actions based on contracts, including legal malpractice, must be brought within six years of the breach of the contract. Haw. Rev. Stat. § 657-1 (2000). However, Hawaii has an exception to these statutes of limitations whenever a suit arises out of a motor vehicle accident. Therefore, where an automobile accident is involved, the time period in which to file a third-party action for workers’ compensation subrogation will almost certainly be extended. The reason for this rule is simple. For a viable tort claim to accrue under the monetary-threshold exception in Hawaii’s no-fault law, a plaintiff, or a collateral source providing benefits to the plaintiff, must have actually incurred expenses that exceed the statutory threshold. Savini v. Univ. of Hawaii, 153 P.3d 1144 (Haw. 2007). Haw Rev. Stat. § 431:10C-315(b)’s postponing of the accrual of claims based upon the medical-rehabilitative limits contained in Hawaii’s no-fault laws is necessary to effectuate the legislature’s abolition of most motor vehicle tort lawsuits.

It has been said that Hawaii is not a state of mind, but a state of grace. While that may be true about the tropical setting and lush vegetation on the island, the state of subrogation in this most interesting state is anything but graceful. Subrogating in Hawaii is difficult and confusing. Rights can be lost before you ever knew you had them.