Recovery Allowed for Plan That Did Not Intervene in Tort Lawsuit
There are many situations where a state has a provision that appears to require a plan to intervene in a tort claim lawsuit to protect its right to subrogation or reimbursement. Does the plan lose its right to seek reimbursement in federal court if it did not intervene in the state lawsuit brought by the plan participant? Normally, that issue is not raised, but it was considered by a U.S. district court in Kentucky, which initially ruled against the plan. The case is Humana Health Plans, Inc. v. Powell, 2008 WL 5096055 (W.D. Ky., Dec 1, 2008).In 2002, Patti Powell was seriously injured in an auto accident covered under her husband’s health plan provided by Humana. Humana paid more than $24,500 on account of her medical care. She filed a lawsuit and settled her claim for a total of $550,000.
Kentucky law (KRS 411.188(2)) requires a person who brings a tort lawsuit seeking damages for injury or illness to notify the plan, if it has subrogation rights, of the lawsuit. Powell never provided the notice but Humana discussed its subrogation rights with Powell’s attorney and knew about the litigation.
After the settlement, the attorney retained his fees and costs and paid the balance of more that $304,000 to Powell, who used the proceeds to make improvements to her home, pay off debts. In 2007, based on its plan provision, Humana began a lawsuit in the U.S. district court for imposition of a constructive trust or equitable lien over specific funds it identified as having come from the settlement. Both parties moved for summary judgment.
A constructive trust remedy was available to Humana, the court concluded, but it could not determine whether the funds paid to Powell were traceable without further discovery. It then addressed whether the make-whole doctrine would bar Humana’s attempt to recover the funds. Although Humana’s plan language did not refer to the make-whole doctrine by that name, the court, citing several federal court decisions, readily concluded that such a specific reference was not required, because the plan’s clear language described its rights to recovery with sufficient clarity to avoid the application of that doctrine.
The Court determined that Humana would be entitled to a constructive trust and that its recovery would not be affected by the made whole doctrine. However, it concluded that because Humana had not intervened in the tort action, it lost its right to pursue subrogation, and granted summary judgment in Powell’s favor.
The court said that Humana did not receive the official 411.188(2) notice. However, Humana was in regular contact with Powell’s counsel and was given regular status updates of the underlying proceedings. The evidence is that Humana was clearly aware not only of the pending lawsuit, but also its right to intervene. Since Humana was bound by 411.188 and it didn’t intervene, the court concluded that it may not pursue its subrogation right.
Humana asked the court to reconsider its ruling, It withdrew its and it agreed to do so. The Court said that Humana moved for reconsideration on the grounds that ERISA preempts the application of KRS 411.188. The parties did not raise this issue in their initial briefing and since it is fundamental to the case, the Court was willing to listen. The Court concluded that KRS 411.188 is a general statue constraining those who seek reimbursement from the proceeds of a pending case. Thus ERISA’s remedy provisions would seem to preempt its application.
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