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Supreme Court Upholds Health Plan's Right to Recover Auto Settlement
Ruling forbids judicial rewrite of ERISA plan for equitable relief in reimbursement dispute

By Stephen Miller, CEBS, and Joanne Deschenaux  4/17/2013
 

The U.S. Supreme Court ruled in US Airways Inc. v. McCutchen that the equitable-remedies section of the Employee Retirement Income Security Act (ERISA) does not authorize courts to rewrite the contractual language of an employer’s health plan.

The court's 5-4 decision was handed down on April 16, 2013. The ruling highlights the need for a carefully written plan document that clearly states whether damages recovered after an accident should be reimbursed to the plan, including attorney's fees.

James McCutchen, a US Airways employee, used his employer-provided health coverage to pay for treatment after a car accident, receiving $66,866 from the self-funded plan. He then brought suit against the driver who caused the accident, and settled for $10,000. McCutchen received another $100,000 through his underinsured motorist coverage, which allows a driver to receive damages for an injury caused by an underinsured, negligent driver. But after paying the attorney's fee and expenses, his net recovery was less than $66,000.

US Airways sought full reimbursement from the recovered damages. McCutchen did not pay the airline, which, in its capacity as administrator of the ERISA benefits plan, sued him.

McCutchen claimed it would be unfair to reimburse his employer in full when he was not fully compensated for his injuries, including pain and suffering. He also argued that US Airways, which made no contribution to his attorney's fees and expenses, would be unjustly enriched if it were permitted to recover from him without any allowance for those costs.

The district court ruled that US Airways was entitled to reimbursement. However, the 3rd U.S. Circuit Court of Appeals overturned the decision, finding that requiring the employee to reimburse the plan violated ERISA's rules of equity.

The Society for Human Resource Management, in its amicus brief, argued that employers need to rely on their health plan terms not being overridden in individual cases by the courts. SHRM has participated in previous cases, successfully arguing that equitable relief under ERISA is only appropriate if it is consistent with the plan terms.

The Ruling

The Supreme Court ruled that the health plan has a right to be reimbursed, but McCutchen should be able to deduct attorney's fees from the $66,866 paid from his health plan. The case will now be remanded to the lower court for proceedings consistent with this decision.

In reversing the 3rd Circuit's ruling, the Supreme Court held “in a §502(a)(3) action based on an equitable lien by agreement—like this one—the ERISA plan’s terms govern. Neither general unjust enrichment principles nor specific doctrines reflecting those principles—such as the double-recovery or common-fund rules invoked by McCutchen—can override the applicable contract.”

The court also held that while “equitable rules cannot trump a reimbursement provision, they may aid in properly construing it.”

“This was directed at McCutchen’s claim for allocation of attorney's fees,” Michelle Anderson, a benefits attorney in the New Orleans and Tampa offices of Fisher & Phillips LLP, explained to SHRM Online. “US Airways’ plan is silent in this regard. Thus, the court noted that the common-fund doctrine provides the default rule to fill this gap.”

When a contract is silent, “courts must look outside the four corners of the document and take into account other doctrines that have traditionally been applied in similar situations,” Anderson said. “Under the common-fund doctrine, litigants or lawyers who recover an amount [common fund] for themselves or their clients are entitled to a reasonable attorneys’ fee from the recovery as a whole.”

Focus on Plan's Language

"The Supreme Court ruling will likely be viewed favorably by plan sponsors, as it will allow them to anticipate with more certainty the impact of the plan terms they draft," said ERISA attorney Myron Rumeld, a partner in the New York office of Proskauer Rose LLP.

"Although in this particular instance the court [in a split decision] limited the plan's reimbursement right because of a perceived ambiguity in the plan's terms relating to attorney's fees, the court unanimously ruled that a clearly drafted reimbursement clause will trump all equitable defenses. Thus, if properly drafted, a reimbursement clause will allow a plan to recover the full amount of the medical costs it paid, without qualification."

“The Supreme Court’s decision brings welcome clarity to a previously jumbled area of the law,” concurred J. Timothy McDonald, a partner in the Atlanta office of Thompson Hine LLP. “The court unanimously held that a benefit plan is to be governed by its terms, and those terms cannot be overridden by vague notions of what someone else thinks is better. A majority of the court was careful to caution, however, that benefit plans need to be drafted clearly and properly to reach this result. While in the short-run companies may need to review the terms of their plans to see if they are clear enough, in the long-run this should reduce the litigation costs and uncertainty regarding these plans and further encourage companies to maintain or enhance benefit plans.”

Companies that sponsor benefit plans “are now free to control the cost of those plans by specifying exactly what costs the plan can recover—provided they do so clearly—when employees and other participants receive both benefits from the plan and money from another source for the same injury,” McDonald added.

"Although this is a win for those self-funded plans governed by ERISA, plan fiduciaries and administrators are wise to review with their counsel the subrogation, reimbursement and attorney fee and costs provisions in the written documents to ensure conformity to the law in this area," concluded Anderson. "Undoubtedly, those who litigate in the personal-injury arena will continue to develop new theories to test the sufficiency of ERISA, since taking the claim of injured persons who have had their expenses paid by a medical plan will be less attractive if the ability to collect fees and recover damages for their client will be secondary to the rights of the plan."

Stephen Miller, CEBS, is an online editor/manager for SHRM. Joanne Deschenaux, J.D., is SHRM’s senior legal editor.

Related SHRM Article: 

Supreme Court to Consider ERISA Statute of Limitations on Claims Denials, SHRM Online Legal Issues, April 2013

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