ERISA Plan Wins Recovery From Settlement; Auto Insurer Must Reimburse Member
Coordination of Benefits Handbook
As we have often seen in cases involving tort settlement proceeds arising from auto accidents, Michigan’s no-fault auto insurance law (Mich. Comp. Laws §500.3135) provides that Michigan drivers can buy secondary no-fault coverage at lower premiums. The law prevents insured health plans issued in Michigan from seeking reimbursement for medical expenses from tort settlement proceeds.
That has the effect of requiring insured health plans to assume primary responsibility for medical expenses arising out of auto accidents. However, in just about all recent federal court decisions in Michigan involving subrogation and reimbursement by self-insured ERISA health plans, federal courts have ruled that ERISA preempts that law.
We have not previously seen cases dealing with the liability of Michigan no-fault auto insurers where an ERISA plan prevails in recovering the health benefits it paid from tort settlement proceeds that were held in escrow pending resolution of the claim of the ERISA plan. Can the plan participant recover the amount paid to the ERISA plan from the Michigan no-fault insurer even if it had already paid its full policy limits? That question was recently considered by a U.S. District Court in Michigan. The case is Bash v. State Farm Mutual Automobile Insurance Co., 2010 WL 1657924 (E.D., Mich., April 23, 2010).
THE FACTS
Kerry Bash, an employee of Petsmart Smart Choices, suffered catastrophic injuries as a passenger in her stepfather’s car. She was covered by Petsmart’s self-insured health plan at the time. She suffered severe traumatic brain injury requiring prolonged hospitalization. At the time of the accident she was also covered under her stepfather’s no-fault auto insurance issued by State Farm based on the Michigan no-fault law and her own State Farm no-fault auto coverage. She was eventually discharged from medical care and ended up in a rehabilitation center for the brain injured, with no semblance of a normal life and unable to live independently. The Petsmart health plan paid about $475,000 for her medical care. It also appears that the Petsmart plan is unlikely to have future coverage obligations for her care.
Her claims under the auto insurance policies issued by State Farm were settled for $1.1 million, and an additional claim against another auto insurer (apparently the plan covering the other driver) settled for $100,000. It appears that each insurer settled for its maximum policy liability. Bash’s attorney held the settlement proceeds (or at least the approximately $475,000 claimed by the Petsmart plan) in escrow pending the court’s determination of the parties’ rights. This action was brought to sort out which plans were obliged to pay what amounts. Since there were no questions of facts to be decided, each of the parties moved for summary judgment against each other.
THE DECISION
The court first considered the Petsmart plan’s claim for reimbursement of the benefits it paid, and ruled that the plan’s well-drafted subrogation and reimbursement provisions were not ambiguous. Based on several cases related to ERISA preemption of the Michigan no-fault law, the court concluded that the plan was entitled to reimbursement from the settlement proceeds. So it granted the self-funded Petsmart plan’s motion for summary judgment.
The court next turned to Bash’s claim seeking reimbursement from State Farm for the approximately $450,000 that now had been paid to the Petsmart plan. The court ruled that under the Michigan no-fault law Bash was entitled to recover that amount from State Farm. Referring to previous decisions of the Michigan Supreme Court regarding the obligations of Michigan no-fault insurers in cases where the injured party ended up paying for his or her medical expenses arising from the accident under circumstances similar to this one, the court said:
In this case, the insured received payment to cover medical expenses that pursuant suffering damages. Because federal law preempts state law, Michigan cannot stop [an ERISA plan] from requiring reimbursement. Consequently, here, as in Sibley v. Detroit Auto. Inter-Ins. Exch., 431 Mich. 164m 427 N.W.2d 528 (Mich. 1988), the insured is being forced to pay her own medical expenses out her tort damages for pain and suffering. This contravenes the expressed intent of the Michigan legislature as embodied in [the Michigan No-Fault Insurance Act], which requires all car owners to maintain insurance coverage for medical expenses and prohibits no-fault insurers from seeking reimbursement for tort settlements. Mich. Comp. Laws §§3301, 311. Furthermore, the Michigan legislature mandated coordinated benefits plans to avoid duplicate coverage, not to deny insured persons coverage altogether. See Smith v. Physicians Health Plan, Inc., 444 Mich. 743, 414 N.W.2d 150, 154. Here the coverage is not duplicative because [Bash]’s tort damages are for pain and suffering and State Farm is covering [Bash]’s medical expenses. Thus the fact that the State Farm Policy is coordinated with [Petsmart’s] policy is irrelevant. [Bash] retains an insurance policy for medical expenses and should not be required to pay her medical expenses without help from her insurance carrier.
State Farm did not submit arguments in response to Bash’s motion for summary judgment against either the Petsmart plan or State Farm, nor did it address the issue discussed in the above paragraph in its own motion for summary judgment. However, based on the cases provided by Bash’s attorney and cited by the court in support of its decision, the court denied State Farm’s motion for summary judgment, and granted Bash’s motion for summary judgment against State Farm. Having granted the Petsmart plan’s motion for summary judgment, the court denied Bash’s motion for summary judgment against the Petsmart plan.
IMPLICATIONS
This is the first time we’ve seen a case where a federal district court ruled that a Michigan no-fault auto insurer now has to pay more than its maximum plan liability when a health plan subject to ERISA recovered a substantial portion of the tort settlement proceeds it paid. There are probably two reasons for this.
1) The previous cases we have seen involved situations where the no-fault insurer had paid its tort settlement proceeds and were no longer parties to the case. In those situations, the court had no jurisdiction over the no-fault insurer and so it could not impose any further liability on it.
2) The no-fault insurer in this case (State Farm) did not address Bush’s arguments in her motion for summary judgment against it, either because it assumed that those arguments had no merit or that its attorneys forgot that they should never to make such an assumption.
As this district court saw it, the legislative intent of the no-fault law was to have the no-fault insurer reimburse the injured party for the medical expenses regardless of any liability of the injured party to reimburse its health plan. The effect of this decision requires State Farm to pay more than its maximum liability. In this case, State Farm’s maximum liability was $1.1 million, and it paid that amount. It appears that at least $450,000 of State Farm’s $1.1 million settlement was held in escrow by Bash’s attorney, who now has to hand it over to the Petsmart plan. The court appears to have determined that Bash ended up paying for her medical care directly because the Petsmark plan recovered what it paid from the tort settlement proceeds. That led it to rule that State Farm now has to pay another $450,000 to Bash.
Will that portion of the award by the district court stand up if State Farm appeals that portion of the decision? We don’t know. Practical and technical procedural issues might prevent such an appeal. It would seem odd for a federal appellate court to end up resolving the issue of legislative intent of the Michigan no-fault law under these circumstances.
In cases of this sort, the conflicting provisions of the state and federal laws reflect different public policies regarding the allocations of loss among insurers. The applicable provision of ERISA is designed to protect the financial integrity of self-insured ERISA health plans by allowing them to recover benefits paid from tort settlement proceeds. This represents the public policy of keeping the cost of health coverage down. The applicable provision of the Michigan no-fault law is to help lower premiums paid by purchasers of no-fault auto insurance who bought policies that were secondary to health insurance policies issued in Michigan. This represents a public policy of making lower cost no-fault auto insurance available to Michigan drivers. The decision in this case undercuts the public policy adopted by the Michigan legislature and supports the public policy adopted by Congress when it enacted ERISA. It makes sense that a federal court would resolve the conflict that way, especially because ERISA preempts state law in these cases.
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