Rethinking ERISA Liens After McCutchen
Did the proverbial door close to yet another group of citizens seeking to recover damages in a personal injury case following the recent decision by the United States Supreme Court in U.S. Airways, Inc. v. McCutchen? Maybe. Attorneys handling personal injury cases wherein the injured party has coverage under a ERISA qualified plan may need to rethink whether they can really help the injured party recover damages – especially where the tortfeaser has limited liability coverage. Why? The injured party may wind up getting nothing – or paying money out of his pocket.
We all know the difficulties in working with liens that are subject to the Employer Retirement Income Security Act of 1974 (ERISA), when an injured person recovers damages. Under a strict interpretation of ERISA, the plan has the right to recover all payments made on behalf of the injured party when the injured party recovers damages from a tort-feaser by way of verdict or settlement. If the plan states it has the right to recover the full amount of medical expenses paid on behalf of the insured without any offsets, it has absolute right to do so under subsection 502(a)(3) of ERISA – which allows the plan to bring a civil action to obtain appropriate equitable relief to enforce the terms of its plan.
Notwithstanding, some ERISA plan administrators have expressed a willingness to relax this hard core right of full recovery for two primary reasons. First, case law exists in a few circuits recognizing the application of equitable principles in defense of ERISA claims, such as the made whole doctrine, common fund doctrine and the unjust enrichment doctrine. Second, ERISA plan administrators recognize that most attorneys will not pursue a third party action on behalf of an injured party unless the attorney can recover his or her litigation costs and the client can obtain a reasonable net recovery. Since the plan is generally reluctant to inde- pendently file an action against a negligent party to recover its medical expenses, it is often willing to compromise its recovery if someone coincidentally does it for them.
The “something is better than nothing” theory.
Along comes U.S. Airways, Inc. v. McCutchen. Did it change the tide? You decide.
McCutchen was an employee of U.S. Airways. U.S. Airways provided health insurance to McCutchen under a ERISA plan which contained the following language:
“If U.S. Airways pays benefits for any claim you incur as a result of negligence, willful misconduct, or other actions of a third party . . . you will be required to reimburse U.S. Airways for amounts paid for claims out of any monies recovered from the third party, including, but not limited to your own insurance company, as a result of judgment, settlement, or otherwise.”
The plan paid medical benefits regardless of the cause or source of the injury – including injuries caused by others. McCutchen was seriously injured in a car accident caused by a third party. Under the plan, U.S. Airways paid a total of $66,866.00 of McCutchen’s medi- cal expenses. Limited insurance coverage resulted in McCutchen only being able to recover $110,000.00 ($100,000.00 of which was paid pursuant McCutchen’s own underinsured policy provisions). After costs and attorney fees, McCutchen’s net recovery was $60,000.00. The plan demanded payment from McCutchen for the full $66,866.00 – meaning McCutchen would have to pay $6,866.00 out of his own pocket. McCutchen denied U.S. Airways was entitled to any reimbursement raising two defenses:
- absent over recovery, U.S. Airway’s right to reimbursement did not kick in
- U.S. Airways had to contribute its fair share of the costs and fees incurred in gaining the recovery
U.S. Airways filed a separate action against McCutchen pursuant subsection 502(a)(3) of ERISA seeking the full $66,866.00. Rejecting McCutchen’s two defenses, the District Court granted U.S. Airways motion for summary judgment. The case was appealed to the Third Circuit who reversed the District Court on the basis that the principle of unjust enrichment overrode U.S. Airways reimbursement clause because the clause would leave McCutchen with less than the full payment for his medical bills and would give U.S. Airways a windfall.
Certiorari was granted by the United States Supreme Court. The Supreme Court held:
“. . . the terms of the ERISA plan govern. Neither general principles of unjust enrichment nor specific doctrines reflecting those principles – such as the double recovery or common fund rules – can override the applicable con- tract.”
So where are we now? In cases where the medical bills represent 60% or more of the available insurance liability limits (assuming a 40% fee contract) and the ERISA plan language allows recovery of all its medical expenses paid on account of the injuries, you need to seriously consider whether you will take the case if a compromise agreement cannot be reached with the ERISA plan administrator before suit. Why, because with this recent case, ERISA plan administrators no longer have any risk associated with a court allowing equitable defenses to their claims. So they have no reason to compromise in suits that have been filed without a previous compromise agreement being reached. The plan administrator can collect every penny which may very well leave your client owing the plan money on top of getting all your net recovery. In fact, if the plan also contains language that says it will not pay costs of recovery, counsel may not get anything either. As a practice recommendation, spend some time looking at the lien issues (ERISA plan language) and potential for actual recovery (liability limits) before deciding to move forward with representation. If the road looks rough, try and negotiate a pre-suit compromise with the ERISA plan administrator.