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 law.  

The Supreme Court’s decision in McCutchen 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.

With an emphasis on litigation, Sara Hauptfuehrer’s practice focuses on Title I of the Employee Retirement Income Security Act of 1974 (ERISA). She also handles employment discrimination litigation and counsels on a number of employee benefits-related issues.
» See more articles by Sara E. Hauptfuehrer
» Read the full biography of Sara E. Hauptfuehrer at Steptoe & Johnson

Leave a Reply

Your email address will not be published.