A 2012 Texas Federal Court decision has brought into focus the ability of an ERISA Plan to file a state subrogation tort action. While dealing specifically with a Contribution of Benefits issue, the Federal Court decision in Central States v. Health Special Risk, Inc., 2013 WL 2656159 (N.D. Tex. 2013) has given ammunition to anti-subrogation elements claiming that an ERISA Plan has no right to file a subrogation suit, no matter what the Plan language says.
ERISA says nothing about the right of a Plan to pursue subrogation or reimbursement rights. Reimbursement is when the Plan seeks recovery of benefits from a beneficiary who has successfully recovered damages from a tortfeasor. Subrogation, on the other hand, is the right of a Plan to sue a tortfeasor in the name of the injured beneficiary, thereby enforcing the beneficiary’s rights against the tortfeasor and recovering benefits the Plan has paid in the process. A Plan’s terms delineate its subrogation rights against parties responsible for causing injuries which result in necessitated healthcare for which the Plan has paid benefits. In many ways, this provision gives the Plan the right to “stand in the shoes” of the Plan beneficiary or covered person, granting them legal standing to file suit against the tortfeasor to recover the benefits paid. A sample subrogation clause might look something like this:
This Plan will be subrogated to any and all rights which a covered individual or beneficiary has against any and all parties responsible for causing the injuries or illnesses for which benefit payments are made under this Plan.
The above provision purports to give the Plan any rights which the covered individual or Plan beneficiary had against anyone responsible for causing the injuries. A provision such as this grants the Plan a contractual right of subrogation, which is different than a right of reimbursement.
Traditional subrogation language – giving the Plan the right to step into the shoes of the beneficiary and recover its benefit payments directly from the third-party tortfeasor – is found in ERISA Plans less frequently than reimbursement language, the latter of which simply gives the Plan the right to be reimbursed from any tort recovery resulting from a tort action filed by the beneficiary. The reason for this is not clear, but may be because ERISA Plans feel they should not be involved in, nor should Plan assets be used for, litigating claims on behalf of participants against third-party tortfeasors. Lisa N. Bleed, Enforcing Subrogation Provisions As “Appropriate Equitable Relief” Under ERISA Section 502(a)(3), 35 U.S.F. L. Rev. 727, 731 (2001). Rather, it is felt that Plan resources should be used primarily to pay Plan benefits. ERISA explicitly requires a Plan fiduciary to “discharge his duties … solely in the interest of the participants and beneficiaries and– (A) for the exclusive purpose of: (i) providing benefits to participants and their beneficiaries; and (ii) defraying reasonable expenses of administering the plan ….” 29 U.S.C. § 1104(a)(1) (1994); Egelhoff v. Egelhoff, 532 U.S. 141 (2001) (observing that “[r]equiring ERISA administrators to … contend with litigation would undermine the congressional goal of ‘minimizing the administrative and financial burdens’ on plan administrators–burdens ultimately borne by the beneficiaries”) (citations omitted).
There are virtually no appellate decisions dealing with ERISA Plans filing subrogation actions against tortfeasors to recover benefits paid by the Plan. Since the Knudson and Sereboff decisions, there has been some speculation as to whether an ERISA Plan has the right to file a state subrogation tort claim on its own. In 2013, a Texas Federal Court decision added to this confusion in the context of a suit for Coordination of Benefits.
Central States I
In Central States v. Health Special Risk, Inc., an ERISA Plan sued four accident medical insurers alleging overlapping and duplicate coverage and arguing that the defendants were primarily liable for the insured’s medical expenses. Central States, SE & SW Areas Health & Welfare Fund, ex rel. McDougall v. Health Special Risk, Inc., 2012 WL 1570981 (N.D. Tex. 2012) (Central States I). Central States paid the medical expenses and sought Coordination of Benefits reimbursement from the defendants, seeking a declaratory judgment, an order of equitable relief requiring restitution, and an equitable lien and imposition of a constructive trust pursuant to 29 U.S.C. § 1132(a)(3). The defendants moved for dismissal claiming that Great-West Life v. Knudson prohibits such a claim for monetary relief. The Court dismissed the claim holding that such a claim was not “equitable.”
Central States II
The plaintiff then amended its complaint to plead a claim seeking to recover against the defendants by stepping into the shoes of its insureds and enforcing their rights for coverage against the defendants for payment of the medical expenses – a direct subrogation cause of action. The defendant again moved for dismissal, and the Court dismissed all claims except as to Central States’ subrogation claim. Central States, SE & SW Areas Health & Welfare Fund, ex rel. McDougall v. Health Special Risk, Inc., 2012 WL 5006054 (N.D. Tex. 2012) (Central States II). In Central States II, the Court correctly pointed out that “an ERISA Plan suing a third party as subrogee of its insureds is not…limited by § 503(a)(3), and, in its capacity as subrogee, may bring legal claims for damages against the third party.” The defendants immediately urged the Court to reconsider its decision.
Central States III
On reconsideration, the Court dismissed the remaining subrogation claim made by Central States. Central States, SE & SW Areas Health & Welfare Fund, ex rel. McDougall v. Health Special Risk, Inc., Case 3:11-CV-02910-D (N.D. Tex. 2013) (Central States III). In Central States III, the Court held that Central States was completely preempted from bringing the subrogation claim directly against the defendants. It announced that Central States could not bring a subrogation claim against the defendants under any provision of ERISA § 502(a). The Court noted that § 502(a) only permits claims by Plan fiduciaries:
(A) to enjoin any act or practice which violates any provision of [ERISA] or the terms of the Plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provisions of [ERISA].
Because Central States was not seeking specified funds from the defendants, the claim is not equitable. Therefore, the Court held that ERISA did not completely preempt the subrogation claim and dismissed the remaining subrogation claim.
The decision in Central States III noted that if the insured recovered from the defendants under its insurance contracts with them, Central States should be able to seek reimbursement from that recovery. It also suggests that ERISA Plans are not powerless to require that beneficiaries assert claims against third parties and thereafter assert rights of reimbursement. Unfortunately, the distinction here between such a maneuver and situation where the Plan is assigned the right to file suit in the name of the insured and then files the subrogation suit in the name of the insured, appears to be one without a difference. Nonetheless, the decision lends misguided support to the unthinkable proposition that a state subrogation tort suit filed by an ERISA Plan seeks “money damages” as opposed to “equitable” relief, and might not be allowed.
The Court in these decisions held that the claim of restitution in the form of an equitable lien and the imposition of a construction trust did not change the legal nature of its claims. Citing Knudson, Sereboff, and Bombardier, the Court noted that whether a claim was characterized as legal or equitable depended on whether the money sought could be traced to particular funds or property in the defendant’s possession. Because Central States was not trying to make a claim to a specific fund in the defendants’ possession, its claim for money damages constituted legal – not equitable – relief. Likewise, it might be argued that a state tort law claim does not qualify as “other appropriate equitable relief” under ERISA’s § 502(a)(3). These decisions are unique in that they are the first “shot over the bow” by trial lawyers who will undoubtedly now claim that a direct subrogation action is purely a legal claim seeking monetary relief, something an ERISA Plan may not undertake. Surprisingly, it was defense lawyers at Cozen O’Connor who aggressively pursued legal arguments on behalf of defendant, Health Special Risk, Inc., that could potentially foreclose subrogation claims for ERISA Plans in the future.
For information on the subrogation of health insurance (ERISA or non-ERISA) or occupational accident Plans, please contact Ryan Woody at [email protected].