Self-Funded Plans Need to be Careful in Enforcing Subrogation Rights

by Stinson Leonard Street - Employee Benefits & Compensation
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[author: Angela Bohmann]

A recent Eighth Circuit Court of Appeals decision considered the situation of a participant covered under a self‑funded ERISA plan who sustained injuries in a slip and fall accident. The plan paid health benefits for that accident. The participant also obtained compensation by settling a civil lawsuit. Like many self‑funded medical plans, this plan required a participant who received such a settlement to reimburse the plan for the benefits it paid. However, the participant declared bankruptcy so did not repay the plan.

In connection with the civil suit, the plan had notified the participant’s attorney of the plan’s subrogation right. The attorney had twice acknowledged that right. However, the attorney did not sign a subrogation agreement with the plan. When the attorney received the settlement money, it retained the amount that was to be reimbursed to the plan for about a month but then paid the amounts to the participant. Because the plan was unable to obtain reimbursement from the participant, the plan sued the attorney for the money.

The Eighth Circuit Court of Appeals determined that the plan could not recover and in fact required the plan to pay the attorney’s fees of the attorney who was sued. Recent U.S. Supreme Court decisions have addressed the extent to which plans can recover damages from their participants. The Supreme Court has emphasized the fact that plans are entitled to “equitable relief,” which does not generally include money damages. The court of appeals found that the plan did not have an equitable claim against the attorney because the attorney had already disbursed the settlement amount to the participant. There was no specific fund that the plan could claim equitably belonged to it.

The plan also was not permitted to enforce its subrogation right directly against the attorney because the attorney had never agreed to it. Although the attorney had acknowledged the plan’s right to subrogation, the attorney had not signed a subrogation agreement so was not contractually bound by the subrogation obligation.

The message for self‑funded plans is to be diligent in protecting their subrogation rights. One alternative is to attempt to have attorneys representing plan participants in a civil suit sign an agreement to reimburse the plan from settlement proceeds. However, an attorney may decline to do so. Another alternative would be for the plan to join the civil suit so that it is involved directly in settlements and judgments. If the civil suit is not in federal court, the plan may bring its own federal court action to protect its subrogation rights.  While intervention will protect the plan, it may also result in higher costs to a plan to enforce its subrogation rights. It will be more difficult, at least in the Eighth Circuit, for plans to sit back, wait for the participants and the participants’ attorneys to recover from third parties, and then try to collect amounts that the plans have paid as medical benefits on behalf of participants.

The Supreme Court has accepted for review in its upcoming term a case that raises issues about subrogation and the right of an ERISA plan to recover from participants who are not fully compensated for their injuries. Plans that aggressively enforce their subrogation rights should watch for developments in this rapidly changing area of law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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