Spilman Thomas & Battle, PLLC

It has been about a year since the United States Supreme Court clarified the circumstances where an employer-based healthcare plan could rely on subrogation to recover funds from plan beneficiaries, and the landscape for subrogation lawsuits has changed dramatically.  For employer- funded plans, the changes could result in significant savings, which, as health care costs rise overall, could be of vital importance to the Plans.  While a full explanation and analysis of ERISA subrogation is beyond its scope, this article is intended to offer enough information to permit an employment lawyer spot a few key issues, especially for employer-client who have self-funded health insurance plans.

The classic subrogation circumstance (though not the only one) is as follows:  employer medical Plan pays for healthcare of a plan beneficiary (an employee or dependant) after a tortious injury; participant sues the tort feasor and recovers either through a verdict or a settlement; Plan tries to recover its payments for the beneficiary’s healthcare from the beneficiary.  In Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002), the United States Supreme Court set out a rule that employer-based healthcare plans may sue plan beneficiaries for “other appropriate equitable relief” as long as the remedy they sought was “typically available in equity.”  Id. at 209-10 (citing 29 U.S.C. § 1132(a)(3)).  Unfortunately, the Supreme Court offered little guidance on what was a “remedy typically available in equity” and the Courts of Appeal developed two divergent lines of authority.  Notably, this was an item of disagreement between the dissent in Knudson, which felt that the ruling “needlessly obscures the meaning and complicates the application of” the ERISA provision at issue, Knudson, 534 U.S. at 234 (Ginsberg, J. dissenting), and the majority which said the difficulty was “greatly exaggerated.”  Id. at 217.  More aligned with the dissent’s prediction, two separate rules developed, with some circuits, such as the Sixth and the Ninth, for all intents and purposes prohibiting subrogation, while others, such as the Fifth, Seventh, and Tenth, permitting subrogation.  In attempt to address the circuit split, the United States Supreme Court heard and decided Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. ___, 126 S. Ct. 1869 (2006).

On its face, Sereboff presented the classic subrogation case.  The Sereboffs were covered by a health insurance plan administered by Mid Atlantic Medical Services, Inc. when they were injured in an automobile accident in California.  Id. at 1872.  The plan paid nearly $75,000 for automobile accident-related benefits to the Sereboffs, who subsequently received a $750,000 settlement in the tort action.  Id. at 1873.  The Plan contained subrogation provision which required a beneficiary who received benefits from the Plan to reimburse the Plan from any recovery from a third party “whether by lawsuit, settlement or otherwise.”  Id. at 1872.  Accordingly, attorneys for Mid Atlantic had notified the attorneys for the Sereboffs on numerous occasion of its lien claim on any recovery from the California suit as repayment of medical payments made on behalf of the Sereboffs, but the Sereboffs’ attorney refused to recognize the lien and disbursed the settlement funds to the Sereboffs and his law firm.  Id. at 1873. 

Mid Atlantic filed suit in the District Court of Maryland seeking to collect on the medical expenses it paid to the Sereboffs and the District Court granted summary judgment to Mid Atlantic.  The Fourth Circuit affirmed holding that Mid Atlantic’s action sought equitable restitution as the term was used in Knudson because Mid Atlantic sought to “recover funds that are specifically identifiable, belong in good conscience to [Mid Atlantic], and are within possession and control of the Sereboffs.”  Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212, 218 (4th Cir. 2005)

The Supreme Court unanimously affirmed the Fourth Circuit’s decision.  Sereboff, 126 S. Ct. at 1878.  The Supreme Court held that Mid Atlantic was able to rely on a “familiar rule of equity” to collect for the medical bills it had paid on the Sereboffs’ behalf by following a portion of the recovery into the Sereboffs’ hands as soon as the settlement fund was identified and by imposing an equitable lien on that portion.  Id. at 1875.  The Court also noted that the “strict tracing rules” that may have accompanied equitable restitution at common law do not apply to equitable liens imposed by agreement or assignment. See Id. (citing Barnes v. Alexander, 232 U.S. 117 (1914)).  In short, Sereboff confirmed that subrogation or reimbursement is available when there is a specifically identifiable sum belonging in good conscience to the Plan – through a reimbursement or subrogation provision – that is within the possession and control of the defendant beneficiary.

In the aftermath of Sereboff the ability of a Plan to seek subrogation has expanded.  While there is subrogation in personal injury situations where healthcare plan participants were injured and required medical care, see, e.g., Popowski v. Parrott, 461 F.3d 1367 (11th Cir. 2006); Admin. Committee of Wal-Mart Stores, Inc. v. Shank, 2006 WL 2546797 (E.D. Mo. Aug. 31, 2006); Providence Health System-Washington v. Bush, 461 F.Supp.2d 1226 (W.D. Wash. Nov. 2006), the relaxation of the strict tracing concept has resulted in plans seeking to enforce subrogation provisions in Long Term and Short Term Disability actions.  See, e.g., Disability Reinsurance Mgmt. Svcs., Inc. v. DeBoer, 2006 WL 2850120 (E.D. Tenn. Sept. 29, 2006); McGuire v. Hartford Life and Accident Ins. Co., 2006 WL 2773441 (N.D. Ohio Sept. 25, 2006); Mote v. AETNA Life Ins. Co., 435 F.Supp.2d 827 (N.D. Ill. 2006); Glenn v. Metlife, 2007 WL 81845 (S.D. Ohio Jan. 8, 2007); Gutta v. Standard Select Trust Ins., 2006 WL 2644955 (N.D. Ill. Sept. 14, 2006); Gilchrest v. Unum Life Ins. Co., 2006 WL 1582437 (S.D. Ohio June 6, 2006); Dillard’s Inc. v. Liberty Life Assurance Co., 456 F.3d 894 (8th Cir. 2006); Reichert v. Liberty Life Assurance Co., 2007 WL 433321 (D. N.J. Feb. 5, 2007).  In these situations, beneficiaries typically qualify for long term and/or short term disability and then subsequently qualify, usually with the Plan’s assistance, for Social Security payments.  Many times, the beneficiary fails to notify the Plan that the beneficiary has qualified for Social Security payments or the Plan simply fails to subtract such payments from the disability benefits paid under the Plan; thus, the Plan continues to over pay sums of money that would otherwise have been reduced in light of the Social Security funds.  See, e.g., Dillard’s Inc., 456 F.3d at 899.  In the past, Plans would simply offset these overpayments from prospective payments, provide the Plan included the necessary clause in its terms.  Benefit plans, however, have become more aggressive in correcting correct these errors and oversights by seeking reimbursement as appropriate equitable relief, often with success. 

Furthermore, some Courts of Appeal have not paid strict attention to whether the funds sought are specifically identifiable or within the possession of the beneficiary, as had been the case, but instead have ordered reimbursement of funds that have been commingled with other general funds of the beneficiary or which have been converted into other assets.  See Dillard’s Inc., 456 at 901 (granting reimbursement where plan sought “a particular share of a specifically identifiable fund; namely, the amount it overpaid . . . by not subtracting [defendant’s] Social Security award”); DeBoer, 2006 WL 2850120 at *4 (granting reimbursement where plan sought “a specifically identifiable fund-all overpayments resulting from the payments of Social Security benefits”); Gutta v. Standard Select Trust Ins., 2006 WL 2644955 (N.D. Ill. Sept. 14, 2006).  In fact, in Gilchrest v. Unum Life Ins. Co., 2006 WL 1582437 (S.D. Ohio June 6, 2006), the Southern District of Ohio specifically ordered reimbursement where the money sought was not in an identifiable fund, but rather found that restitution was equitable merely because Unum sought the “restoration of funds in Gilchrest’s possession.”  Another Court allowed reimbursement where the funds had been invested in a stock purchase, meaning the funds were no longer in the beneficiary’s possession. Reliance Standard Life Ins. Co. v. Smith, 2006 WL 2993054 at *3 (E.D. Tenn. Oct. 18, 2006); see also Sereboff, 126 S.Ct. at 1874 (noting that reimbursement could come from “particular funds or property in the defendant’s possession.”) (emphasis added).  These opinions of the Sixth Circuit give Sereboff a much broader interpretation than opinions issued by other courts that have stuck with the requirement that the funds sought must be specifically identifiable (i.e. in a non-commingled specific fund within the beneficiary’s possession).  See, e.g., Curran v. Camden National Corp., 2007 WL 625160 (D. Me. Feb. 28, 2007) (“even though Plaintiffs seek to recover a particular sum of money - $525,000, they seek the money from CNC’s general, commingled assets, not from particular funds or property in the defendant’s possession.  It follows that the Plaintiffs are not asserting an equitable lien or claiming equitable remedy of restitution.”)  Sereboff did not specifically address this point because the parties in Sereboff had originally stipulated that the funds were “clearly identifiable or traceable” even though the money owed to the plan has been “placed in accounts with the Sereboffs’ other monies.”  Sereboff, 407 F.3d at 218.

Simply put, Sereboff has gone a long way in liberalizing the relief available to plan fiduciaries when seeking reimbursement from unjustly enriched beneficiaries in the federal courts.  However, the true breadth of the Supreme Court’s ruling remains to be seen.  Under current precedent, it is likely best practice to draft a specific reimbursement clause into an employee benefit plan regardless of type.  Finally, commingling or dissipation of funds may not be the same impediment to recovery.  Nonetheless, attorneys for Plans should not rely on the continued relaxation of the “clearly traceable” language and should continue to be vigilant in preserving Plan assets by filing suit quickly, often in conjunction with a Temporary Restraining Order, in order to effectuate the subrogation claim.  Still, it is comforting to know that all is not necessarily lost when a beneficiary receives a recovery and that there are avenues available for making sure that Plan assets are preserved and available to be sued to pay claims, as opposed to giving double recoveries.