Have Plaintiffs become mere "collection agents" for self-funded ERISA health benefit plans? For a properly drafted plan, the U.S. Supreme Court ruled yes.
U.S. Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013)
Facts
In McCutchen, a health plan participant suffered serious injuries when another driver lost control of her car. McCutchen was an employee of U.S. Airways and a participant in its self-funded ERISA health benefits plan ("Plan"), which paid $66,866 in medical expenses arising from the accident. McCutchen retained an attorney and recovered $110,000 - of which $100,000 was from McCutchen's own automobile insurer and only $10,000 was from the adverse driver. His attorney's fees were $44,000 and McCutchen was to receive the remaining $66,000. U.S. Airways then sought reimbursement of the $66,866 (i.e. the entirety of McCutchen's recovery and then some) it paid relying on the following reimbursement provision in its Plan:
If [US Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct or other actions of a third party, ... [y]ou will be required to reimburse [US 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 the result of judgment,settlement or otherwise.
McCutchen's Arguments: Equitable Defenses Trump the Plan's Contract-Based Lien
McCutchen sought first dibs to the settlement - in front of his Plan - by his using "certain equitable defenses deriving from principles of unjust enrichment." He first asserted "that U.S. Airways could not receive the relief it sought because he had recovered only a small portion of his damages." Second, at the very least, U.S. Airways "had to contribute its fair share to the costs he incurred to get his recovery" (i.e. attorney fees) under the equitable Common Fund doctrine, which in turn would reduce U.S. Airway's recovery.
Court Holding: McCutchen Loses/the ERISA Plan Wins
U.S. Airways could enforce its "contract-based lien called an equitable lien by agreement" and get first dibs to the settlement. The Plan's reimbursement provision was "not a lien imposed independent of contract by virtue of equitable subrogation"; therefore, McCutchen's equitable defenses were "beside the point" and did not trump the plain terms of the Plan contract that gave U.S. Airways first right of recovery.
However, McCutchen caught a break on his common fund doctrine argument that U.S. Airways reaped a "windfall" given "its failure to contribute to the cost of obtaining the third-party recovery." Since "the Plan is silent on the allocation of attorney's fees, and in those circumstances, the Common Fund doctrine provides the appropriate default. In other words, if U.S. Airways wished to depart from the well-established Common Fund rule, it had to draft its contract to say so - and here it did not." Therefore, U.S. Airway's recovery must be reduced by a portion of the attorney fees required to obtain the recovery. Even winning this small victory, McCutchen still ends up on the short end of the stick. In running the numbers and assuming that the Plan bore 50% of the attorney fees (i.e. $22,000), the $110,000 settlement would be distributed as follows:
Attorney: $44,000
U.S. Airways: $44,866 ($66,866 lien less $22,000 - ½ of attorney fees)
McCutchen: $21,134
Put simply, McCutchen has the smallest interest in his own personal injury claim.
Take-Away Points
1. The United States Supreme Court clarified an ERISA plan's right of reimbursement when a plan participant recovers from a third-party tortfeasor. The bottom line is that the terms of an ERISA plan, not any equitable doctrine, govern the right of recovery and will give priority to the Plan.
2. ERISA Plans will scramble to re-draft the terms to defeat the Common Fund rule and thereby maximize its own recovery ahead of its Plan participant (i.e. Plaintiff). Be assured that after this opinion, Plans will no longer be "silent" on the allocation of attorney's fees but instead insert language that they are not subject to the Common Fund doctrine and therefore recoveries will not be reduced by some portion of attorney fees. This is already happening. In a recent case, we came along the following Plan language designed to defeat the Common Fund rule - quoting from the Plan:
- The Plan has a first priority right to receive payment on any claim against a third party before you receive payment from that third party.
- The Plan's subrogation and reimbursement rights apply to full and partial settlements, judgments, or other recoveries paid or payable to you or your representative, no matter how those proceeds are captioned or characterized. Payments include, but are not limited to, economic, non-economic, and punitive damages. The Plan is not required to help you pursue your claim for damages or personal injuries, or pay any of your associated costs, including attorney's fees. No so-called "Fund Doctrine" or "Common Fund Doctrine" or "Attorney's Fund Doctrine" shall defeat this right. (emphasis supplied)
- The Plan may enforce its subrogation and reimbursement rights regardless of whether you have been "made whole" (fully compensated for your injuries and damages).
If you have any questions about this Court opinion, please do not hesitate to contact Cruser & Mitchell, LLP.
