The fact that a stop-loss insurer reimbursed a plan for some of the benefits the plan does not affect the plan’s ability to seek recovery from the participant’s tort settlement with a third-party tortfeasor. A federal court in Idaho upheld that outcome, allowing the plan to assert an equitable lien. The plan was covered by a stop-loss policy with a $50,000 stop-loss trigger. The participant incurred nearly $125,000 in health expenses and the plan received nearly $75,000 from the stop-loss insurer. The plan sought assets from the settlement. Clear plan provisions stated it had a right to the settlement funds. The court rejected arguments that stop-loss insurance makes a self-funded employee benefit plan insured for the purpose of ERISA preemption. The court concluded that the participant signed away her right to invoke the make-whole rule, because the plan specifically provided that it was entitled to reimbursement of the benefits paid even if the plan participant was not made whole.

Most self-insured ERISA plans protect themselves against large or catastrophic claims by purchasing stop-loss insurance. Thus, if a plan participant’s claim exceeds an amount designated in the stop-loss policy (usually called a trigger), and if all the requirements of the stop-loss policy are met, the insurer reimburses the plan for all amounts over the stop-loss trigger.

When the stop-loss insurer reimburses the plan for a portion of the benefits it paid (or has already reimbursed the plan), does it affect the ability of the plan to seek reimbursement from the plan participant’s recovery against a tortfeasor? S U.S. District Court in Idaho has indicated that it does not, and that the plan can assert an equitable lien against the tort settlement proceeds. The case is Pioneer Title Co. Employee Welfare Benefit Trust v. Tague, 2009 WL 1687966 (D. Idaho, June 17, 2009).

Eileen Tague was covered by the Pioneer Title Co. plan, a self-insured ERISA plan, when she was seriously injured in an auto accident. The plan was covered by a stop-loss policy with a $50,000 stop-loss trigger. She incurred nearly $125,000 in health expenses as a result of the accident and the plan received nearly $75,000 fron the stop-loss insurer. Eventually, she settled her tort claim against the other driver for an unspecified sum of money. Based on its subrogation provision, the plan sued to recover the benefits it paid, arguing that the existence of the stop-loss insurance made the plan insured rather than self-funded.

The court cited both a 9th an 3rd U.S. Circuit Court of Appeals case holding that the purchase of stop-loss insurance does not make a self-funded employee benefit plan insured for the purpose of ERISA preemption. See United Food & Commercial Workers & Employees Arizona Health and Welfare Trust v. Pacyga, 801 F.2d 1157 (9th Cir., 1986), and Bill Gray Enterprises, Incorporated Employee Health and Welfare Plan v. Gourley, 348 F.3d 206 (3rd Cir., 2001) (App. IV of the Handbook, Case No. 259).

The court then found that the plan was seeking an equitable lien against a specific fund pursuant to its unambiguous plan provisions, and that it was entitled to do so. Tague also argued that she was not made whole by the tort settlement, but the court concluded that she has effectively signed away her right to invoke the make-whole rule, apparently because the plan under which she elected to be covered specifically provided that it was entitled to reimbursement of the benefits paid even if the plan participant was not made whole. Therefore, it granted the plan’s motion for summary judgment.

The court did not discuss hoe the plan would have to deal with the stop-loss insurer. It appears that the plan had been reimbursed approximately $75,000 by the stop-loss insurer, and the court’s decision allowed it to recover the full amount it had paid – that is about $125,000 – from the tort settlement proceeds.

Obviously, the plan would not end up with a double recovery. In cases such as this, it would have to refund the approximately $75,000 the stop-loss insurer paid. This was not an issue that was presented to the court, which is why it was not discussed in the court’s opinion.

Although stop-loss insurance such as the policy in this case is regulated as if it were a form of health insurance, it is really a form of casualty insurance whereby the self-insured plan is covered for losses in excess that trigger amount. Generally, only the largest employers can safely assume the risk of catastrophic expenses without stop-loss insurance. The availability of such insurance enables smaller employers (of perhaps a few hundred employees) to self-insure their health plans by limiting their losses on any one claim to an amount they can afford to bear – in this case, $50,000.

As the court pointed out, the decision is within the mainstream of court decisions involving this issue. In the Bill Gray case, the 3rd Circuit cited similar decisions of other federal courts in support of this conclusion

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This entry was posted by Adam V. Russo on Wednesday, November 18th, 2009 at 9:48 am and is filed under 9th, ERISA, Stop Loss. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.