Supreme Court Tells Health Plans How to Take a “Free Ride” on Injured Beneficiaries’ Efforts to Recover from Responsible Third Parties

April 26, 2013

Insurance Lawby John K. DiMugno

Suppose your client suffers catastrophic injuries in an automobile accident, leaving her with a life-long disability? Her damages approach seven figures, including $60,000 in medical expenses, which are paid by her employer-provided health insurance plan. The other driver was at fault, but he has no significant assets other than his $100,000 automobile liability policy limit. The at-fault driver’s insurer offers to settle for his $100,000 policy limit. The automobile liability insurer’s offer is nowhere near enough to make your client whole, but it is all you can hope to recover from the otherwise judgment proof at fault driver. After you take your contingency fee, she would at least have $60,000 to help with her rehabilitation costs.  Should she accept the $100,000 policy limit rather than litigate with an otherwise judgment proof defendant?

Plaintiffs’ attorneys are much less likely to advise settlement in these circumstances in light of the United States Supreme Court’s decision last week in US Airways v. McCutchen, 133 S.Ct. 1537 (2013). They should never agree to settle for liability insurance proceeds without first closely examining the language of their clients’ health insurance plan. McCutchen holds the federal ERISA statute prohibits equitable defenses to language in a health plan entitling the plan to reimbursement of covered medical expenses from any recovery an insured obtains from a third party responsible for his or her injuries. If your client’s health plan provides for reimbursement without credit for a proportionate share of the cost of prosecuting the claim against the third party (your attorney fees), the health plan will take the entire $60,000 before your client sees a dime. According to the Supreme Court, a statute that was enacted to protect the interests of workers precludes a court from considering the equity and fairness of plan language allowing an insurance company to be made whole before the injured worker.

Although these were not the facts of McCutchen, the Supreme Court left little doubt that it would approve of such an outcome when it observed that the language of an ERISA health benefit plan should be construed “to produce . . . strange results” if the plan’s language clearly provides for such results. You can bet that health plan sponsors are examining and rewriting the language of their plans to take full advantage of the Supreme Court’s ruling.

The Supreme Court’s Ruling

The only difference between the above hypothetical and the facts of McCutchen was that the health plan in McCutchen did not expressly entitle the plan to reimbursement without sharing the cost of obtaining recovery from the third party. When McCutchen refused to comply with the U.S. Airways employee health plan’s request for reimbursement, the health benefits plan filed suit under § 502(a)(3) of ERISA, which authorizes health-plan administrators to bring a civil action “to obtain … appropriate equitable relief … to enforce … the terms of the plan.”

McCutchen raised two equitable defenses to the plan’s suit. The first defense, known as the double recovery or “made-whole” doctrine, was that the plan was entitled to reimbursement only after McCutchen was fully compensated and then only to the extent necessary to prevent him from obtaining double recovery. The second defense, known as the common fund doctrine, was that the plan must pay a proportionate share of the costs of obtaining recovery. Under the common fund doctrine, the plan’s recovery would have to be reduced by the attorney’s 40 percent contingency fee.

The Court rejected McCutcheon’s first defense as inconsistent with the “mutual promises” contained in the plan’s reimbursement provision. But the Court found nothing in the plan about how to pay for the costs of recovery. Given the plan’s silence, the Court determined that the common fund doctrine should apply. “[I]nsurer free rides on its beneficiary’s efforts—taking the fruits while contributing nothing to the labor”—are permitted under the Court’s analysis only if the insurer expressly contracts for the ride.