Court Takes Strict Approach In Reading Subrogation Provision
Plan’s subrogation and reimbursement language may actually thwart their ability to recover from tort settlement proceeds benefits they paid. It is important for plan language to ensure that its recovery claim is limited to settlement proceeds. In one such case, a health plan did not identify a particular fund from which the reimbursement should be paid and it failed to say that the recovery was limited to third-party settlement proceeds. Because of the imprecise drafting, the court could assume the plan was trying to recover from the plan participant’s general assets. That created the possibility that a member could receive a recovery from a third party that was less than the benefit paid by the plan but would still have to repay the plan in full. As a result, the court found it impossible to award the recovery.
Subrogation and reimbursement provisions of health plans are drafted to help them recover the benefits they paid from tort settlement or judgment proceeds. Different plans use different language to express their rights to recovery. After the U.S. Supreme Court decision in Sereboff v. Mid Atlantic Medical Services, Inc. 547 U.S. 356 (2006) [See App. IV of the Handbook, Case No. 498], most federal courts have concluded that plan language enabled plans to successfully seek equitable lien against those proceeds.
Two recent decisions indicate that courts may find that plans’ subrogation and reimbursement language may actually thwart plans’ ability to recover from tort settlement proceeds benefits they paid. While most plans use language that clearly supports recovery, some courts find that the specific plan language does not do so.
Even where a plan provision states that no benefits shall be payable if the plan participant fails to execute a subrogation agreement to repay, and where no such agreement was executed, the plan could still recover the benefits paid, a U.S. District Court in Illinois ruled in Anderson v. Dergance, 2009 WL 1702820 (N.D. Ill., June 18, 2009). A little more than a month later, a U.S. District Court in Kentucky ruled that plan language was in sufficient to specify that the recovery would be limited to specific proceeds of a tort settlement, thus thwarting a plan’s attempt to recover. That case is James River Coal Co. Medical and Dental Plans v. Bentley, 2009 WL 2211906 (E.D. Ky., July 23, 2009).
Cory Dergance was injured at a Dollar Store when he cut his hand on a glass jar. His health expenses were covered by a multi-employer health and welfare fund, which paid more than $14,000 for his injuries. His tort claim against the Dollar Store was settled for $30,000. The plan asserted an equitable lien against the settlement proceeds, which his attorney was holding. The plan brought suit to assert an equitable lien under the plan’s subrogation and reimbursement agreement and moved for summary judgment.
The court granted the plan’s motion. Dergance’s attorney argued that the plan’s subrogation and reimbursement provision stated that a plan participant’s entitlement to plan benefits “shall be further conditioned upon the execution” of a subrogation agreement to repay, and although no such agreement was executed, the plan paid its benefits anyway.
The court concluded that the specific provision that Dergance’s attorney relied on, including the need for a signature on such an agreement, “are explicitly in addition to the Plan provision upon which the [Plan] relies.” The court pointed out that the plan’s subrogation and reimbursement provision further stated, “notwithstanding any other provisions of this Plan, and in addition to such rights of recovery and offset, the Plan shall have a lien, enforceable as a provision of this plan… for the full amount due to the Plan.” That led the court to conclude that the plan’s clear language stated its right to reimbursement. It said that since Dergance received his plan benefits, he and his attorney could not use the provision on which they relied to preclude the plan from recovering the reimbursement to which it is entitled.
Bentley’s minor son (not named in the court’s opinion), incurred almost $26,000 in health expenses due to serious injuries resulting from a dog attack. He was covered under his father’s employer’s health plan. The plan’s reimbursement provision stated, in part:
…if the Plan pays for or provides benefits for such an Injury or Sickness, the Participant shall promptly reimburse the Plan when the recovery is received until the Plan has been fully reimbursed for benefits it paid for or provided. Reimbursement shall be made regardless of whether the Participant has been made whole or fully reimbursed by the third party for his damages and regardless of any classification of such recovered proceeds as medical expenses. [Emphasis added.]
The provision went on to grant plan participants “a lien in the proceeds of any such recover[y].”
The Bentleys settled their claim against the dog owner for $70,000, and the plan brought an action to recover the benefits it had paid from the proceeds, apparently alleging that it had an equitable lien against the settlement proceeds. The Bentleys moved to dismiss the claim.
The court dismissed the plan’s lawsuit. Although the plan could assert an equitable lien against the tort settlement proceeds under Sereboff, it did not identify a particular fund from which the reimbursement should be paid, the court ruled, saying:
Under the Plan here, a reimbursement is required, when the participant recovers from a third party and the Plan has paid benefits on the participant’s behalf. Notably, however, the Plan fails to identify specifically from where the reimbursement is to come (e.g., had the plan provided that the recovery was limited to the proceeds recovered from a third party, it would have satisfied the first prong of Sereboff). Since the Plan does not identify a fund – distinct from the member’s general assets – from which the reimbursement is to be paid, it fails [to identify a particular fund from which reimbursement is to be made]. Therefore, the [plan’s] claim does not seek an equitable remedy as a claim under [ERISA] must. [Emphasis by the court.]
In this instance, in requiring reimbursement “until the Plan has been fully reimbursed for benefits it paid or provided” whenever a Plan member recovers from a third party, the reimbursement is not necessarily connected to a specific fund. The Plan does not specify that it is to be reimbursed only from the proceeds of the recovery until it has been fully reimbursed for benefits previously paid. This creates the possibility that a Plan member may receive a recovery from a third party that is less than the benefit paid by the Plan but would nevertheless be required to repay the Plan in full. Because the reimbursement could exceed the recovery in this situation, the Plan language clearly contemplates recovery out of the Plan member’s general assets rather than a particular fund tied to the recovery. Thus the Plan language creates personal liability on the part of the Plan member for the amount of the benefit rather than an equitable lien or constructive trust on particular property or funds tied to the recovery.
The court went on to say that “the Plan allows for reimbursement to come from the Plan member’s general assets. Therefore it follows that the Plan does not limit the reimbursement’s source to a particular share of a recovery from a third party.” Based on that correct analysis of the plan language, the court’s decision appears to have been inevitable.
The decision in the Dergance case appears to fall within the mainstream of current decisions by federal courts dealing with subrogation and reimbursement from tort settlement proceeds. The court was not inclined to focus on the single sentence in the provision cited by Dergance that, on its own and taken out of the context of the entire provision, would have undercut the plan’s right to seek an equitable lien (or constructive trust) against the settlement proceeds.
On the other hand, the decision in the Bentley case, while also focusing on the plan’s provision in it entire context, concluded that the provision in question went much further than the plan drafters had probably intended. It is extremely doubtful that the intent of the plan provision was to require the plan participant to reimburse the plan in full for the benefits it paid even when the tort settlement proceeds were inadequate to cover full reimbursement. Nobody familiar with the law as it now stands would have dared to try to do that. However, the court had no alternative but to interpret the provision as it was written – not as it should have been written. The court’s interpretation of the plan provisions quoted at length above is entirely consistent with the words that were used.
Neither of the two subrogation and reimbursement provisions were models of excellent draftsmanship. The Dergance court did not have to struggle to construe the plan’s language correctly because the argument made by Dergance was based on a sentence in the plan’s provision that was taken out of context. The Bentley decision likewise does not depart from the mainstream of post-Serboff decisions. In that case, the fatal sentence was not taken out of context. Thus, the Bentley court correctly denied the plan’s claim for an equitable lien based on the clear plan language that allowed the plan to make a full recovery even if the settlement proceeds were inadequate to cover all of the benefits paid or provided. Even if that was not what the plan sponsor intended, the court had no resource but to reach the decision it did.
The fact that the settlement proceeds in Bentley were more than adequate to reimburse the plan and would have left plenty for the family is irrelevant. Based on the actual language of the plan’s reimbursement provision, the Bentley court could not have allowed recovery because the settlement proceeds in this were more than enough to reimburse the plan in full.
There is an important lesson here. The subrogation and reimbursement provisions of all plans should be reviewed and revised to be sure that they reflect exactly what the current state of the law allows. And while doing so, the plan should be written in language capable of being clearly understood by the average plan participant and not only by legal experts familiar with current litigation trends.
