U.S. Supreme Court Decides Important Self-Insured ERISA Plan Reimbursement Case

April 19, 2013

Plan administrators and sponsors of self-insured group health plans under the Employee Retirement Income Security Act of 1974 (“ERISA”) should be aware of a case decided by the U.S. Supreme Court on April 16, 2013, US Airways, Inc. v. McCutcheon. The facts that gave rise to the lawsuit are typical. A participant in a self-insured group health plan sponsored by his employer, who was seriously injured in a car accident, hired an attorney and sued the other parties in the accident. The group health plan had paid the participant’s medical expenses resulting from the accident. The amount of available liability insurance was inadequate to cover the participant s damages (there was a million dollar injury but a gross insurance recovery of only $110,000). The contingent fee for the participant’s lawyer amounted to $44,000, leaving the participant with a net recovery of $66,000, which was $866 less than the amount the self-insured health plan paid for the participant’s medical expenses. Asserting its right of reimbursement under the terms of the plan document, the plan sought full reimbursement from the participant: not merely the $66,000 net recovery, but the $44,000 attorney fee, too.
The participant in US Airways had argued (successfully in the 3rd Circuit Court of Appeals) that notwithstanding the language in the group health plan document, equitable principles should control and therefore he should not have to reimburse the plan if he wasn’t fully compensated in his lawsuit for his injuries (the make whole doctrine), and secondly the plan would be unjustly enriched if it did not have to contribute towards his attorneys’ fees (the common fund doctrine). The self-insured group health plan countered with its right of reimbursement language in the plan document, and argued that language should not be overridden by the asserted equitable doctrines. The Supreme Court therefore was asked to rule on whether clear plan terms can be overridden by equitable principles (such as make whole doctrines and common fund doctrines), and whether gaps in plan language can be filled by equitable principles.
Do self-insured health plans have a legal right to reimbursement from the participant’s net settlement recovery even if the plan participant hasn’t been made whole? The Court answered this question, resoundingly, yes, so long as the language in the plan document and summary plan description clearly spell out the plan’s contractual right to do so. In this case the plan language passed that test because it clearly stated that the participant “will be required to reimburse” for amounts received by way of settlement or award, and it clearly provided that the plan had first priority to reimbursement of its expenses paid. Alternatively, had the plan documents been silent as to the right of reimbursement, the law would have filled that gap in the plan language with an equity-based default rule that would have deprived the plan of the right to reimbursement because under the default rule, the participant would have to be made whole before the plan could recover.
It is common for group health plan documents to contain reimbursement language similar to that in US Airways. The Court’s decision on this issue is not particularly surprising, but for plan administrators and sponsors, it is a welcome reinforcement. Most injury cases are brought in state court, yet state courts are required to apply federal law under ERISA for reimbursement from self-insured health plans. The importance of US Airways is that it gives clear guidance to state court judges that the right of reimbursement out of the participant’s/beneficiary’s net award is paramount, so long as the requisite language is in place, which usually is the case.
US Airways also makes it clear that a plan could obtain reimbursement from the participant’s/beneficiary’s gross settlement or award (that is, the plan would be paid before the attorneys fees were deducted), but, only so long as the plan language specifically so provides. In other words, an ERISA group health plan may include a right of reimbursement that applies to the total amount of the settlement or award, including the portion of the award which the participant used to pay contingent attorney fees and costs. In US Airways the plan language was silent on that point. Accordingly, the Court applied an equity-based default rule called the “common fund doctrine” which requires the plan to share proportionately in the participant’s attorney fees and costs incurred.
How an ERISA group health plan s reimbursement right is designed is a decision for the plan sponsor. Intentionally or not, ERISA group health plan language is often silent as to reimbursement from the attorney fees and cost portion of the settlement or award. As the Court observed in US Airways, such silence might reflect a wiser policy selection. “Third-party recoveries do not often come free: To get one, an insured must incur lawyer’s fees and expenses.” In many instances if the attorney fees and costs were to be encompassed within the plan’s right of reimbursement, there would be no incentive for the participant to pursue (or for an attorney to undertake) a lawsuit against the party who caused the injuries. The facts in US Airways illustrate this point. As a result of the Court’s decision, Mr. McCutcheon’s net recovery will be zero, the plan will receive $66,000 in reimbursement, and McCutcheon’s lawyer will receive his $44,000, to which the plan will make a proportionate contribution.
By contrast, if the plan’s right of reimbursement were written so as to encompass attorneys’ fees and costs, as well, what lawyer would agree to take the case? If the participant does not bring a suit, then the plan must decide whether to be satisfied with that outcome or instead seek to enforce its right of subrogation by bringing its own suit against the tortfeasor in federal court.
Ruder Ware has experience in 1) drafting ERISA group health plan reimbursement and subrogation language which accurately reflects the plan sponsor’s intent and which satisfies the clarity which the courts require, and 2) enforcing reimbursement and subrogation rights in state and federal courts on behalf of plans and their sponsors. Please contact Attorneys Russ Wilson, Mary Ellen Schill, or Dan Peters at (715) 845-4336 with any questions you have concerning this legal update.

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