11th Circuit Explains Why It Upheld Plan’s Reimbursement Provision
Coordination of Benefits Handbook
Victims of accidents in subrogation/reimbursement cases have emotional appeal when they argue that tort settlements are reduced without some consideration of the fact that they were not “made whole” or had their recoveries diminished by not requiring a recovering plan to share the legal fees they incurred in making the settlement. There can be cases where the amount of the tort settlement seems to include significant amounts to reimburse losses beyond actual medical expenses incurred by the plan participant and paid by the ERISA plan. In this case, the 11th Circuit upheld an earlier ruling allowing the plan to recover the full amount it paid to a participant who received a much larger settlement. The decision was unusual in the clarity of its explanation of why the subrogation was in fact equitable. The plan gained an advantage by becoming involved in the tort settlement early enough to ensure a separate and identifiable portion of the settlement was set aside.
In just about every recent federal court decision involving subrogation and reimbursement, courts have allowed ERISA plans — if they include well-drafted subrogation and reimbursement provisions — to recover either full reimbursement for medical expenses paid out of tort settlement proceeds, or the full amount of the tort judgment or settlement proceeds (if the amount is less than full reimbursement).
Nevertheless, plan participants continually point out that they are not fairly treated when their tort settlements are reduced without some consideration of the fact that they were not “made whole” or had their recoveries diminished by not requiring the plans to share the legal fees they incurred in making the settlement.
Those arguments have an emotional appeal when the plan participant is seriously injured. Further, there can be cases where the amount of the tort settlement seems to include significant amounts to reimburse losses beyond actual medical expenses incurred by the plan participant and paid by the ERISA plan.
Attorney’s fees incurred in reaching tort settlements can vary, but generally they are one-third of the amount recovered. In addition, settlements can include allowances for future medical expenses. Further, seriously injured individuals usually suffer long-term pain and limitations on their activities and earning capacities, and tort settlements usually include some amount on account of those factors when the tortfeasor’s liability is clear and there are sufficient funds to do so.
Also, few (if any) health plans pay the full cost of medical services provided to injured plan participants. Plan participants almost always pay deductibles, coinsurance and/or copayments, and some medical expenses are excluded from coverage. Thus, any diminution of tort settlement proceeds reduces the net recovery to the injured plan participants. Yet, plans nowadays usually succeed in making a full recovery (unless, of course, they delay in establishing their equitable lien on the entire settlement proceeds) or end up with the entire tort judgment or settlement proceeds if the tortfeasor’s insurance coverage is limited.
Most often, the tort settlement proceeds are limited to the maximum liability of auto or other liability insurance covering the tortfeasor. Generally, tortfeasors do not have sufficient assets to cover all losses suffered by injured parties.
Sometimes, but not always, courts address the reasons why such recoveries make sense under the law as it now stands. One such recently decided case where the court clearly explained the overall purpose of ERISA’s provisions is Zurich American Insurance Company v. O’Hara, 2010 WL 1641369 (11th Cir., April 26, 2010).
THE FACTS
Keith O’Hara was covered by the Zurich American health plan when he was seriously injured in an auto accident. His plan paid more than $262,000 toward his medical expenses. He sued the other driver and received a settlement of almost $1.3 million.
The Zurich American plan’s subrogation and reimbursement provision was very well written. Its applicable provisions stated that:
• no court costs or attorney’s fees may be deducted from the plan’s recovery without the plan’s express written consent; any so-called “Fund Doctrine” or “Common Fund Doctrine” or “Attorney’s Fund Doctrine” shall not defeat this right; and
• regardless of whether a covered person has been fully compensated or made whole, the plan may collect from covered persons the process of any full or partial recovery that a covered person or his or her legal representative obtains, whether in the form of a settlement or judgment. The proceeds available for collection shall include, but not be limited to, any and all amounts earmarked as noneconomic damage settlement or judgment.
The plan brought an action to recover the full amount of the benefits it paid (more than $262,000), and the U.S. district court granted its request for summary judgment. O’Hara appealed.
THE DECISION
In his appeal, O’Hara claimed that:
[A]s a matter of equity and in order to effectuate ERISA’s policy of protecting plan beneficiaries, the make-whole rule must be applied because allowing Zurich to recoup the medical expenses it paid on his behalf unduly punishes him by requiring him to forfeit a substantial portion of the compensation he received for his other losses, including future wages and bodily integrity, and unjustly enriches Zurich.
The appeals court disagreed, saying:
Applying federal common law to override the Plan’s controlling language, which expressly provides for reimbursement regardless of whether O’Hara was made whole by his third-party recovery, would frustrate, rather than effectuate, ERISA’s repeatedly emphasized purpose to protect contractually defined benefits.
The court explained this as follows:
While we sympathize with O’Hara’s situation, we cannot conclude that enforcement of Zurich’s contractual right to full reimbursement conflicts with ERISA’s policy of protecting Plan beneficiaries or that a balancing of the equities in this case requires application of the make-whole doctrine to defeat the Plan’s unambiguous reimbursement requirement. … Reimbursement inures to the benefit of all participants and beneficiaries by reducing the total cost of the Plan. If O’Hara were relieved of his obligation to reimburse Zurich for the medical benefits it paid on his behalf, the cost of those benefits would be defrayed by other plan members and beneficiaries in the form of higher premium payments. Plan fiduciaries must also ensure that the assets of employee health plans are preserved in order to satisfy present and future claims. … Because maintaining the financial viability of self-funded ERISA plans is often unfeasible in the absence of reimbursement and subrogation provisions like the one at issue in this case, [Citation omitted.] denying Zurich its right to reimbursement would harm other plan members and beneficiaries by reducing the funds available to pay those claims. Moreover, O’Hara availed himself of the benefits of the Plan with the knowledge that the Plan would be entitled to full reimbursement for those benefits in the event he was injured and received full or partial recovery from a third party tortfeasor. As the 3rd Circuit has pointed out, any inequity in this case would lie in permitting O’Hara “to partake of the benefits of the Plan and then after [he] had received a substantial settlement, invoke common law principles to establish a legal justification for [his] refusal to satisfy [his] end of the bargain. [Citations omitted.]
The court went on to point out that O’Hara’s argument that the result in the district court forced him to make a greater contribution to the plan than other plan participants and thus results in him receiving lesser benefits than similarly situated benefits. It noted that what “Zurich seeks in this case is not a premium or contribution of the basis of any health status-related factor to be paid out of O’Hara’s general assets,” but rather recovery “of specific and identifiable funds [it] advanced to cover O’Hara’s accident related medical expenses, that are being held in trust by O’Hara’s attorney.”
The court also noted that the reimbursement and subrogation provision is a limitation or restriction on the level of plan benefits provided, and thus:
[I]t is not impermissibly discriminatory because it applies uniformly to all participant and requires reimbursement for any participant or beneficiary who receives medical benefits under the Plan and then subsequently recovers from a third party. The fact that O’Hara is affected by the Plan’s right to subrogation, while others who have not received tort recoveries from third-parties are not, does not render the Plan discriminatory. [Emphasis by the court, and citations omitted.]
IMPLICATIONS
What is unusual about this decision is the clarity of its explanation of why the subrogation provision is in fact “equitable.” It is true that this case is unusual in that the cases we often see involve tort settlement proceeds that clearly are insufficient to make the injured party whole. Aside from that, there is nothing unusual about this decision. It is well within the mainstream of current federal court decisions in similar cases.
Further, this case appears to have been well-handled by the plan, which became involved in the tort settlement proceedings early enough to ensure that the portion of the tort settlement proceeds related to Zurich’s claim for reimbursement were held by O’Hara’s attorney in trust until the Zurich claim was resolved.
Clearly, from O’Hara’s perspective, the outcome was unfortunate because it is likely he is permanently limited in his ability to resume his former life as a result of the accident and the amount of the settlement was probably inadequate to fully compensate him for all of his losses even though it exceeded $1 million. However, this case illustrates the balance of equities that apply in such cases, and demonstrates that there always is another side to a situation that has emotional appeal.
Readers of this Newsletter are likely to be more understanding of the equities recognized by the court in this case than the average plan participant, including O’Hara.
Comments