Recent court cases have highlighted the thorny issues that arise when a benefit plan enforces its subrogation rights or seeks reimbursement of overpaid employee benefits.
Plan administrators have faced uncertainty about subrogation and reimbursement claims in the wake of the Supreme Court rulings in Sereboff v. Mid Atlantic Medical Services, Inc., 547 U.S. 356 (2006) and Great-West Life & Annuity Ins. Co. v. Knudson, 534 U.S. 204 (2002). In Sereboff and Great-West, the Court addressed what should be considered “equitable relief” in order to state an ERISA claim to recoup benefits that have been paid out to a plan participant. The lines drawn by the Court have created differing decisions among the circuit courts and uncertainty for plan administrators. Roy Harmon’s Heath Plan Law blog has been tracking the recent developments. The results demonstrate how the courts have reached different conclusions in such cases. See ERISA Group Health Plan Subrogation Update; Plan Fiduciary Claims For Overpayments, Post-Sereboff; Complaint Need Not Identify Specific Funds For Imposition Of Constructive Trust (noting conflicting court decisions on whether identifiable funds are required to state a claim for equitable relief).
The cases create a risk for plan administrators that efforts to collect overpaid benefits or subrogation interests could fall into a black hole between federal and state law. On one hand, there is a risk that a federal court could hold that a claim for overpaid benefits is a claim for money damages and not “equitable relief” (particularly where the funds are have been disbursed and cannot be “traced”) and therefore that a federal cause of action—and federal court jurisdiction--under ERISA is not permitted. On the other hand, there is a risk that a state court could hold that ERISA preempts such claims, or that various state law equitable defenses would make such claims uncertain and more expensive to litigate.
One recent case demonstrates that some federal courts have found a way to address this problem. The United States District Court in the Northern District of Illinois permitted a plan adminstrator’s lawsuit for overpaid disability benefits on the basis of an “equitable lien by agreement.” In the case, Mr. Van Slyck, the plan participant, collected disability benefits even after he collected retirement benefits from his former employer. Under the plan, the benefits should have stopped with the retirement payout but they continued until Van Slyck had been overpaid $261,559. A plan provision required retirement benefits to offset disability benefits. The court held that a claim for “unjust enrichment” was permitted under the federal common law of ERISA, and the claim for an “equitable lien by agreement” was permitted as a claim for “equitable relief” under ERISA Section 502(a)(3). According to the court, “there is no tracing requirement where there is an equitable lien by agreement.” The plan requirement for offsetting retirement benefits from disability benefits was sufficient to create an "equitable lien by agreement" and a claim under Section 502(a)(3). The case is United Air Lines Inc. Retirement and Welfare Administration Committee v. Van Slyck. A copy of the decision can be read here.
But even when an ERISA claim can proceed, plan administrators still face various obstacles in the form of common law limitations on subrogation and reimbursement rights, such as the "made-whole" doctrine. The “made-whole” doctrine is an insurance principle applied by many state courts (including Washington) and some federal courts. It provides that subrogation rights cannot be enforced until the party insured has been fully compensated for his or her injuries. In other words, subrogation is permitted only after a claimant has been “made whole.” Recently, the 5th Circuit Court of Appeals held that a state court rule applying the made-whole doctrine was not preempted by ERISA and thus it could be applied in federal cases, at least insofar as fully insured plans are concerned. The case is Benefit Recovery, Inc. v. Donelon.
If a plan administrator can successfully navigate all of these issues and collect overpaid benefits or a subrogation claim, there also are potential public relations issues that can arise. Consider the recent example of Wal-Mart, which found itself in a public relations firestorm after attempting to collect a subrogation interest from a plan participant. In the Wal-Mart case, it sued to recoup health benefits paid to Debbie Shank after Shank and her family settled a tort lawsuit. For photos and video about the case, see Fight with Wal-Mart Ends for Jackson Woman with Brain Damage from Crash.
Wal-Mart was labeled "Worst Person in the World" by MSNBC's Countdown with Keith Olbermann. The Executive Director of "Wal-Mart Watch" said, "Wal-Mart claims it must recover the money from the Shank family in 'fairness' and to 'protect' the plan, but those claims are absurd because Wal-Mart self-funds its health care plan. Wal-Mart can and should do the right thing and let the family keep this money to take care of Debbie Shank." Some writers even attempted to bring the Shank case into the presidential campaign. See Hillary Clinton and Wal-Mart: What About Debbie Shank?
Ultimately, Wal-Mart decided to drop the claim for reimbursement from Shank's family.
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