Auto Insurance Deep Dive: What is the “Common Fund Doctrine” and why is it important?

Sep 1, 2020

Continuing with our “Auto Insurance Deep Dive” series, today’s post focuses on a legal concept that appears in many personal injury cases – the “Common Fund Doctrine”. While this topic can be somewhat complex, today’s post attempts to simplify it by focusing only on its application to a car or truck crash case. Accordingly, this blog begins by defining the common fund doctrine and explaining how it regularly impacts personal injury settlements. The post then concentrates on the common fund doctrine’s application in Illinois courts by using a recent Illinois appellate court decision as a case study.

What Is the Common Fund Doctrine?

The American Rule with respect to attorneys’ fees is that each party is generally responsible for paying their own legal fees. This rule stands in contrast to several other legal systems which force the losing party to pay the winning party’s attorneys’ fees. However, as with virtually all legal standards, this broad rule has numerous exceptions, one of which is the common fund doctrine.

Put briefly, the common fund doctrine holds that an attorney who recovers a “common fund” for the benefit of parties other than themselves or their client is entitled to reasonable attorneys’ fees for their work to obtain the fund. To be entitled to attorneys’ fees under the common fund doctrine in Illinois, the attorney must usually demonstrate that: (1) the fund was created as a result of the attorney’s services, (2) the insurance company did not participate in the creation of the fund, and (3) the insurance company benefited or will benefit from the fund’s creation. Wajnberg v. Wunglueck, 2011 IL App (2d) 110190.

The doctrine originates from traditional legal concepts aimed at restricting unjust enrichment and forcing parties that benefit from a lawyer’s work to pay for those benefits. Despite this concept’s objective towards assisting lawyers, it helps clients maximize their legal settlements as well. Namely, lawyers must always be compensated in some form for their work, and through the common fund doctrine, lawyers can seek partial payment from an insurance company rather than taking their entire portion from a client’s settlement fund. After all, insurance companies are already being reimbursed if they covered the victim’s costs, so since they obtained this benefit from the lawyer’s work, they should also be required to contribute to the legal fees accumulated while working for the client.

Finally, an important concept in the context of the common fund doctrine is that of subrogation. In the technical sense, subrogation is defined as the “legal right held by most insurance carriers to legally pursue a third party that caused an insurance loss to the insured.” For purposes of an auto insurance policy, a subrogation claim occurs when the victim’s insurer initially covers expenses, but later seeks reimbursement from the at-fault driver’s insurance. As further described below, subrogation can play an important role in the application of the common fund doctrine. An informative guide to subrogation can be found HERE.

How Do Illinois Courts Approach the Common Fund Doctrine?

The State of Illinois accepts the common fund doctrine, but applies it in only a few distinct circumstances. For example, Illinois courts typically apply the doctrine in class action cases, insurance subrogation claims, and wrongful death cases involving an intervenor. However, an important area of contention among Illinois appellate courts is whether to apply the common fund doctrine where the insurer was incidentally benefitted from the common fund rather than having directly received money from the fund. The state’s appellate courts are actually split on this issue, and the split was highlighted in a recent decision out of the Second Appellate District entitled Moruzzi v. CCC Services, Inc., 2020 IL App 2d 190411.

In Moruzzi, the plaintiff was injured when she was struck by an underinsured driver, and after filing suit her total damages award was $350,000. Specifically, the at-fault driver’s insurance company paid its policy limit of $100,000, and the plaintiff’s insurance company – Country Preferred Insurance – paid $100,000 for medical payments (“MP”). Moruzzi then again looked to Country to pay out its full underinsured motorist (“UIM”) coverage limit of $250,000, but Country only provided $50,000 after setting off the two prior $100,000 payments.

Finding issue with Country’s decision to decrease its payout under the UIM policy, Moruzzi and her attorneys at Kaiser Law filed a complaint for declaratory judgment against Country. In this complaint, Moruzzi primarily argued that Country improperly set off the $100,000 in MP benefits against her UIM limit ($250,000) rather than her total damages ($350,000). Separately, Kaiser also contended that they were entitled to reasonable attorneys’ fees based on the common fund doctrine, i.e., arguing that Kaiser created two “common funds” from the MP payment and the $100,000 payment from the at-fault driver’s insurance company.

The Court ruled in Moruzzi’s favor regarding Country Insurance’s payment set-off. Namely, the Court found that an aspect of Country’s insurance contract with Moruzzi to be vague in referencing – but failing to adequately define – the term “damages” with respect to payment set-offs. However, the Court also rejected Kaiser’s arguments concerning the common fund doctrine and determined that they were not entitled to attorneys’ fees from Country Insurance.

In support of its argument, Kaiser Law relied on two Fourth District cases in which insurers that incidentally benefitted from the attorney’s creation of a common fund were still required to compensate the attorney for their work. Acknowledging this precedent, the Second District firmly struck down the Fourth District’s analysis, finding that the Fourth District “brush[ed] off the facts of the case” and “simply refus[ed] to consider” the insurer’s argument over incidental benefit. The Court in Moruzzi noted that Country Insurance was never subrogated, emphasizing that “subrogation is key, because the subrogee derives a direct benefit from the fund, in which it has a legal interest.” Therefore, the Court determined that, since the common fund doctrine only applies in Illinois where the attorney created “fund in which others have an ownership interest to be reimbursed from that fund,” the concept could not apply here because there was no such common fund created by Kaiser.

As a result of the Moruzzi decision, it is now even more unclear when Illinois courts will allow plaintiffs’ lawyers to use the common fund doctrine to recover reasonable attorneys’ fees. One takeaway is that courts may be more likely to permit recovery under the common fund doctrine when an insurance subrogation claim was involved in the settlement process. However, this standard may not prove true outside of the Second District Appellate Court.

For those involved in a car, truck, or motorcycle crash and concerned over insurance proceedings, do not hesitate to reach out to Coffman Law. Owner and Founding Partner Brian Coffman has handled virtually every type of crash case, and through his experience defending corporate insurers for years prior to founding his own firm, Brian has also come to understand the strategies typically employed by insurance companies in these types of cases. Click HERE to contact our office for a free consultation.

About Coffman Law Offices, P.C.

Coffman Law is committed to providing superb legal representation for people who are suffering from severe personal injuries or are dealing with the loss of a loved one due to negligence or misconduct. Coffman Law is a results-driven firm focused on ensuring that clients receive the compassion, attention, and consideration that they need to seek adequate redress for injuries or loss. The firm is led by Owner and Founding Partner Brian Coffman, who has dedicated his career to helping accident victims navigate the legal system and obtain redress for their injuries. If you have been injured or lost a loved one, contact Coffman Law today for a free consultation.