Published Articles

Health Insurance and Erisa Subrogation

By Gary L. Wickert; Matthiesen, Wickert & Lehrer, S.C., Hartford, Wisconsin

By Gary L. Wickert
MOHR & ANDERSON, S.C.
P.O. Box 270670
1111 E. Sumner Street
Hartford, WI 53027-0670
(262) 673-7850 (Phone)
(800) 637-9176
(262) 673-3766 (Fax)

PART 3: ERISA SUBROGATION RIGHTS

One of the first things anyone responsible for subrogating health insurance Plans must do is take a look at the Plan and determine what its subrogation rights are. Whether a Plan is ERISA-qualified or not, the subrogation rights of the Plan are usually dictated by the plain and simple language of the Plan itself.

Plan Language Determines Subrogation Rights. If an employee welfare benefit Plan is a self-funded Plan sponsored by a private employer and the subrogation Plan contains the necessary magic words, the Plan will probably prevail in subrogation litigation and will make a recovery. It is the terms of the Plan language on which every ERISA subrogation case rises or falls. Under ERISA, the provisions of the Plan are allowed to control, rather than provisions of state law. This will be discovered later in the section on preemption. Because state law will not apply and ERISA is silent as to subrogation, the crucial questions are whether and to what extent the Plan language contains a right of reimbursement or subrogation language. When an injured person contests the Plans request for repayment out of a tort recovery, the court must critically look at and possibly interpret the subrogation language, if any, of the Plan. If the Plan language doesn't have any language giving a right of subrogation or reimbursement, the Plan will not be entitled to recover anything.

Subrogation clauses are often read broadly. If the Plan language does provide for subrogation, an endless number of questions are created. These include questions such as against what recovery does the Plan claim an interest? Answers to these and similar questions are the subject of much litigation regarding ERISA rights.

29 U.S.C. § 1102(b)(4). Strange as it may seem, there is no statutory provision on subrogation contained in the ERISA statute. The only provision of the statute which even comes close is § 1102(b)(4) which reads as follows:

Every employee benefit Plan shall specify the basis on which payments are made to and from the Plan. [1]

Accordingly, we must look to the Plan language itself to discover its subrogation rights.

Subrogation Receipts and Agreements. A Plan administrator may ask the beneficiary to sign an agreement to reimburse the Plan, even though the Plan language does not contain any reimbursement language. Such an agreement may be void for lack of consideration, however, since the Plan is already obligated to pay the benefits anyway. [2] If there is legally valid language in the Plan document which conditions the receipt of medical benefits on the signing of the subrogation agreement, then the Plan is justified in withholding payment of medical benefits until the subrogation agreement is signed by the beneficiary, according to one Maine Federal District Court decision. [3]

Subrogation Agreement Does Not Control. A subrogation receipt, reimbursement language, or other post-Plan subrogation agreement is used, the 8^th Circuit has held that it is still the language of the Plan itself, rather than the terms of the agreement, that controls the partys rights. [4]

Subrogation Agreement Does Control. Other states have given full effect to a subrogation agreement signed by a participant and his attorney. Where a participant and his attorney sign a subrogation agreement containing language which agrees to reimburse the Plan in full from the proceeds of any recovery the participant receives from third parties, a North Carolina district court has held that the Plan would be reimbursed in full without regard to the costs of the recovery. [5]

If the injured party signs a right to reimbursement agreement after the injury, the agreement and the subrogation provision of the SPD may determine the outcome of the Plans subrogation rights. In one Texas district court case, the husband of a woman who was injured in a fall signed an agreement which acknowledged the receipt of benefits and stated that he promised to reimburse the medical expenses. In light of this agreement, the court held that the husband was obligated to reimburse the benefits even if the wife did not allow him access to the monies she recovered in her settlement. [6] Similarly, in a 5^th Circuit case, an injured claimant signed an agreement which agreed that he would reimburse the Plan out of any recovery he obtained, while the SPD stated that subrogation allows the Plan to recover duplicate benefit payments. [7] Under the SPD language, the insurance company would have had to prove that the amounts recovered by the claimant were duplicate amounts. The court not only enforced the reimbursement agreement, it also rejected the claimants argument that the reimbursement agreement was obtained under duress.

Recovery Priorities. If the Plan language does provide for subrogation, against what recovery does it claim an interest? Subrogation applicability clauses are often read broadly and Plan language claiming reimbursement out of any recovery relating to injury or any funds have been held by the 8^th Circuit to reach all monies recovered, whether or not for medical expenses. [8] In many situations, the Plan receives full reimbursement even though the participant recovered less than the medical benefits paid.

Elements of Damage Recovered. On the other hand, a Plan has been held not to be entitled to recover from a settlement amount that was for pain and suffering only and not for medical expenses, where the Plan language was not broad enough to reach any recovery. [9] Therefore, if the Plan language is adequate, settlement language which characterizes the recovery by category - such as damages other than medical expenses - to defeat a Plans reimbursement claim, is unlikely to be successful. Because the Plan language determines all of the subrogation rights of the Plan, the Plan will not be bound by the characterization of the recovery in the settlement agreement, if the Plan language is adequate. [10] One possible exception to this may be the 7^th Circuit. [11]

Subrogating for More than Benefits Paid. It is generally assumed that an ERISA Plan can subrogate only for the payment benefits it has made under the terms of the Plan. However, the 8^th Circuit held that where the Plan language defined a subrogation interest as extending to the reasonable value of services and benefits provided, the Plan was entitled to recover the fair value of the services rendered and was not limited to a recovery for actual cash expenditures only. [12]

In this case, the participants also argued that the Plan and Plan administrator breached their fiduciary duties by failing to disclose that they were asserting subrogation claims for greater amounts than the Plan in fact paid for the medical services provided.

Gray Areas. In ERISA, the gray areas predominate over black letter law. There is no statutory provision on subrogation under ERISA and subrogation is allowed only if the written document Plans provides for it. Likewise, the different rules of subrogation under ERISA are governed by the terms of the Plan. Many subrogation issues have not been decided under federal ERISA law, primarily because there are an infinite number of subrogation issues which can arise with the various Plans out there. Whether or not you will be successful in subrogating depends mainly on the language in the ERISA-qualified Plan, as well as the unique facts of your case and the circuit in which your court sits. ERISA has not been around for very long and there are many issues on which there are no decided cases under state law subrogation.

Causation. An ERISA Plan still must bear some burden of proving that its subrogated interest was causally related to the tortfeasorss conduct. In an Arkansas District Court decision, the court held that where the participant seeks damages for multiple medical conditions and is forced to abandon a portion of her claim because she cannot prove the tortfeasorss fault proximately caused by one of her medical conditions, the Plan may not, without establishing a connection between the tortfeasorss conduct and the medical condition, seek reimbursement for medical expenses incurred as a result of that condition. [13]

Therefore, where state law may have relatively few gray areas, ERISA has mostly gray areas, with very little guidance in the case law. This is compounded by the fact that the terms of the Plan will govern, usually even if the Plan is silent, and the Plan subrogation clauses do not usually say much except that the Plan can subrogate and the participants and beneficiaries must reimburse the Plan. A Plan will usually not provide any terms that help a plaintiffs attorney and ERISA does not require Plans to include any subrogation terms favorable to the participants, beneficiaries, or their attorneys. Therefore, when in doubt about a rule, stick with the basic principle of ERISA subrogation: The terms of the self-insured employee benefit Plan will govern, even if state law contradicts the terms of the Plan and even if the Plan is silent on the issue. In other words, if the Plan does not specifically say the plaintiffs attorney can do something, then he cannot do it - even if state law says he can. But remember there are exceptions to this rule and the number of exceptions are growing.

Sue in the Name of Plan or Third Party Administrator? In order to determine whether suit or intervention needs to be filed in the name of the Plan or the third party administrator, you must look at the subrogation clause in the Plan documents and see who has the right to pursue subrogation. Theoretically, unless the Plan document gives the TPA the right to sue, the TPA must sue on behalf of the Plan, or the Plan must sue as an entity. If in doubt, it is advisable to sue in the name of the TPA, but mention that TPA is suing on behalf of the Plan. There is probably no need to name the Plan, just explain that the TPA is subrogated to the rights of the injured person under the terms of employee benefit Plan which paid their medical benefits. If you want to name the Plan, just add employee benefits Plan to name of your employer. If you sue the participant or beneficiary for reimbursement under § 1132 of ERISA, the TPA must be a fiduciary and you must name it as the plaintiff.

Credit Rights. Under workers compensation subrogation scenarios, once the worker receives a large settlement, and the carrier has been reimbursed, the balance is usually calculated as a credit against future benefits. Unless and until that credit is used up, the workers compensation carrier doesn't have to make any future benefit payments. With regard to an ERISA Plan, any rights are once again dictated by the Plan. A Plan is not entitled to get a credit against future benefits, regardless of how much the beneficiary recovers in the third party personal injury action, unless the Plan so provides. [14]

Summary Plan Description (SPD). An ERISA Plan must advise its beneficiaries in clear and understandable terms of all applicable provisions, and any beneficiary who is not informed may not be bound by the terms of the Plan. [15] ERISA requires a Plan to make available to its covered persons a disclosure document known as the Summary Plan Description or SPD. [16] A summary description of the subrogation right that differs from the Plan language may be held to be controlling. For example, where the Plan gave reimbursement rights against the recovery from a liable person, but the Summary Plan Description referred to a recovery from a person whose negligence caused the injury, the summary language could have the effect of denying reimbursement from a recovery arising from uninsured motorist coverage. [17] In Ninaus v. State Farm Mutual Automobile Insurance Company, [18] a Wisconsin court held that where the terms of a SPD and an ERISA Plan conflict, and where the SPD is more favorable to the employee, the summary controls, even where the Plan itself contains a disclaimer to the contrary. One Kansas district court has held that the SPD doesn't have to include subrogation rights in it. [19]

Summary Plan Description Determines Subrogation Rights. The Summary Plan Description language may affect the subrogation rights of the Plan. In one federal district court case, the court held that no subrogation needed to be paid to the ERISA Plan because the Summary Plan Description only provided that the employee reimburse the Plan. Since the benefits were paid to the children and his former wife, the Plan was not entitled to reimbursement. [20] In Hamilton, the court stated the general rule with regard to Summary Plan Descriptions as follows:

The SPD is interpreted as a whole (citations omitted). The SPD is binding, and if there is a conflict between the SPD and the terms of the policy, the SPD shall govern (citations omitted). Further, any ambiguity in the SPD must be resolved in favor of the employee and made binding against the drafter (citations omitted). The 5^th Circuit has also rejected the notion that the SPD should be interpreted in the light of the language of the Plan. It is the SPD and not the Plan upon which the average beneficiary has relied, and the SPD most nearly represents the intention of the parties.

In almost every other 5^th Circuit case, the SPD has been construed in favor of the ERISA Plan, so the Hamilton decision is a rare example of how following the SPD can sometimes help the claimant.

Plan Fiduciarys Interpretation of Plan Language.§ 1102(a)(1) requires every employee benefit Plan to have a named fiduciary who shall have the authority to control and manage the operation and administration of the Plan. In 1989, the U.S. Supreme Court held that where an ERISA Plan expressly vests the Plans fiduciaries with power to interpret the terms of the Plan document, such interpretive decision by the fiduciaries is subject to review under an abuse of discretion standard. [21] Unlike a de novo standard, under which a court can reverse the fiduciaries decision if the court disagrees with the decision, the abusive discretion standard requires the court to uphold the fiduciaries decision - even if the court believes the decision is wrong - so long as the decision is not arbitrary and capricious. [22] Under the arbitrary and capricious standard of review, the court first determines de novo whether the fiduciary erred when it made its decision. If the fiduciary erred, the court must then decide whether the erroneous determination was nevertheless a reasonable determination, or whether it amounted an abuse of discretion. [23] This makes overturning a fiduciarys interpretation of the Plan quite difficult, and gives the fiduciary great power to assist the Plan in making subrogation recoveries by interpreting subrogation provisions favorably. However, the Plan must first vest a Plan fiduciary with this power to interpret it terms.

Most employee benefit Plans in the country should have language vesting the Plan fiduciary with this discretion, and those that do not will lose subrogation battles. This language allows the Plan fiduciary to stretch the literal, often general, and sometimes even vague terms of the Plan subrogation provisions to defeat contrary and perhaps just as reasonable, interpretations, set forth by plaintiffs attorneys attempting to defeat your subrogation interest. This power gives the fiduciaries the flexibility to expand the literal terms of the subrogation provisions to effectively deal with new situations and new anti-subrogation arguments raised by plaintiffs attorneys and insureds.

Purpose of ERISA Subrogation. The unstated but clear purpose and intent of self-funded ERISA Plans is to provide health benefits to the employees of their employers. Because this mission is depended on the Plans continued economic viability, this mission is facilitated by the Plan being reimbursed for payments it has made on behalf of covered employees. [24] Reimbursement and subrogation rights are vital to ensuring the financial stability of self-funded Plans.

NEXT: PART 4: ERISA PREEMPTION AND THE MADE WHOLE DOCTRINE

NEXT: PART 4: ERISA Preemption and the Made Whole Doctrine