The Common Fund Doctrine is a legal principle that entitles a party who recovers a common fund for the benefit of others to reasonable attorney’s fees from the fund as a whole, preventing those who benefit from legal services from being unjustly enriched at the successful litigant’s expense.
The Common Fund Doctrine serves as an equitable exception to the American Rule, which typically requires each party to pay their own legal fees.
This doctrine is not established by statute but has been confirmed and upheld by courts throughout the United States over many decades.
Under this doctrine, when an attorney’s efforts create, discover, increase, or preserve a fund that benefits multiple parties, the attorney is entitled to receive reasonable compensation from that fund before distribution to beneficiaries.
This doctrine often applies in subrogation cases. Subrogation occurs when an insurance company pays a claim to a policyholder and then seeks reimbursement from the party responsible for the loss.
When the insured party hires an attorney to pursue compensation from a liable third party, the resulting settlement or judgment creates a common fund.
If the insurance company seeks to recover its payments through subrogation without contributing to the litigation costs, the Common Fund Doctrine may require it to pay a proportionate share of the attorney’s fees.
For business owners, it affects how settlement proceeds are distributed and ensures that parties who benefit from legal efforts contribute fairly to the costs incurred.
Without this doctrine, businesses might bear the full burden of legal expenses while their insurers receive full reimbursement without contributing to the recovery costs.
The application of this doctrine rests on three key principles:
- fairness to the successful party whose recovery would otherwise be consumed by expenses,
- prevention of unfair advantage to those entitled to a share in the fund but who did not share the expense burden, and
- encouragement for interested parties to take a more active role in litigation efforts.
Examples of the Common Fund Doctrine in practice
Example 1: Manufacturing Equipment Damage
Imagine XYZ Manufacturing experiences a catastrophic equipment failure causing $500,000 in damage and business interruption losses. Their property insurance pays $400,000 for the equipment replacement and business interruption.
XYZ then hires an attorney on a 30% contingency fee basis to sue the equipment manufacturer for negligent design. After extensive litigation, XYZ wins a $500,000 judgment. This $500,000 judgment covers both the insured and uninsured portions of the loss.
The insurance company files a subrogation claim seeking full reimbursement of its $400,000 payment. Under the Common Fund Doctrine, since the insurer didn’t participate in the litigation, it cannot recover the full $400,000.
Instead, it must contribute to the attorney’s fees. The court might reduce the insurer’s recovery by 30% (the contingency fee percentage), allowing them to recover $280,000 while $120,000 goes toward attorney’s fees. This prevents the insurance company from being unjustly enriched by XYZ’s litigation efforts.
Example 2: Commercial Vehicle Fleet Accident
A logistics company has a fleet of delivery trucks covered by commercial auto insurance. When one of their drivers is injured in an accident caused by a negligent third party, the company’s workers’ compensation insurance pays $150,000 for medical expenses and lost wages.
The injured employee retains an attorney who successfully recovers $250,000 from the at-fault party, with a 33% contingency fee arrangement.
The workers’ compensation insurer claims subrogation rights to recover its $150,000 payout.
Without the Common Fund Doctrine, the employee would pay $82,500 in attorney’s fees (33% of $250,000) while the insurer receives a full $150,000 reimbursement without contributing to recovery costs.
Under the Common Fund Doctrine, the court would likely reduce the insurer’s recovery by 33%, allowing them to recover $100,500 while $49,500 contributes to the attorney’s fees. This ensures the insurer shares proportionately in the litigation costs that benefited them.
Advantages and Disadvantages of the Common Fund Doctrine
The Common Fund Doctrine promotes fairness by ensuring that all parties who benefit from legal services contribute to their cost, preventing the unjust enrichment of those who would otherwise receive a “free ride.”
The doctrine also encourages attorneys to take on complex cases by guaranteeing reasonable compensation for their efforts that benefit multiple parties.
For businesses, it means not bearing the full financial burden of litigation that ultimately benefits their insurers through subrogation.
It also incentivizes insurance companies to actively participate in litigation efforts rather than passively waiting to collect from successful outcomes.
However, determining the appropriate attorney fee percentage can become contentious, particularly when multiple parties have varying interests in the common fund.
The doctrine may also lead to conflicts between policyholders and their insurers regarding litigation strategy and settlement decisions.
Some insurers attempt to circumvent the doctrine through policy language, creating potential disputes that require court intervention. For businesses, understanding these complexities requires legal expertise, which can add additional costs.
Judicial interpretation of the doctrine varies across jurisdictions, creating inconsistencies in its application throughout the United States. Some states have codified versions of the Common Fund Doctrine or have specific statutes that address similar principles, as judicial interpretation varies by jurisdiction.
Did You Know?
The Common Fund Doctrine has roots dating back to two landmark U.S. Supreme Court cases from the 1880s: Trustees v. Greenough (1881) and Central Railroad & Banking Co. v. Pettus (1885).
Originally developed in the context of trust law, the Court applied the principle that when one party among many with a common interest in a trust fund takes action at their own expense to save or restore the fund, they are entitled to reimbursement either from the fund itself or through proportional contribution from others who benefit.
This century-old foundation of the doctrine demonstrates how enduring equitable principles can be in American jurisprudence, continuing to influence modern business insurance practices despite being rarely codified in statutory law.
Sources and further reading:
The “Common Fund Doctrine” – A Guide to How It Works
common-fund doctrine definition · LSData – LSD.Law
Attorney fee awards and the common fund doctrine – Plaintiff Magazine
Nebraska Supreme Court Clarifies the Common Fund Doctrine
The Common Fund Doctrine in Personal Injury Cases
Auto Insurance Deep Dive: What is the “Common Fund Doctrine” and why is it important?
What is the Common Fund Doctrine | Maison Law