The law in many states provides that reimbursement to a plan from tort settlements or judgments will not be allowed unless the plan participant is “made whole.” Certainly, the plan participant is not made whole if the settlement or judgment is less than the amount of benefits paid. But even if the settlement or judgment id greater than the amount of benefits paid by the plan, the plan participant may not be made whole by it. Sometimes, it’s hard to draw a clear line to determine when a plan participant is or is not made whole.

It is well established that if a self-insured ERISA plan specifically provides that it is entitled to full reimbursement from tort settlement or judgment proceeds even if the plan participant is not made whole, that provision will override an applicable state made-whole rule. That’s because ERISA preempts state law. Initially, many federal courts developed what might be classified as picky requirements for such a provision to successfully override state made-whole rules. But over time, courts have begun to approve most such provisions as long as they were drafted in language that a typical plan participant could understand. This is illustrated in the recent case of Goggin Warehousing, LLC v. Morin, 2009 WL 2043877 (E.D. Tenn., July 9, 2009).

Sharon Morin was covered by the Goggin Warehousing health plan when she was seriously injured in an auto accident. She incurred more than $146,000 in medical bills, of which the plan paid only about $73,800. She sued the individual responsible for the accident, and the case was settled for $100,000 (which was the limit for that individual’s liability insurance policy). The state court approved the settlement and allowed an attorney’s fee of one third of the amount recovered and directed that the balance (obviously about $66,667) be paid to the county clerk’s office pending the outcome of the federal lawsuit that had apparently been filed by the employer at about the time the settlement was made. Both parties moved for summary judgment based on whether or not Morin was made whole by the settlement.

The applicable law in the 6th U.S. Circuit Court of Appeals (of which Illinois is a part) is Copeland Oaks v. Haupt, 209 F.3d 811 (6th Cir., 2000) (See App. IV, Case No. 222), which makes the made-whole rule a default federal rule unless the ERISA plan disavows it by clearly establishing “both a priority to the funds recovered and a right to any full or partial recovery.” In this case, the plan provision stated that:

…the Plan shall be entitled to reimbursement from the first dollars paid without regard to whether the total amount to be paid or received by an Eligible Employee or Eligible Dependent is less than the actual amount suffered, that is, the Plan is entitled to full reimbursement or 100% of all amounts paid by the Plan, without regard to whether the Eligible Employee or Eligible Dependent is made whole by the amount recovered from any third party(ies).

The court found that the plan satisfied the requirements of the Copeland Oaks case, and thus granted summary judgment in favor of the plan and against the plan participant.

This decision is well within the current mainstream of federal court rulings based on the doctrine of Copeland Oaks. The specific provision (quoted above) is certainly adequate, although it can be argued that it the long and complex sentence is not a model of a provision capable of being easily understood by an average plan participant. Some attorneys prefer to also specifically reference that made-whole rule in addition to explaining what that rule requires.

Although the outcome of this case is totally correct under applicable law, and although the doctrine of the Copeland Oaks case makes total sense in that it shifts liability for injuries to those who cause injuries, one can be somewhat uncomfortable with the result. In this case, the plan participant clearly was not made whole by the tort settlement. This was not the fault of any of the parties to this case. The person who caused her injuries may have been negligent, but it is unlikely that he or she intended to cause harm. The insurer in this case paid the maximum amount of its liability. And the plan was completely justified in seeking reimbursement for the benefits it paid out of the settlement.

Nevertheless, Morin was obviously very seriously injured, as evidenced by the fact that her health expenses were more than $146,000. Her net recovery of $66,667 was insufficient to fully reimburse the plan for the $73,800 it paid. The health care providers (probably the hospital and some doctors) were not paid about $72,200. That would be the case even if the plan was entitled to be reimbursed for the full $100,000 settlement because only about $66,667 was available to reimburse the plan. Morin would owe the health care providers that amount, and she is unlikely to have enough money to pay it, either now or in the foreseeable future. One can argue that there ought to be a better way to deal with situations like this, but it’s difficult to come up with an idea of what that way might be.

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This entry was posted by Adam V. Russo on Wednesday, November 18th, 2009 at 9:56 am and is filed under 6th, Made Whole Rule. 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.