Clear plan document terms in ERISA group health plans are the best defense against legal claims asserting broad equitable remedies, the U.S. Supreme Court reinforced in an April 16 decision.
In its holding, the Court affirmed that equitable theories, such as make-whole, common fund, unjust enrichment and double-recovery doctrines should not be allowed to override a plan’s clear language reserving its right to full reimbursement for benefits it paid when all other contractual conditions are met.
The reason cited by the High Court in its 5-4 decision is that the plan’s reimbursement agreement is mutual, whereas after-the-fact carve-outs to protect a plan participant from equitable defenses such as windfall, unjust enrichment, etc., are unilateral.
Employer Failed to Disavow Common-fund Rule
But in US Airways v. McCutchen, No. 11-1285 (U.S. Ct., April 16, 2013), the US Airways plan document was not air-tight, and when less-than-perfect plan language is used, courts can insert a beneficiary‘s “equitable” rules as gap filler.
The plan document failed to include language disavowing the common-fund doctrine, under which plan recoveries can be reduced by the percentage retained by the plan participant’s attorney in securing the settlement.
The majority opinion, written by Justice Kagan and joined by Justices Kennedy, Ginsburg, Breyer and Sotomayor, ordered application of the common-fund doctrine and a reduction of US Airways‘ claim.
A dissenting minority opinion written by Justice Scalia joined by Chief Justice Roberts, and Justices Thomas and Alito, said that “full reimbursement” was understood as the funds the plan spent, and since the plan said that its reimbursement could not be reduced by any amount, then no allowance should have been made for attorney’s fees.
The Case
Plan participant James McCutchen was injured in an auto accident due to a third party. The plan paid $66,866 for his care. McCutchen hired an attorney and secured a $110,000 award from the third part, of which McCutchen received $66,000 after paying his lawyers a 40-percent fee.
US Airways demanded reimbursement of the full $66,866 it had paid; more than the total amount actually received by McCutchen.
When McCutchen did not comply, US Airways filed suit against McCutchen under Section 502(a)(3) of ERISA, which authorizes health plan administrators to obtain appropriate equitable relief to enforce plan terms.
Clear Plan Blocks Made-whole Arguments
McCutchen raised two arguments opposing US Airways’ attempt to recoup funds from the recovery.
- He was not being made whole, so US Airways’ recovery should be limited to the percentage of his settlement that went to medical expenses only, leaving out the portion of the award for loss of future earnings, and pain and suffering, for example.
- The common-fund doctrine must be applied, reducing any award to US Airways by a percentage amount equal to the contingency fee paid to his attorneys.
Although a federal district court rejected these arguments, the 3rd U.S. Circuit Court of Appeals decided that full recovery would be inequitable because it would constitute unjust enrichment for the plan.
High Court Backs Clear Plan Allowances
The Supreme Court disagreed with the 3rd Circuit’s finding. The Court held that enforcing a lien by agreement took precedence above all else because that constituted holding both parties “to their mutual promises.” US Airways had a right to the funds because its beneficiary had promised to turn them over. The outcome would have been different in the absence of a contract.
For US Airways, this meant that language asserting a first right to the money in the tort settlement recovery was binding, regardless of McCutchen’s attempt to separate out non-medical expenses.
More details on this case can be found in the Employer’s Guide to Self-Insuring Health Benefits, at http://hrcomplianceexpert.com.