Issue #11       April 18, 2005
 

SETTLING A CLAIM FOR AN INCAPACITATED PLAINTIFF

 

By John J. Campbell, Esq., CELA, MSCC

 

Introduction

 

            Plaintiffs will not always have the ability to make informed decisions regarding settlement.  The plaintiff might be a minor and lack the legal capacity necessary to enter into the settlement contract.  An adult plaintiff may suffer from mental illness, an injury or another condition which results in incapacity. 

 

            In virtually every jurisdiction, some type of court approval of the settlement will be needed in such cases.  Additional arrangements may also be needed to ensure that someone has legal authority to enter into a binding settlement agreement on behalf of the plaintiff; and to receive and apply settlement funds for the plaintiff’s benefit after the settlement is completed. 

 

Guardianship/Conservatorship

 

            In some cases, an adult plaintiff may have executed a valid financial durable power of attorney prior to his or her incapacity.  If so, the agent under the power of attorney would likely have sufficient authority to negotiate a settlement of the plaintiff’s third party liability (TPL) or worker’s compensation (WC) claim; and to receive and manage the proceeds.  Often, however, the plaintiff will not have a valid power of attorney.  In these situations, it may be necessary to initiate a separate proceeding for the appointment of a guardian or conservator.

 

            Ideally, an adult, incapacitated plaintiff should have a guardian or conservator appointed as soon as he or she becomes incapacitated.  This is usually necessary to allow the filing and prosecution of the plaintiff’s TPL or WC claim and the appropriate direction of the plaintiff’s counsel.  However, if the plaintiff does not already have a guardian or conservator, one will need to be appointed before settlement negotiations get underway.

 

            The laws regarding guardianship or conservatorship vary widely from state to state.  In some states, a guardian has authority over both the person and the property of the incapacitated individual (often called the “ward”).  In other states, a guardian is appointed to make decisions regarding the ward’s person, while a separate conservator is appointed to manage the ward’s property.

 

            The criteria and procedures for appointment will vary as well.  In some states, the diagnosis of an incapacitating condition or illness which effects decision-making is enough to warrant a finding of incapacity.  Other states have adopted criteria which depend more upon the ward’s functional incapacity.  However, under either set of criteria, incapacity which prohibits the ward from adequately comprehending and appreciating the nature and effect of his or her decisions will affect the ward’s ability to agree to any settlement.

 

            Procedures for appointment of a guardian or conservator have grown stricter in most states in recent years.  This is largely due to concerns over protecting the constitutional rights of persons who are alleged to be incapacitated.  Clearly, the appointment of a guardian or conservator will impose severe limitations on the ward’s liberty and property interests. 

 

            As a result, procedural safeguards are necessary to protect the ward’s due process rights under the Fourteenth Amendment. The appointment of a guardian or conservator for an adult will always require some type of court proceeding.  The particulars are typically contained in a state’s probate code provisions. 

 

            At a bare minimum, the ward must receive notice of the proceeding and an opportunity to be present at the hearing to oppose the appointment of a guardian or conservator.  An evidentiary hearing will be necessary before the appointment of a permanent guardian or conservator.  At the hearing, the ward may present evidence and cross examine witnesses. 

 

            In many states, additional procedural protections will exist.  The ward may have the right to separate legal representation; and to a court appointed attorney, if the ward cannot afford one.  The ward’s presence at the hearing may be required, absent a judicial finding of good cause to excuse the ward’s attendance.  The ward may even have the right to demand a jury.

 

            Incapacity will usually need to be proven by clear and convincing evidence.  Thus, medical evidence of the ward’s illness, injury or condition, and the degree of the ward’s resulting inability to manage his or her own affairs safely, will be crucial.  If the court finds, after considering all of the evidence, that the ward is incapacitated, a guardian or conservator can be appointed with authority to proceed with the ward’s TPL or WC claim.  Final settlement of the claim will usually require court approval after a separate hearing before the probate court or the court in which the claim was filed.

 

            An uncontested guardianship or conservatorship proceeding can usually be completed within 1-3 months after the filing of a petition to appoint a guardian or conservator.  However, if the ward objects to allegations regarding his or her incapacity and contests the appointment, a final determination on the issue of the ward’s incapacity could take up to a year or more.  Waiting until the last minute to file a petition for guardianship or conservatorship could unnecessarily delay or completely frustrate the ability of the parties to reach a settlement.

 

The Settlement Process

 

            The legal guardian, conservator or agent of an incapacitated plaintiff will be a necessary party to any settlement negotiations.  This is true from the first day that there is serious discussion of settlement among the parties.  Sometimes, the plaintiff may not be fully incapacitated, resulting in limitations on the guardian’s, conservator’s or agent’s authority.  In these cases, the plaintiff must be allowed to participate as well.  Thus, it is important to review the Letters of Guardianship or Conservatorship or the durable power of attorney, which set forth the extent of the guardian’s, conservator’s or agent’s authority, to determine who all of the necessary parties to the settlement negotiations must be.

 

            Offers of settlement by the defendant must be communicated by the plaintiff’s attorney to the plaintiff’s guardian, conservator or agent, and to the plaintiff if he or she is less than totally incapacitated.  Similarly, these individuals will be the ones to accept or reject a settlement offer, or to propose a counter offer.  It is vital that all parties with authority over the plaintiff’s property interests be involved in every part of the settlement process.  Otherwise, any resulting agreement could be legally void.

 

            Where a plaintiff is incapacitated as the result of his or her injuries, he or she often will have been forced to rely on public benefits to help pay for medical, attendant or custodial care expenses.  Both Medicare and Medicaid will likely have claims or liens against settlement proceeds for reimbursement of payments made for such services prior to settlement.  When settling a claim involving an incapacitated plaintiff, it is always important to obtain a determination of whether any such claims or liens exist; the amounts of those claims and liens; and the manner and amounts that will be needed to obtain necessary releases. 

 

            Similarly, plaintiffs under incapacity or disability are far more likely than others to have incurred significant hospital, nursing care or other expenses that have been unpaid; or that have been paid under a group health or private insurance policy.  Like government claims and liens, hospital liens and insurance subrogation claims must be determined and negotiated as part of the settlement process.

 

            Once a tentative settlement is reached, it will have to be reviewed and approved by a court.  In some states, this will be the court that appointed the guardian or conservator.  In other states, or in situations where the plaintiff is represented by an agent under a power of attorney, the settlement will be reviewed by the court in which the claim was filed. 

 

            In the case of a WC settlement, virtually every state requires that a WC judge or commissioner approve the settlement, regardless of the claimant’s or applicant’s incapacity.  Where the claimant or applicant is incapacitated and a guardian or conservator has been appointed, the settlement may also need to be approved by the court having jurisdiction over the guardianship or conservatorship.

 

            In general, the court will require information equivalent to what the plaintiff would normally be expected to consider in reaching a decision to settle his or her own claim.  In particular, the court will require full disclosure of the proposed terms of settlement.  This will include disclosure of the amount of settlement; the manner in which the proceeds will be paid (i.e., a lump sum or structure); the nature and extent of the injuries claimed by the plaintiff; the amount of attorney’s fees and costs to be paid by the plaintiff from settlement proceeds; and the extent of the authority of a guardian, conservator or agent to act on the plaintiff’s behalf.  Additional information, such as the amounts of injury related medical expenses already incurred and expected to be incurred in the future, must also be disclosed, as must the existence of any liens or subrogation claims against settlement proceeds.

           

            In recent years, the courts have become very aware of the frequent need for incapacitated plaintiffs to maintain post-settlement eligibility for public benefits, such as Medicaid and SSI.  As a result, a court which is asked to approve a settlement for an incapacitated plaintiff will often require assurances that public benefit eligibility issues have been adequately addressed as part of the settlement process.  The plaintiff’s attorney should be thorough in advising the plaintiff and the plaintiff’s guardian, conservator or agent about the option of creating and funding a Supplemental Needs Trust to preserve public benefit eligibility; and should address this issue fully with the court at the settlement hearing.  If necessary, the court can be asked to both approve and create a Medicaid and SSI exempt Supplemental Needs Trust to be funded with the proceeds of the settlement. 

 

            Normally, the court must find that the terms of the settlement are fair and reasonable, considering all of the circumstances; and that the settlement is in the plaintiff’s best interests.  Regardless of how pleased the parties may be with the results of their negotiations, the settlement is not final and binding unless and until the court enters an order of approval.

 

After the Settlement is Final

 

            Once the settlement has been finally approved by the proper court and/or WC agency, arrangements must be in place for the receipt and management of the settlement proceeds.  A court which appoints a guardian or conservator will usually exercise continuing jurisdiction over the ward and the ward’s property after the appointment.  Guardians and conservators will be required to file regular reports and accountings with the court. 

 

            Accountings must reflect all income and expenditures to and from the ward’s estate, to demonstrate that all of the ward’s property is being used for the ward’s benefit.  Thus, where a guardian or conservator has been appointed, settlement funds must be paid to the plaintiff’s guardianship or conservatorship estate.  If a structure is used to fund all or part of the settlement, the guardian or conservator will need to be named as the payee.

 

            An alternative to requiring an ongoing guardian or conservator is to request that the court permit the creation and funding of one or more trusts or similar arrangements to receive and administer the ward’s settlement proceeds.  Often, continuing court supervision is not required where all of the plaintiff’s property, including settlement proceeds, is placed into a proper trust.

 

            In the context of settlements involving the plaintiff’s continuing eligibility for Medicaid or SSI, the creation of a Supplemental Needs Trust may be a necessary.  In WC settlements, where the claimant or applicant is already eligible for Medicare, or where the claimant or applicant is reasonably expected to become eligible for Medicare within 30 months of the settlement and the total value of the settlement exceeds $250,000, a Medicare Set-Aside Arrangement will be needed.  (However, where the claimant or applicant is incapacitated, he or she may not “self-administer” the arrangement.)

 

            Where a trust or custodial arrangement is approved by the court as part of the settlement, the court will likely require assurances of the trustee’s or custodian’s performance of its fiduciary duties.  Thus, trustees and custodians will often be required by the court to post a bond or demonstrate adequate insurance coverage.  Further, professional trustees and custodians will be entitled to reasonable fees for administrative services.  Where such costs cannot be paid from the trust or custodial arrangement, as in the case of a Medicare Set-Aside Arrangement, the settlement will need to provide a separate means to cover those expenses.

 

Conclusion

 

            Settlement of a TPL or WC claim for an incapacitated plaintiff presents unique issues.  The appointment of a guardian or conservator will be necessary where the plaintiff has not appointed an agent under a valid financial durable power of attorney.  Public benefit eligibility issues are more likely to be present; and additional court procedures will often be needed to achieve a final and binding settlement.

 

            It is the responsibility of every practitioner and professional who participates in the settlement process to ensure that the necessary steps are taken to obtain all required authorizations and approvals.  Otherwise, all of the time and hard work expended to reach a settlement could be wasted on an invalid and unenforceable settlement agreement.  Perhaps more importantly, each practitioner and professional has the ethical obligation to ensure that the plaintiff’s incapacity is not unfairly exploited.