Settlement liens explained for injury victims in New Jersey and New York

When an injury case settles, the first question most people ask is how much they will actually receive. The answer depends on the fees and costs, and on the liens.

A lien is a legal claim against your settlement by someone who paid for your care or your lost income because of the injury. Some liens come from federal law, some from state statutes, and some from the contract that created your health plan. Some must be paid. Some can be reduced. Some are not enforceable at all. Sorting them out correctly is one of the most important parts of closing a case.

Why liens matter at settlement

Picture a settlement as a pie. The attorney’s fee and case costs come out first, then any valid liens, and the rest goes to you. Every dollar a lienholder does not take is a dollar that reaches you.

Liens also affect timing. Some lienholders, like Medicare, must be resolved before the money can be safely released. Ignoring a valid lien can lead to collection actions, penalties, and in Medicare’s case, the risk of paying double.¹

Medicare

Medicare often pays medical bills while an injury claim is pending. Under the Medicare Secondary Payer Act, those are conditional payments. Medicare is supposed to be secondary to liability and no-fault insurance, so when a settlement or judgment later comes in, Medicare must be repaid from it. The federal government can recover double damages when it has to sue to collect.¹

The process usually runs like this.

1. The claim is reported to Medicare’s recovery contractor, which issues a letter listing the payments it says are related to the injury.
2. Your lawyer reviews that list line by line and disputes charges that have nothing to do with the accident.
3. After settlement, Medicare is notified of the amount, the fees and the costs, and it issues a final demand.

Federal regulations require Medicare to bear its share of the cost of getting the recovery. When Medicare’s payments are less than the settlement, its claim is reduced by the same percentage that the attorney’s fees and costs represent of the total settlement.² If fees and costs are 36 percent of the settlement, Medicare’s claim is cut by 36 percent. If Medicare’s payments equal or exceed the settlement, its recovery is limited to the settlement minus the fees and costs.²

Liability insurers are also required to report settlements with Medicare beneficiaries to the federal government, so Medicare will usually learn of a settlement even if no one tells it.¹

Medicaid

Medicaid is a joint federal and state program, and the U.S. Supreme Court has set real limits on what states can take from an injury recovery.

• In Ahlborn, the Court held that a state Medicaid program can recover only from the portion of a settlement that represents medical expenses, not the money for pain and suffering or lost wages.³
• In Wos v. E.M.A., the Court held that a state cannot use an irrebuttable presumption, set by statute, to decide how much of a recovery counts as medical expenses.⁴
• In Gallardo v. Marstiller, the Court held that a state may seek repayment from the part of a settlement allocated to future medical care, not only past care.⁵

In New Jersey, a Medicaid recipient is treated as having assigned to the state his or her rights to payment for medical care from a responsible third party. The Division of Medical Assistance and Health Services must be given written notice when the recipient sues a third party, and the recipient must notify the Division of any recovery and reimburse it from the proceeds.¹¹ The State’s right reaches medical assistance paid because of the injury, and its claim is reduced by a proportional share of the attorney’s fees and costs.¹¹ Even so, the amount claimed often includes charges unrelated to the accident, and those can be challenged line by line.

Health plans, ERISA, and the difference between self-funded and fully insured

If your health insurance came through work, the first question is how the plan is funded.

A self-funded plan pays claims out of the employer’s own money, often with an insurance company acting only as administrator. These plans are governed mainly by a federal law called ERISA, and state laws that limit reimbursement often do not reach them.¹⁴ In US Airways v. McCutchen, the Supreme Court held that the reimbursement terms written into an ERISA plan control, so equitable arguments cannot override clear plan language. Where the plan does not address attorney’s fees, however, the common-fund doctrine applies and the plan must share in the cost of the recovery.⁶ In Montanile, the Court held that a plan cannot collect from a person’s general assets once the settlement money has been spent on nontraceable items, which is why plans move quickly to assert their claims before funds are paid out.⁷

A fully insured plan is one where the employer buys a policy from an insurance company. State insurance law usually applies to these plans, and both states limit reimbursement claims.

• New York. General Obligations Law § 5-335 provides that a personal injury settlement is conclusively presumed not to include payment for health care and other economic losses already paid or owed by an insurer, and that the insurer has no lien or right of reimbursement against it. The statute does not apply to Medicare, Medicaid, workers’ compensation, or certain no-fault subrogation claims.¹⁰
• New Jersey. The collateral source statute, N.J.S.A. 2A:15-97, deducts duplicative benefits from a verdict instead of letting the benefit payer recover them, and it does not apply to auto cases governed by the no-fault law.⁸ In Perreira v. Rediger, the New Jersey Supreme Court held that the statute does not allow health insurers to recoup their payments from an injured person’s tort recovery through subrogation or contract reimbursement.⁹ Auto cases add their own wrinkles, so the plan documents and the type of case always need to be reviewed together.

Collateral source rules

A collateral source is a payment for your losses from someone other than the person who caused the injury, such as health insurance or disability benefits.

In New Jersey, the collateral source statute requires certain duplicate benefits in a non-auto personal injury case to be disclosed to the court and deducted from the award, less any premiums you or your family paid for that coverage. Workers’ compensation benefits and life insurance are excluded.⁸ In auto cases, a separate no-fault rule applies to PIP benefits (see our New Jersey PIP guide).

In New York, CPLR 4545 lets the court, after a verdict, reduce awards for medical costs, lost earnings and other economic loss by amounts that collateral sources have paid or will pay with reasonable certainty. Life insurance and payments from a source with a statutory right of reimbursement are not deducted, and premiums the plaintiff paid are credited back.¹⁵ Because this happens after trial, it mainly affects how both sides value a case for settlement.

Workers’ compensation liens

If you were hurt on the job by someone other than your employer, such as another driver, you may have both a workers’ compensation claim and a lawsuit against that third party. The carrier may have a lien on the third-party recovery, subject to important exceptions.

In New Jersey, the carrier is reimbursed from the third-party recovery less the employee’s expenses of suit, capped at $750, and an attorney’s fee of up to 33⅓ percent of the amount the carrier is reimbursed.¹²¹⁴ In New York, the carrier’s lien is subject to an equitable sharing of litigation expenses, and a settlement for less than the compensation provided by law needs the carrier’s written consent or a court compromise order. Skipping that step can cut off future comp benefits.¹⁶

In a New York motor-vehicle case, the compensation carrier has no lien on a recovery under Insurance Law § 5104(a) for benefits it paid in place of no-fault first-party benefits.¹⁶ Other compensation payments can still create a lien, so the payment categories must be reviewed.

Hospital and provider liens

Both states let certain hospitals claim a lien on an injury recovery, but only if they follow the statute exactly.

In New Jersey, hospitals, nursing homes, physicians and dentists may assert a lien for treating someone injured through another person’s negligence.¹⁷¹⁸ The notice must be filed with the county clerk where the injury happened, before any money is paid to the injured person and no later than 90 days after the first treatment.²² A hospital lien may not exceed ward rates, a physician or dentist lien may not exceed 25 percent of the recovery, and there is no lien at all when the injury is covered by workers’ compensation.¹⁹²⁰²¹

In New York, Lien Law § 189 can give qualifying charitable, state university and municipal hospitals a lien for eligible emergency treatment or admission within one week of the injury. The hospital must comply with the statute’s notice, service and filing requirements, including a verified notice filed with the county clerk after discharge and notice to the responsible parties and known insurers before payment. The lien covers reasonable charges at cost rates and does not attach to workers’ compensation awards or settlements.¹³

A lien that was never properly filed or noticed is often just an unpaid bill, not a lien. That difference can matter a great deal in negotiations.

A sample settlement breakdown

The table below is a hypothetical example only. Real cases differ, fees depend on your retainer agreement and court rules, and lien amounts and reductions vary. It shows how a Medicare lien is reduced by the federal procurement-cost formula.²

If the lawyer also persuades Medicare to remove unrelated charges from its $24,000 list, the reduction applies to a smaller number and the client receives more.

How a firm negotiates liens

Lien work is unglamorous, and it is where careful lawyering often adds money to a client’s recovery. The usual steps look like this.

1. Identify every possible lienholder early. Ask about Medicare, Medicaid, employer health plans, workers’ compensation, disability plans and hospital bills from the first meeting.
2. Get the documents. Request itemized lien statements, the plan document for any ERISA plan, and proof that any hospital lien was properly filed and served.
3. Audit every charge. Lienholders often include treatment for unrelated conditions. Each unrelated charge is challenged with records.
4. Apply every legal limit. These include Medicare’s procurement-cost reduction, the Medicaid limits from Ahlborn and its successors, New York’s § 5-335, New Jersey’s Perreira rule, the workers’ compensation fee and cost reductions, and the strict filing rules for hospital liens.
5. Negotiate the remainder. Many lienholders will compromise further, especially when insurance limits are low or the injuries are severe.
6. Hold disputed money in trust. Disputed amounts stay in the attorney trust account until the lien is resolved, so the undisputed portion can often be paid to the client sooner.
7. Explain the numbers in writing. A closing statement shows the settlement, the fee, each cost and each lien payment, so the client can see exactly where every dollar went.

Our guide to how a personal injury case works explains where lien resolution fits in the life of a case.