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LEGAL REPORT

Spring 2006

This is one in a series of reports on recent changes in the law, provided as a service by Mooney, Green, Baker & Saindon, P.C.

Supreme Court Revisits Subrogation

For more detail on Great West, see our Winter 2002 Legal Report.

Four years ago, the Supreme Court created great confusion and consternation with its decision in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002). There, the Court addressed the enforceability of a health plan’s subrogation provision. Ultimately, the Court concluded that the plan’s action to recover the amounts it had paid to a beneficiary who had subsequently recovered from a liable third party could not be maintained under ERISA. In a long-awaited follow-up decision, Sereboff v. Mid Atlantic Medical Services, Inc., 74 U.S.L.W. 4240, Slip Op. No. 05-260 (2006), the Supreme Court has now reached the opposite result, under strikingly similar facts. This is our effort to reconcile those two cases.

Great West involved a plan beneficiary who was in an automobile accident. The plan document contained a typical subrogation provision, requiring repayment from any third-party recovery of benefits paid by the plan related to the accident. Furthermore, the plan imposed a "lien" on any such recovery. The beneficiary entered into a settlement with the other driver’s insurance company. Under the settlement, the plan would receive only a small portion of the benefits it had expended. Most of the money would go into a "Special Needs Trust" that would provide the beneficiary with money to cover future medical expenses.

The plan sued, seeking to enforce its subrogation lien. Ultimately, the Supreme Court, in a 5 to 4 decision, concluded that the plan’s subrogation lien was unenforceable. In an opinion penned by Justice Scalia, the Court noted that ERISA only permits specific, enumerated types of civil actions. The only general "catch-all" provision, and the one that the plan in the Great West case relied upon, authorizes a civil action:

by a participant, beneficiary , or fiduciary (A) to enjoin any act or practice which violates . . . the terms of the plan, or (B) to obtain other appropriate equitable relief (I) to redress such violations or (ii) to enforce any provisions of . . . the terms of the plan.

The Court determined, however, that the plan’s action to enforce its subrogation rights amounted to nothing more than a legal action for damages, and was therefore not permitted under ERISA.

The Court has now issued its long-awaited follow-up to Great West. Undoubtedly reflecting new Chief Justice Roberts' propensity for consensus, the Court unanimously upheld a plan’s ability to enforce a subrogation lien. In Sereboff, a health plan beneficiary was also in a traffic accident. As in Great West, the plan contained a subrogation provision, requiring repayment to the plan of all benefits expended related to an accident out of any recovery from a third-party.

Among other things, the beneficiary argued that in a suit at equity for restitution, equitable principles required strict tracing of the property against which the lien was to be asserted. Once the recovery proceeds are mixed with an individual’s general assets, however, tracing becomes impossible. Consequently, argued the beneficiary, the plan’s action was really not an equitable action to enforce a lien, but a legal action for damages, precisely the sort of action that the Court in Great West had determined could not be maintained under ERISA. The Supreme Court rejected this argument. The Court equated a plan’s lien to a lien "by agreement," which can be enforced without any strict tracing requirement. Strict tracing is only required when the remedy sought is "equitable restitution," which is something different. Interestingly, although the Court acknowledges that a lien can only attach to identifiable funds, those funds do not need to be identifiable either at the time the lien is initially created or at the time the lien is enforced; so long as somewhere along the way (such as at the point where the recovery proceeds are first paid to the beneficiary) there were identifiable funds.

The Court declined, however, to rule on what, if any, equitable defenses would be available against subrogation actions. Specifically, the Court refused to consider the applicability of the "make whole" doctrine, under which some courts have reduced subrogation liens by the amount of, for example, attorneys' fees attributable to the plan’s share of the recovery. Because those arguments had not been raised at the trial court level, they could not be raised for the first time on appeal.

How can the Sereboff and Great West decisions be reconciled? In Great West, the proceeds from the recovery were never actually in the hands of the beneficiary. Consequently, when the plan sued the beneficiary, it was not enforcing a lien against identifiable assets. Rather, it was seeking damages for violating the plan’s subrogation provision. Sereboff, on the other hand, involved a payment directly to the beneficiary. Consequently, the subrogation lien attached at the moment of payment, and was therefore enforceable by the plan. Rather than reflecting an actual legal distinction between the two factual scenarios, however, it is likely that the new Roberts Court wanted to clean up the mess left behind after the Great West decision by limiting its applicability. This may be a harbinger of things to come, meaning that the Court will begin issuing consensus opinions that take into consideration the impact of those decisions, or it may be only a cruel tease.

What does this mean for health plans? Generally, it means that subrogation provisions are once again enforceable under ERISA, as long as the money actually finds its way into the hands of the people who received the benefits. It also means that it is all the more important that plan subrogation provisions–and subrogation agreements–be reviewed to ensure that they include sufficient language to establish an enforceable lien. Furthermore, plans must be careful to monitor their subrogation cases to ensure that their liens are asserted on a regular and timely basis, and become watchful for efforts to circumvent subrogation rights (such as by establishing "special needs trusts" or paying money directly to third parties). We will continue to monitor developments.

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