Most lawsuits to recover damages in car accidents are resolved in state courts.  State courts will order that at least a portion of the judgment be deposited into court when it appears that a health plan may have the right to reimbursement.  But can a state court override the right of the health plan to recovery? This issue was addressed in Iowa Health System, Inc. v. Graham, 2008 WL 2959796 (C.D. Ill., July 30, 2008).

Graham was covered as a dependent under the self-insured health plan sponsored by Iowa Health System and administered by Principal Life Insurance Company when he was injured in an auto accident.  Iowa Health paid almost $21,600 in benefits for treatment of his injuries and the plan provided for reimbursement of its payment from any tort settlement or judgment.

His parents brought a lawsuit for negligence, which was settled for $50,000.  The state court ordered that $37,500 – settlement less attorney fees and costs – be deposited into the bank to preserve the fund for the Iowa Health plan to seek reimbursement.

Duncan’s parents then petitioned to have the Iowa Health’s lien adjudicated and served a summons on Principal.  But Principal did not respond to the pleading, and the Grahams moved for default, which was granted.  Almost two years later, Iowa Health brought this lawsuit in federal court for equitable relief to enforce its right to reimbursement.

Duncan’s parents moved to dismiss the lawsuit arguing that: (1) Iowa Health was barred from bringing the action under the doctrine of res judicata (which bars further lawsuits after the matter was resolved earlier by a court); (2) Iowa Health was not entitled to subrogation against a minor’s recovery in a personal injury claim; and (3) they did not have possession or control of Duncan’s funds.

The U.S. District Court ruled that the doctrine of res judicata did not apply because Iowa Health could not have brought its ERISA claim in the state court and did not have the opportunity to choose a federal forum in the tort lawsuit. It stated that, “While a federal district court may exercise supplemental jurisdiction over a state law claim, state courts may not exercise jurisdiction over exclusive federal claims.”

The court went on to rule the ERISA preempted state law denying subrogation of a self-insured ERISA plan against a minor’s recovery in a personal injury claim, and it ruled that the Grahams’ claim that they did not have possession of Duncan’s finds was “logically deficient” because Duncan’s mother was his guardian and thus equivalent to a trustee of his funds, and that it would also “undermine the purpose of ERISA by shielding all minors from subrogation claims.”

The court denied their motion to dismiss Iowa Health’s claim.

Federal Court Reimburses Plan Despite Lack of Make-Whole Doctrine

It is clear that self-insured ERISA plans can avoid the application of the make-whole rule by disclaiming it in their plan documents. But what happens when the plan document does not specifically disclaim the rule, but just make it clear that he plan has a right to reimbursement?  The case of AT&T, Inc. v. Flores, 2008 WL 2785649 (W.D. Tex., July 17, 2008) faced that issue.

Flores was covered by a self-insured health plan, administered by AT&T, when he was very seriously injured in an auto accident that left him a paraplegic.  The plan paid benefits of about $315,500 on account of his injuries.  His claim against a third-party tortfeasor settled for $850,000. AT&T immediately commenced this lawsuit against Flores and his attorneys to assert its right to reimbursement under the plan provisions, and moved promptly for summary judgment imposing a constructive trust and equitable lien in the plan’s favor for the $315,500 it paid.  Flores and his attorneys did not respond.

The Applicable provision in the summary plan description made it quite clear that the plan had a lien on all recoveries, without reduction for legal fees and costs, and that a plan participant was required to cooperate fully with the plan’s exercise of its subrogation, but it did not mention anything about whether the plan participant was made whole.

In dealing with the issue of the make-whole rule, the court relied on a previous decision by the 5^th Circuit in Sunbeam-Oster Co., Inc. v. Whitehurst, 102 F.3d 1368 (5^th Cir. 1996).  According to the Fifth Circuit, even if the plan document does not explicitly address the made whole doctrine, so long as the document makes clear that the beneficiary owes a duty of subrogation/reimbursement to the Plan, the Plan’s right to such reimbursement trumps the beneficiary’s made-whole defense.

Accordingly, the court granted summary judgment in the plan’s favor, imposed a constructive trust and equitable lien on the settlement proceeds in the amount the plan paid as benefits, declared the plan’s ownership of that amount and ordered Flores and his attorneys to submit the proceeds to the plan execute all necessary document to transfer legal title of that amount to the plan.

It is clear that in the 5^th Circuit, the made whole rule does not have to be stated explicitly in order for a plan to prevail.

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This entry was posted by Adam V. Russo on Tuesday, November 11th, 2008 at 3:56 pm and is filed under 5th, 7th, Subrogation. 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.