Guest article by James Steinburg, ERISA attorney
"the application of the subrogation principle is different if the benefits provider is an insurance carrier and the Welfare Benefit Plan proceeds fail to differentiate which amounts are for medical expenses, pain and suffering, and loss of past and future earning"
Welfare Benefit Funds and
Subrogation for Partial Settlements
By: James M. Steinberg
Under common law principles, the doctrine of subrogation is defined as "the substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies or securities." Subrogation was founded upon the principles of equity to prevent unjust enrichment. In connection with the relationship between an insurance provider and its insured, subrogation is applied to prevent the insured from recovering twice for his or her injuries and provide reimbursement to the insurance provider for the repayment of benefits it paid to the injured party.
Under certain circumstances, the insured receives a cash settlement against a tort-feasor as a result of injuries suffered in an accident. Prior to such settlement being made, the insured receives medical benefits from his or her insurance provider. However, the application of the subrogation principle is different if the benefits provider is an insurance carrier and a Welfare Benefit Plant proceeds fail to differentiate which amounts are for medical expenses, pain and suffering, and loss of past and future earnings. The insurance provider seeks subrogation or reimbursement for those benefit proceeds provided to its insured for medical expenses. However, the application of the subrogation principle is different if the benefits provider is an insurance carrier and a Welfare Benefit Plan.
Subrogation and the Insurance Company
New York State courts have determined that where an insurance carrier has provided medical benefits to an insured, and later received settlement proceeds that do not differentiate the aforementioned categories, the insurance carrier cannot obtain reimbursement for benefits provided solely for medical expenses.
In Teichman v. Community Hospital of Western Suffolk, the Supreme Court of the State of New York, Appellate Division, Second Department was asked to decide the issue of whether or not an insurance carrier which had paid out medical benefits on behalf of an insured could seek reimbursement for those benefits even though the proceeds of the insured's settlement did not indicate which portion of the settlement proceeds were for medical expenses. The insurance carrier, Metropolitan Life Insurance Company, based its right to subrogation upon the insurance policy's reimbursement clause:
If [Met Life] pays benefits under this Plan for Covered Medical Expenses incurred on your account, and it is found that [Met Life] paid more benefits than should have been paid because . . . You were repaid for all or some of those expenses by another source, [Met Life] will have the right to a refund from You.
The Teichman court expounded that Met Life's right to reimbursement was dependent upon whether the insured's settlement included payment for past and/or future medical expenses. In holding that Met Life did nothave a right to subrogation, the court explained that "the subrogee would necessarily be compelled to prove that medical payments were recovered from the tort-feasor." However, Met Life could not satisfy this standard and reimbursement was denied.
Subrogation and the Welfare Benefit Plan
While the standard applicable towards private insurance carriers is clear, the issue has arisen as to how subrogation principles should be applied to Welfare Benefit Plans established under the Employee Retirement Income Security Act of 1974, when such Plans attempt to recover payments advanced to an insured from the insured's settlement proceeds which fail to state what the settlement amount is for.
While many may believe that New York State Law's subrogation standard is applicable, several federal courts have held that state law has no controlling effect because of ERISA pre-emption. Section 514(a) of ERISA provides that:
the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 1003(a) of this title and not exempt under section 1003(b) of this title.
"State laws" are defined as "all laws, decisions, rules, regulations, or other State action having the effect of law." In Shaw v. Delta Airlines, Inc., the United States Supreme Court explained that a law "relates to" an employee benefit plan if it has a connection with or reference to such plan, and therefore, ERISA pre-emption is not limited to "state law specifically designated to affect an employee benefit plan."Therefore, while the New York State courts articulated their standard in Teichman, the applicable provision of an ERISA based Welfare Benefit Plan must be reviewed to determine the Plan's right to subrogation or reimbursement.
In U.S. Healthcare, Inc. v. O'Brien, the United States District Court for the Southern District of New York was presented with the issue of whether a welfare benefit plan governed by ERISA could recover monies paid to a participant's child who later received settlement proceeds in connection with a medical malpractice claim. In O'Brien, the covered participant was a child who suffered severe brain damage and neurological impairment as the result of physicians' malpractice. Based upon these injuries, U.S. Healthcare, Inc. of New York ("U.S. Healthcare") provided the child with medical benefits in an amount exceeding $1,000,000. Thereafter, the underlying malpractice action was settled for approximately $750,000.00 (such amount did not specify what the settlement amount covered) and U.S. Healthcare moved to recover a portion of the medical benefits from the covered participant.
U.S. Healthcare claimed that it could recover these paid benefits pursuant to the reimbursement clause in its contract with the participant:
With regard to any benefit paid to a Member, [U.S. Healthcare] can recover the reasonable value of such benefits when they were paid to the Member in any third party settlements or satisfied judgments. [U.S. Healthcare] will exercise its right only when the amount received by a Member is: (i) for hospital, medical or surgical services; and (ii) only to the extent that those services were provided by [U.S. Healthcare].
Further, U.S. Healthcare argued that federal courts in McIntosh v. Pacific Holding Co.,Singleton v. Board of Trustees of IBEW Local 613 and Cutting v. Jerome Foods, Inc. had established an "ERISA Rule" that any allocation of a state court settlement or judgment could not interfere with an ERISA based Plan's right to recovery. Therefore, U.S. Healthcare was entitled to recover from any settlement or judgment in the child's malpractice action.
However, the Southern District court countered that none of these cases established a general principle regarding an ERISA based Plan's right to subrogation or reimbursement. To the contrary, the O'Brien court explained that, just as the courts in McIntosh, Singletonand Cutting had decided, a Welfare Benefit Plan's right to reimbursement for medical expenses would have to be based upon an examination of the terms of the Plan's subrogation clause. For instance, in Cutting--a case involving a company-administered employee benefit plan seeking determination of whether it could be reimbursed for medical expenses rising out of an automobile accident--the subrogation clause provided that:
by accepting any Plan payments of benefits arising out of illness, injury or medical condition, an individual . . . agrees that the Plan shall be subrogated to all claims, demands, actions and rights or recovery of the individual against any third party or any insurer . . . to the extent of any and all payments made or to be made hereunder by the Plan.
In comparing this subrogation clause to the reimbursement provision in the U.S. Healthcare Plan, the O'Briencourt stated that the Cutting subrogation clause provided for broader rights, and therefore, a court was more likely to find that the Plan in Cutting could obtain reimbursement even though monetary amounts were not differentiated in the insured's settlement. However, the O'Briencourt continued, that the second sentence of the reimbursement clause it was reviewing, limited U.S. Healthcare's right to recover benefits, "to those cases in which the member actually receives payment for hospital, medical or surgical services provided by [U.S. Healthcare]."Therefore, since the insured's settlement did not specify what, if any, monies were being paid for medical expenses, U.S. Healthcare could not recover any monies from its insured.
Practical Application
Relevant case law has established that while state law has no controlling effect because of ERISA pre-emption, a welfare benefit plan's right to subrogation or reimbursement will be determined by federal common law. This standard, therefore, necessitates the need for subrogation clauses which are broad enough to establish a Welfare Benefit Plan's right to reimbursement for medical expenses regardless of the terms of a tort settlement.
Therefore, with this standard in mind, the following are sample subrogation clauses which have been found to provide broad bases for recovery of medical benefits paid:
1. It is hereby agreed that in the event a participant receives any benefits arising out of injury or illness for which the participant has, may have, or asserts any claim or rights to recovery against a third party or parties, then any payments by the plan for such benefits shall be made on the condition and with the agreement and understanding that the plan will be reimbursed by the participant to the extent of the amount or amounts received by the participant from such third party or parties by way of lawsuit or settlement.
2. Benefit payments are made on the condition that the plan will be reimbursed by the participant to the extent of, but not exceeding, the amount received by the individual from such third party by way of settlement or in satisfaction of any judgment.
3. Upon any recovery made by a participant from any third party or parties whether by suit, judgment, settlement, compromise or otherwise, the plan shall be entitled to reimbursement to the extent of benefits paid.
4. By accepting any plan payments of benefits arising out of illness, injury or medical condition, a participant agrees that the plan shall be subrogated to all claims, demands, actions and rights or recovery of the participant against any third party or any insurer to the extent of any and all payments made or to be made hereunder by the plan.
In addition to providing a subrogation clause in the welfare benefit plan documents, it is suggested that a Welfare Benefit Plan participant execute a separate subrogation agreement which provides that the participant:
1. acknowledges that no benefits will be provided which are included or includable by any claim or lawsuit instituted by the participant against a third party;
2. subrogates to the welfare benefit plan, in consideration of the amount of all benefits advanced by the plan for medical expenses paid by the plan which is included or includable by any lawsuit instituted by the participant;
3. agrees to pay to the plan, all amounts recovered by suit, settlement or otherwise from any party or insurance carrier as a result directly or indirectly, of the events causing or contributing to the injuries sustained by the participant; and
4. recognizes that the plan will impose a lien on any award or payment made in settlement of such claim or lawsuit.
By incorporating these provisions, Welfare Benefit Plans may guarantee the enforcement of their subrogation rights.
