Under ERISA, fiduciaries have no ability to sue participants for breach of the terms of a plan. To illustrate this point, here’s a health insurance scenario that crops up regularly. Mabel Cautious is insured under the Conglomerate Inc. Medical Benefits Plan ("the Plan"). Mabel is driving through an intersection one day and Johnny Hotrod blows a red light, hits Mabel and injures her. She has medical bills of $10,000 which the Plan pays. Later, Mabel sues Johnny for her injuries and his auto insurer pays her $25,000, Johnny’s policy limits, a portion of which is to pay for Mabel’s medical expenses. The document governing the Plan has a provision in it that calls on Mabel to reimburse the Plan for any medical expenses it has paid Mabel if Mabel later recovers those expenses from a negligent third party, such as Johnny. These contract terms, usually referred to as subrogation provisions, are common in insurance policies.
So what if Mabel refuses to reimburse the Plan for the medical expenses she recovers from Johnny? ERISA is very clear: neither the Plan, its corporate sponsor nor the administrators of the Plan can sue Mabel for breach of contract. 29 U.S.C. §1132(a)(1)(B). ERISA does have a provision, 29 U.S.C. §1132(a)(3), that allows a fiduciary to obtain "appropriate equitable relief" for violations of the terms of the Plan. However, in Great-West v. Knudson, 534 U.S. 204 (2002), the Supreme Court decided that "appropriate equitable relief" does not include recovering money for breach of contract.
But the folks administering ERISA plans, called "fiduciaries" under the statute, were not deterred from pursuing subrogation claims. There are equitable theories that allow for recovery of money under certain circumstances. One of these theories is equitable restitution. Some federal Circuit Courts of Appeals interpret Great-West as allowing ERISA fiduciaries to recover funds from Mabel under this theory. Other Circuits have interpreted Great-West as prohibiting fiduciaries from pursuing subrogation claims at all. So the federal Circuits are split on this issue.
Last month the Supreme Court agreed to review a case, Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212 (4th Cir. 2005), to resolve the question. In Sereboff the Fourth Circuit allowed an ERISA plan to recover a portion of its medical expenses based on equitable restitution. Usually, whether an insurer is entitled to be reimbursed when a person receives money from a personal injury claim calls on a court to analyze whether that person has been "made whole" by the personal injury money she receives. Only if she has been fully compensated for her injuries is the insurer in a position to insist on getting its money back. This analysis, known as "equitable subrogation," looks beyond the terms of the insurance policy. However, in Sereboff, the Fourth Circuit was having none of that. It simply looked at the terms of the Plan, identified language in the Plan that called on the Sereboffs to repay the Plan regardless of whether they had been made whole, and awarded the Plan the money, less the Plan’s proportionate share of the Sereboffs' attorney fees.
In other words, the court allowed the ERISA fiduciary to enforce the terms of the Plan to recover money for breach of contract through §1132(a)(3), effectively enabling an end-run around the limits of §1132(a)(1)(B). We’ll now see if the Supreme Court lets the fiduciary get away with that.