What is Mahler money?
The Washington Supreme Court held in the landmark Mahler case that insurance companies under some circumstances have to pay part of the injury victim’s attorney fees and costs (even if the attorney works on a contingency fee basis).
Normally you do not have to pay back an insurance company for benefits paid under a policy. The policy benefits are what you paid for with your premium payments. But, if you collect from an at-fault party that caused the loss, your insurance has a right to be reimbursed, too. This legal rule is called subrogation.
You have personal injury protection (PIP) coverage on your auto insurance which covers for medical expenses related to an auto accident injury, unless you expressly waived PIP coverage.
If you hire a personal injury attorney, your PIP insurance must pay its fair share of the attorney fees and litigation costs. Otherwise, the insurance company would get a windfall. They would get paid back by riding the coattails of the personal injury attorney’s efforts, which the injury victim pays for from the personal injury settlement. To avoid this windfall the PIP insurance company must pay a share of the attorney fees and other costs that created the settlement. This is the Washington Supreme Court holding in Mahler.
Whose money is it?
There is some disagreement on this point among personal injury attorneys, but we regard the Mahler money belonging to the personal injury client.
The Washington Supreme Court in the Mahler opinion noted that the amount to pay the insurance company was being held in trust by the attorney and this money “belongs entirely to Mahler [the personal injury client].” The rationale is that it is unfair for the personal injury victim to fully compensate the attorney and pay all expenses out of the injury settlement—and yet the insurance company gets a check, too. This inequity is avoided if the injury victim does not pick up the whole bill from the settlement.
Important notes. Note that Mahler does not always apply. In some situations, different law applies a different reduction for a pro-rata share of attorney fees and costs. In some situations, the injury victim does not have to reimburse their own insurance at all. In still other situations, the injury victim must pay back every dollar. And in any type of situation, it may (or may not) be possible to negotiate a different and more favorable amount. It is best to have a consultation with an attorney to sort out how this all works in your particular circumstances.
Mahler math. Contrary to a common fallacy, the Mahler calculation is not a flat percentage. Instead, it is a ratio. You start with the amount PIP paid, then divide that by the gross settlement amount. Whatever percentage that comes out to, the PIP insurance company must pay that percentage of the attorney fees and costs. The Mahler pro-rata share of expenses is simply taken out of the check that reimburses the insurance company.
The example uses an attorney fee that is 1/3 of the gross settlement, which is common. The actual attorney fee may vary depending on the fee agreement terms and other factors and may be more than or less than one-third of the gross settlement. You can override the one-third calculation by manually entering a different attorney fee amount.
The costs figure is arbitrary for the purposes of a simple demonstration. The actual costs might be lower if litigation is avoided, but would be considerably more if litigation cannot be avoided—something not always in the control of the personal injury attorney or client.
Note again that this is based on the personal injury law of Washington state. The laws in other states vary.