by Sara E. Hauptfuehrer
Employer-sponsored group heath plans typically allow
reimbursement to the plan for benefits paid in connection with injuries
sustained as a result the tortious conduct of a third party. That right
of reimbursement arises when the injured plan participant obtains a recovery
against the tortfeasor and is enforceable, as an equitable lien by contract,
against the proceeds of any recovery. Plan terms also, as an alternative
remedy, subrogate the plan to the rights of the injured participant and allow
the plan to pursue the participant's tort claim in its own name.
The rights of subrogation and reimbursement are solely a
creature of the plan's terms, which define the scope of the rights. In
the absence of precise plan language, certain common law principles can be
applied limit or defeat the plan's rights. For example, when the
participant's recovery from the third party does not fully compensate him or
her for his or her medical expenses, the plan's reimbursement right can be
limited to the amount of the participant's double recovery. Also, under the
common law, the party seeking reimbursement is required to pay a share of the
attorneys' fees incurred in securing the recovery from the third party.
That rule is known as the "common fund" doctrine. The terms of an ERISA
plan, however, generally will control over both of those common law rules as
they are grounded in state law, and ERISA preempts, or supersedes, state
The Supreme Court's decision in McCutchen [an enhanced version of this opinion is available to lexis.com
subscribers] underscores the importance of careful drafting of plan
subrogation/reimbursement provisions. In that case, the plan's
reimbursement terms provided that the injured participant was "required to
reimburse [the plan] for amounts paid for claims out of any monies recovered
from [the third party], including, but not limited to, your own insurance
company as the result of judgment, settlement, or otherwise." The plan
paid out some $66,800 in medical expenses and sought reimbursement of that
amount from the $110,000 the participant recovered on account of the
injury. The participant's share of the recovery was reduced by $44,000 in
attorneys' fees. The federal trial court concluded that the plan was
entitled to reimbursement of the entire $66,800, leaving the participant in an
$800 net negative position.
The federal Court of Appeals for the Third Circuit vacated
the decision in favor of the plan based its understanding of ERISA's civil
enforcement provisions. As applicable to the plan's claim for
reimbursement, the statute authorizes recovery of "appropriate equitable
relief" in lawsuits brought to plan administrators to enforce the plan's
terms. The Court of Appeals determined that "equitable doctrines and
defenses" - unjust enrichment, double recovery, and the common fund doctrine -
should be applied to limit the plan's reimbursement. Otherwise, the
participant would not receive full payment for his medical bills, and the plan
would receive a windfall in light of its failure to contribute to the cost of
obtaining the recovery. Thus, the Court of Appeals held that general
principles of equity could override the plain terms of the ERISA plan.
That ruling represented a serious threat to the sanctity of plan terms, which
had previously been scrupulously enforced.
The Supreme Court, fortunately, saw things
differently. An ERISA plan, the Court noted, is a contract and as such
must be enforced as written. Equitable principles of unjust enrichment
are "beside the point when parties demand what they bargained for in a valid
agreement." When the contract/plan specifically allows reimbursement,
equitable principles do not apply to limit that right. The Court
concluded that the "double recovery" rule did not apply because its application
would contradict the terms of the U.S. Airways plan.
On the other hand, on the issue of attorneys' fees and
the "common fund" rule, the Court noted that the plan's terms were
silent. In that circumstance, the plan could (and should) share in the
expense of obtaining the recovery. In other words, where the plan's terms
do not address the issue, the common fund rule will operate to shift to the
plan a fair share of the attorneys' fees. Significantly, though, if the
plan by its express terms eschews application of the common fund doctrine, such
terms are enforceable.
Careful drafting of plan terms is the key to ensuring
that plan operates as intended.
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