GREAT WEST AND SUBROGABLE LIENS UNDER ERISA – ARE THERE ARE ANY MAGIC BULLETS LEFT?
The issue of subrogation poses important problems concerning settlement of civil cases. Settlement is more difficult due to issues such as whether or not medical expenses must be repaid to an ERISA health insurance plan, what attorneys fees could be charged and retained from a settlement or verdict or escrowed indefinitely, what amounts that a claimant may retain from settlement proceeds and/or verdict and post-settlement medical treatment that a claimant may receive after retaining settlement proceeds. Subrogation problems start with an attorney or claimant signing a lien letter either to have medical treatment or to obtain copies of medical records and bills. After signing a lien letter, the problem then manifests itself in cases involving questionable liability, or where the settlement proceeds and/or verdict amounts were less than the previously paid medical expenses or where the only real source of damages involves medical bills. Even if the attorney does not sign the lien letter, the ERISA health insurer may show up at anytime demanding immediate payment of its lien.
The Supreme Court's decision in Great West in 2002 was important because the Court attempted to clarify when and under what circumstances that an employer sponsored health plans could seek equitable relief under ERISA to recoup medical expenses previously paid on behalf of beneficiaries and participants.
Initially, in order to understand the Great West decision, one first needs to know what employer sponsored health insurance plans are covered by ERISA? The vast majority of employer sponsored health insurance plans are covered by ERISA. The only exceptions to ERISA coverage are self-employed individuals that pay their own health insurance premiums, religious and other charitable institutions offering health insurance or governmental entities (federal state and local) or agencies and instrumentalities of government agencies that offer health insurance (including Medicare and Medicaid). See 29 U.S.C. 1003 (b)(1)-(5)
A. THE GREAT WEST FACTS AND DECISION
The facts in Great West are critical. Ms. Knudson, the respondent in the Supreme Court case and plan beneficiary of Great West's health insurance plan was involved in a severe automobile accident. Ms. Knudson received her health insurance through the employer of her husband. The Great West health plan paid $411, 157 of Ms. Knudson's medical expenses because she was rendered a quadriplegic as a result of a car accident. The plan had a provision for reimbursement:
This provides that the plan shall have "the right to recover from the [beneficiary] any payment for benefits" paid by the Plan that that the beneficiary is entitled to recover from a third party. 122 S.Ct. 711
The settlement in Ms. Knudson's case was for $650,000. The $650,000 was split as follows: $373,426 in attorneys fees and costs, (fees and costs taken from a trust) $256,745.30 under California law that was paid to a Special Needs Trust, $5,000 to the California Medicaid program and $13,828.70 to Great West Life and Annuity Co. (portion of the settlement attributable to past medical expenses previously paid by Great West). 122 S.Ct. 711.
The day before the state court hearing scheduled for judicial approval of the Knudson settlement, Great-West calling itself a defendant, attempted to remove the case to federal court. The federal court concluded that Great West was not a defendant and remanded the case back to state court. The state court approved the settlement ordering the settlement proceeds to be paid directly to the trust and the remaining settlement amounts to the attorneys, who in turn would pay the settlement checks to Medi-Cal and Great-West.
Great West was not satisfied with receiving only $13,000 and refused the check from the attorneys and filed suit in federal court under ERISA. Great West relied solely upon Section 502 (a)(3) of ERISA, a catch-all provision for injunctive and other equitable relief suing Ms. Knudson only (not her attorneys) alleging that she had wrongfully received proceeds that should have been paid back to the plan based on its terms. The plan's request for relief against Ms. Knudson was that she should repay the entire amount (money damages) that the plan had previously paid for her entire medical expenses.
The Supreme Court decided that the plan could not bring a claim under ERISA Section 502 (a)(3) against Ms. Knudson seeking additional payments because the proceeds of Ms. Knudson's settlement were not in her possession rather the funds were being held in a special needs trust under California law. 122 S. Ct. 715 In addition, the plan was seeking a legal not an equitable remedy which was for monetary damages. As a result, the plan could not seek equitable relief.
In dicta, Justice Scalia also observed that the Court was not expressing any opinion as to whether or not Great West could have intervened in a state tort action brought by the Knudsons or whether a direct action by Great West against the Knudsons under state law asserting state law claims such as breach of contract would have been preempted by ERISA. 122 S. Ct. 718. Significantly, Justice Scalia also observed that the Court was not deciding whether or not Great West could have obtained equitable relief against Ms. Knudson's attorney(s) and the trustee of the Special Needs trust under ERISA or other federal remedies. 122 S.Ct. 718
II. FOURTH CIRCUIT DECISIONS SINCE KNUDSON
The Fourth Circuit since Knudson has consistently allowed health insurers to bring actions for restitution based on ERISA Section 502 (a)(3) if two specific requirements can be satisfied which are the settlement funds are specifically identifiable and are within the possession and control of the beneficiary and/or the escrow account of the beneficiary's attorney.
In Mid Atlantic Medical Services, LLC v. Sereboff, 407 F. 212, 218-19 (4th Cir. 2005), the Fourth Circuit allowed a health insurer, MAMSI, to recoup monies held by plaintiffs in an investment account arising out of settlement of litigation in state court in California.
The plaintiff-Sereboffs filed a lawsuit in California concerning a personal injury action arising out of an automobile accident. However, the Sereboff's health insurer was MAMSI as a result of Ms. Sereboff's employment with the Katzen Eye Group. MAMSI, in its policy with Ms. Sereboff, had a standard subrogation clause requiring her to repay all monies paid for medical expenses arising of acts or injuries caused by third parties. Under the terms of the MAMSI policy, however any recovery by MAMSI would be subject to a deduction for "reasonable attorneys fees and costs". After receiving a formal demand letter from MAMSI in 2001 to repay slightly more than $74,000 of outstanding medical expenses incurred as a result of the accident in 2000, MAMSI offered a contingent fee agreement to the Sereboffs' attorney to represent it concerning its subrogated lien. The Sereboffs' attorney rejected the MAMSI proposal and advised it that under the law of the Ninth Circuit in 2001 that its lien was not enforceable. Significantly, the attorney did not file an action to void the lien in either state or federal court in California even though he claimed that the lien was not enforceable before or after the time that Knudson had been decided by the Supreme Court. MAMSI continued to pursue enforcement of its lien after receiving the letter from the lawyer for the Sereboffs in 2001 arguing that since the contract was in Maryland, the law in Maryland applied to the case. The matter lay dormant until the settlement of the accident case in 2003.
On January 23, 2003, the Sereboffs settled their claim for $750,000 and refused to pay any portion of MAMSI's lien. Their attorney disbursed the settlement funds to the clients and kept the balance for his fee. The Sereboffs placed the settlement proceeds in an investment account.
MAMSI sued in Maryland under ERISA (Section 502 (a) (3)) because the Sereboffs lived in Owings Mills. Judge Davis upheld the MAMSI lien and their request for restitution under ERISA including ordering an injunction to prevent the Sereboffs from disposing of $74,000 to pay the lien. See, 316 F. Supp. 2d 265 (D. Md. 2004)
Judge Davis went further and ordered the Sereboffs to pay MAMSI's attorneys fees and costs for bringing the ERISA action.
Judge Davis did however reduce the MAMSI lien based on the reduction agreement contained in the MAMSI policy by prorating the attorneys’ fees and costs by ten per cent for the attorney's efforts incurred in the California litigation.
The Fourth Circuit upheld Judge Davis's decision concerning the enforcement of the lien under ERISA based on the following factors. First, the funds have not been dissipated, and they are specifically identifiable. By the stipulation of August 11, 2003, between the Sereboffs and MAMSI, $74, $74,000 of the settlement proceeds are preserved by the Sereboffs and MAMSIin their investment accounts. Although the funds have been placed in accounts with the Sereboffs ‘ other monies, they can "clearly be traced to particular funds" covered in the California litigation. Knudson, 534 U.S. at 213, 122 S.Ct. 708. Second, the disputed funds belong in good conscience to MAMSI. The Plan contains express unambiguous reimbursement provisions, according to MAMSI, the "right to recover" payments made to Sereboffs by a third party. Third, the disputed funds are within the possession and control of the Sereboffs. They received those funds in the California litigation and held them in their investment accounts pending resolution of this proceeding. In Knudson, by contrast, the funds were placed in a Special Needs Trust, outside the possession and control of the beneficiary. Thus, action pursued by MAMSI and resulting in the reimbursement award is equitable in nature under Section 502 (a)(3) and the court properly granted the relief with respect to it. See, 407 F. 3d 218-19
The Fourth Circuit cited a Seventh Circuit decision with approval involving a constructive trust placed against the claimant's counsel to uphold Judge Davis's decision.
The Fourth Circuit reversed and remanded the attorneys’ fee and cost award in favor of MAMSI finding that the lower court did not apply all five factors used in ERISA litigation. Specifically, the Fourth Circuit rejected the finding that the Sereboffs' attorney would credit MAMSI's award of attorneys’ fees and costs in the Maryland litigation against his contingent fee in California. See 407 F. 3d 221-222. The Sereboffs attorney never made any such agreement to do so.
One of the reasons why the lower court in MAMSI ordered attorneys fees according to Judge Davis was that the question of enforcement of the liens had been determined in an earlier unpublished decision of the Fourth Circuit in Primax Recoveries, Inc. v. Young, 83 Fed Appx. 523 (4th Cir. 2003) See also, Sereboff at 407 F. 3d at 221
In Primax Recoveries, the Fourth Circuit upheld a constructive trust against a claimant because the settlement proceeds were still in the possession of the claimant.
It is noteworthy that the Fourth Circuit in Primax Recoveries rejected two arguments made by the claimant in that case. First, the Fourth Circuit held that the provision concerning subrogation applying to third party settlements would not be narrowly construed so that the recovery had to specifically denote whether or not it came from the insurance policy of a third party insurer or uninsured motorists funds. Second, Maryland insurance law that precluded recovery of reimbursement from uninsured motorists funds was inapplicable to the action because Primax was bringing the action under ERISA, which is a federal law.
See also, Wal-Mart Stores Inc. v. Carpenter, 2002 U.S. App. Lexis 101615 (4th Cir. 2002)
In Provident Life & Accident Insurance Co. v. Cohen, 2005 U.S. App. Lexis 18587 (decided August 29, 2005), the Fourth Circuit held that an insurer could not seek to void ab initio, a policy providing for disability benefits under ERISA based on Knudson supra even though the policyholder made affirmative misrepresentations about the length of time that he was totally disabled.
The Fourth Circuit held such relief under federal common law was not appropriate equitable relief based on Knudson supra because Congress chose to exclude such a remedy under ERISA. Provident was not seeking equitable relief to void the policy based on fraudulent inducement by Cohen as to his condition when the disability benefit policy was initially issued. Provident also did not provide in the disability policy for recoupment or overpayment of disability benefits if it was later determined that Cohen was found not totally disabled at the time he was paid benefits.
The Fourth Circuit's decision in Cohen supra would appear to end any efforts by health insurers under ERISA to void health insurance policies if claimants are caught on videotape performing activities while seeking medical treatment.