Be Sure To Read Subrogation Clause in Benefits Plan

Filed under: Personal Injury by Contributor @ May 8, 2013

Last Tuesday, the United States Supreme Court issued its opinion in US Airways, Inc. v. McCutchen. The Court sought to answer the question: Do equitable principles and the rule against unjust enrichment trump the language of a benefits plan when an insurer attempts to subrogate money from the insured party? In a 5-4, decision, the Court found that they do not. Justice Kagan authored the majority opinion, joined by Justices Kennedy, Ginsburg, Breyer, and Sotomayor. Justice Scalia authored the dissent, joined by Chief Justice Roberts and Justices Thomas and Alito.

In 2007, US Airways mechanic James McCutchen was a victim in a car accident that caused him and others serious injuries. US Airways, acting as McCutchen’s insurer, paid $66,866 in medical expenses resulting from the accident. McCutchen hired personal injury attorneys to sue the at-fault party for a judgment in excess of $1 million to cover medical expenses, pain and suffering, and lost future earnings. Unfortunately, McCutchen settled for a paltry $10,000, since the driver was underinsured and had limited coverage. McCutchen’s own vehicle insurance company paid him $100,000, earning him a gross of $110,000. After his lawyers collected a 40% contingency fee, McCutchen netted $66,000.

After they learned about McCutchen’s earnings, US Airways attempted to subrogate the full $66,866 they had expended under the Employee Retirement Income Security Act (ERISA) §502(a)(3), seeking “appropriate equitable relief”. The problem here is apparent: If McCutchen were to pay US Airways the full amount they demanded, he would actually have to pay $866 from his own funds, essentially punishing him for seeking relief from the at-fault party. Nevertheless, the terms of his benefits plan with US Airways were clear and read as follows:

“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.”

Before the Trial Court, McCutchen argued that under the principle of unjust enrichment, US Airways should not be allowed to collect the full $66,866. Specifically, he cited two equitable principles that he argued overrode the explicit terms of the contract: the double recovery rule and the common-fund doctrine. First, he argues that US Airways could collect only the portion of the $110,000 that was a double recovery for McCutchen, i.e., money intended to pay for medical expenses, but not pain and suffering or loss of future earnings. And since he only received a small fraction of the amount he was seeking, McCutchen argued that US Airways was not entitled to any reimbursement under the double recovery rule. Second, McCutchen argued that any amount of reimbursement to US Airways should be reduced by 40% to cover the cost of his attorneys’ fees. This argument stems from the common-fund doctrine, which states that an insurer cannot “piggyback” off of an insuree’s earnings without subtracting an amount equitable to whatever the insuree expended on receiving those earnings.

US Airways argued that both of these arguments are nullified by the plain language of the contract: Since the benefits plan explicitly states that US Airways will be reimbursed for “any monies”, the amount is not limited under the double recovery rule, nor is it reduced by application of the common-fund doctrine.

The District Court granted summary judgment to US Airways, reasoning that the “the plan clear[ly] and unambiguous[ly] provided for full reimbursement of the medical expenses paid”. McCutchen appealed and the Third Circuit reversed the District Court’s ruling, holding that “the principle of unjust enrichment overrides US Airways’ reimbursement clause if and when they come into conflict”. The Third Circuit decided this based on equitable principles, namely that McCutchen would be left with less than full payment for his medical bills and that US Airways would receive a “windfall”, “given its failure to contribute to the cost of obtaining the third-party recovery”. As such, the Third Circuit instructed the District Court to determine how much US Airways was entitled to that still would qualify as “appropriate equitable relief”. US Airways appealed and the United States Supreme Court granted certiorari.

The Court relied heavily on Sereboff v. Mid Atlantic Medical Services, Inc. (2006) to render its opinion. Sereboff is a similar case that, in short, says that a contract’s conditions trump equitable principles that would otherwise be enforceable absent their nullification in the contract. Consistent with that ruling, the Court ruled that per the expressed terms of the benefits plan, US Airways has first dibs on “any monies recovered”, not just money that was a double recovery for McCutchen. In this regard, the Court sided with US Airways.

The issue of relief under the common-fund doctrine is not as clear. While the contract does specify that US Airways is first to collect on “any monies recovered”, it does not specify whether or not that money is gross or net relief, i.e., money collected before or after attorneys’ fees. Given the absence of this clarification in the benefits plan, the Court ruled that the common-fund doctrine should be used to consider the intent of both parties when they signed the contract. McCutchen clearly did not sign his benefits plan expecting to have to pay money if he is in injured in an accident, and US Airways likely did not anticipate that either. So, a middle ground must be reached. As such, the case was remanded for further proceedings consistent with the Court’s opinion. Justice Scalia’s dissent was surprisingly brief and only argued that the majority should not have considered the issue of the common-fund doctrine filling in the holes of the “contractual gap”, since the only question raised before the Court was whether or not equitable principles can override an otherwise-clear contract.

The lower court will rule again on this issue, but this time consistent with the Supreme Court’s rather vague opinion on the application of the common-fund doctrine. McCutchen could be ordered to reimburse US Airways anywhere from $40,120 ($66,866 less 40% for attorneys’ fees) to the full $66,866. The takeaway from this case is that both employees and employers should read and understand the subrogation clause in their benefits plan. Employers should make sure that the plan is explicit in its terms, namely whether or not they will help pay for attorneys’ fees. Employees should also be aware of what they are signing, as no one wants be left without relief for their pain and suffering. If you have any questions about subrogation clauses, contact a personal injury attorney at Fairlie & Lippy today.

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