Ashley Burkhart and Pratheep Sevanthinathan’ article on Covenant Medical v State Farm was published in Michigan Lawyer’s Weekly on December 31, 2015
Ashley Burkhart and Pratheep Sevanthinathan recently authored an article on the controversial Covenant Medical case. A case which has caused confusion and delay in the settlement of No-Fault cases. The full article can be found at the following link” http://milawyersweekly.com/news/2015/12/31/covenant-enemy-of-the-pip-settlement/
Our original draft of the article is below:
Full and final Settlement? Not just yet.
On October 22, 2015, the Michigan Court of Appeals ruled on Covenant Medical Center Inc. v State Farm Mutual Automobile Ins. Co.,  a decision that has a significant impact on the settlement of No-Fault cases. The case is tremendously positive for medical providers seeking reimbursement from No-Fault insurers. Conversely, Covenant is troublesome for insurance carriers and, to a degree, injured claimants. 
The Covenant case is a medical provider suit that involved an unpaid medical bill related to a 2011 automobile accident. At the center of the case was an outstanding bill for $43,484.80 that Covenant Medical Center submitted directly to defendant State Farm for reimbursement. The bill was submitted to State Farm in 2012 while Covenant’s patient was in the midst of a No-Fault suit. On January 10, 2013, the patient settled his PIP case with State Farm for $59,000.00 and released State Farm from all “past and present claims incurred through January 10, 2013.” The settlement was, apparently, a lump sum with no specified apportionment of the proceeds. For years, this has been the normal way to settle PIP cases.
Thereafter, Covenant Medical filed suit against State Farm, alleging that State Farm had unreasonably refused to pay its bill. State Farm moved for summary disposition, arguing that the patient’s release barred Covenant Medical’s claims. The trial court (Saginaw Circuit Court) agreed with State Farm and granted summary disposition. Covenant Medical then appealed, arguing that it provided written notice to State Farm of the services they provided and are, therefore, entitled to pursue the outstanding balance despite the general release signed between State Farm and their insured
The Court of Appeals agreed with Covenant Medical and overturned the trial court’s ruling. In its rationale, the Court of Appeals focused on the statutory language of MCL 500.3112.
MCL 500.3112 provides in pertinent part:
Personal protection insurance benefits are payable to or for the benefit of an injured person or, in the case of his death, to or for the benefit of his dependents. Payment by an insurer in good faith of personal protection insurance benefits, to or for the benefit of a person who it believes is entitled to the benefits, discharges the insurer’s liability to the extent of the payments unless the insurer has been notified in writing of the claim of some other person. If there is doubt about the proper person to receive the benefits or the proper apportionment among the persons entitled thereto, the insurer, the claimant or any other interested person may apply to the circuit court for an appropriate order. The court may designate the payees and make an equitable apportionment, taking into account the relationship of the payees to the injured person and other factors as the court considers appropriate. [emphasis added.]
In view of MCL 500.3112, the Court of Appeals held that “the plain text of the statute provides that if the insurer has notice in writing of a third party’s claim, then the insurer cannot discharge its liability to the third party simply by settling with its insured.” In other words, if an insurer is on notice of a medical provider’s bill, the insurer cannot extinguish its liability to the medical provider simply by obtaining a release from the injured claimant. Rather, according to the Court of Appeals, if the insurer wishes to extinguish a provider’s claim, MCL 500.3112 requires that the insurer file a motion with the circuit court to obtain an order directing how a settlement must be allocated. Presumably, once the court has allocated a certain amount to each provider, the providers will no longer have a right of independent action.
What are the implications of this decision?
The Covenant case will have an appreciable impact on the settlement of all No-Fault cases between injured claimants and auto insurers. Medical providers will benefit greatly from this decision.  Conversely, the Covenant case will cause headaches for insurer and injured claimants trying to settle cases. This is especially true for seasoned practitioners that have an enshrined and formulaic settlement process for settlement of PIP cases. The below will address the specific impacts to medical providers, injured claimants, and insurance companies.
For medical providers, the Covenant decision is a generous gift – at least in the short term. The decision confirms that medical providers can still assert their rights against an insurer after a patient has settled and released the insurer in a PIP case. The decision, essentially, protects providers from grossly inadequate PIP settlements by its patients.
One of the primary reasons for the recent explosion of medical provider suits is because patients/claimants often do not obtain fair reimbursement for medical bills. Sometimes this is a result of inadequate representation by the patient/claimant’s attorney. When that is the case, the medical provider will want to pursue its bill through its own counsel. MCL 500.3112 provides for this as long as the insurer had notice of the provider’s bill, and the circuit court has not allocated settlement proceeds for the underlying PIP case.
Pre- Covenant, courts would readily grant motions to dismiss provider suits based purely on the fact that the patient/claimant had signed a release. The Covenant Medical case confirms that this is improper. If the insurer had notice of a provider bill, it cannot extinguish the provider’s claim unless an MCL 500.3112 motion was filed and the court ordered an allocation. Thus, the floodgates have been opened for new provider suits where no 3112 orders have been entered. 
The Covenant decision is extremely detrimental to insurers that are looking to close out claims. The decision, essentially, allows a medical provider to “undo” what an insurance company believes is a full and final settlement. Insurers have long-relied on full and final PIP releases to combat providers that look for payments after the settlement of a PIP case. However, Covenant expressly holds that an insurer cannot escape liability of a bill, for which it has notice, merely by executing a release with the injured claimant. In order to properly extinguish its liability on a bill a circuit court order allocating funds from a settlement is required.
Since MCL 500.3112 motions to allocate were rare pre- Covenant, the ramifications of the decision for insurers are significant. Potentially thousands of cases that were settled as “full and final” may end up re-litigated through last minute provider suits, where the provider aims to get a better deal than what was obtained through the patient/claimant’s PIP suit. Obviously, this would be a damaging and unfortunate consequence for No-Fault insurers.
The impact on this case for injured claimants is not as significant. The big benefit of Covenant for the injured claimants is that they are less likely to be sued by medical providers, since Covenant dictates that the providers can still go after the No-Fault insurer after a claimant’s settlement and release. Pre- Covenant, if a claimant’s attorney failed to include a medical bill in a settlement with the auto insurer the claimant would likely be stuck with the bill. Post- Covenant the medical provider knows that it should still seek reimbursement from the insurer first, and it is less likely that the patient would be ultimately responsible
The biggest drawback of the Covenant case for injured claimants is that it holds up PIP settlements. Covenant makes it clear that the court must apportion the settlement of a case if the insurer wishes to completely extinguish all bills litigated in the PIP suit. Thus, rather than just executing a release and signing a stipulated order for dismissal, an insurer will insist on getting a court ordered allocation pursuant to MCL 500.3112. Thus, extra steps will be needed to make settlements final.
How do PIP litigators address Covenant going forward?
In the short-term, the Covenant decision is bound to cause confusion and headaches in the No-Fault litigation world. However, it really should not. The Court of Appeals did not create new law in Covenant. The Covenant decision merely affirmed the clear language interpretation of MCL 500.3112.
Accordingly, addressing Covenant going forward merely requires compliance with MCL 500.3112 – including placing all providers on notice of a potential settlement, and filing a motion with the court for the allocation of proceeds. The easiest way to accomplish this is to file a motion to allocate all settlement funds directly to the injured claimant and then sending notices of settlement, and of the allocation hearing, directly to each provider. Judges should grant these motions with no issue. Covenant Medical Center Inc v State Farm Mut Auto Ins Co , ___ Mich App ___ (2015),  This decision did not create any new law, but clarified the rights of medical providers in PIP claims.  Although the Covenant opinion is merely an affirmation of a provider’s rights under MCL 500.3112, it helps providers by providing the court with guidance and clarity.  The “new” provider suits would, of course, still be subject to the one-year back rule – MCL 500.3145