Ramifications of Eliminating Equitable Subrogation
Wal-Mart Admin. Committee v. Shank continues to generate comment. I've taken my own shots in prior posts. Stephen Rosenberg adds his perspective on one aspect of it here. He states that the inequitable result in Shank seems to be "not an ERISA problem, but a litigation tactics problem." He goes on to suggest that Shank's counsel could and should have contacted Wal-Mart before the case was brought and either obtained waiver or compromise of her subrogation interest or try the case and reconcile herself to paying Wal-Mart back the first $470,000 she recovered.
I agree with Stephen that there is a litigation tactics angle to Shank. But the elimination of the doctrine of equitable subrogation is definitely a problem in how ERISA is interpreted and applied. To conclude, as the Eighth Circuit does in Shank, that the phrase "appropriate equitable relief" in ERISA's remedies section allows no room for the doctrine of equitable subrogation is simply absurd. Stephen's post actually highlights the mischief that comes about when the doctrine of equitable subrogation is eliminated.
That legal principle is far from being defined with certainty. But even under the version most favorable to an insurer's interpretation, equitable subrogation requires that when there are competing claims to a fund that is insufficient to make the competing parties whole, they are required to split the recovery in proportion to the amount of their claims. If equitable subrogation had been in place in Shank, Wal-Mart would have been required to accept the same proportion of recovery for its interest that Shank received on her total claim. Say, for example, Deborah Shank’s total damages were $7 million dollars and she recovered $700,000. Equitable subrogation would say that Wal-Mart must follow Shank’s proportionate incomplete recovery and be reimbursed no more than $47,000 of its $470,000 claim. The Eighth Circuit rejected this idea. Thus, the effect of Admin. Committee of Wal-Mart v. Shank, at least in the Eighth Circuit, is to eviscerate this equitable requirement and allow Wal-Mart to be compensated for its loss to a much greater degree than Deborah Shank was compensated for her loss.
Without equitable subrogation being in place, Wal-Mart and other self-funded plans and insurers are free to enforce completely one-sided reimbursement language that allows them to be repaid from the first dollar a plan participant recovers from a third party and without any obligation to contribute toward the plan participant’s attorney fees and costs. If that is the field on which we are playing, I agree with Stephen that personal injury attorneys should, as a strategic matter, be even more inclined that they might otherwise be to deal up front with insurers or employers holding reimbursement or subrogation interests. To do otherwise is to be especially vulnerable to the significant risk of being bitten on the back end.
Related to, but a step beyond the point Stephen makes, is that, although losing equitable subrogation is a travesty and results in a great loss to claimants, personal injury claimants and their counsel are not completely shut out of the picture. They are in a stronger position than they may realize in dealing with the Wal-Marts of the world.
What if Deborah Shank had gone to Wal-Mart before she filed her personal injury lawsuit and said: "I will not take the time and expense to sue the person who ran into me and try to get the $700,000 insurance coverage that's available until and unless you, Wal-Mart, agree to split any proceeds I recover in a manner that takes care of my attorney fees, costs and puts no less in my pocket than you take home in yours." Would Wal-Mart be so quick to insist on being completely repaid its lien from the first dollar? I doubt it. The reality is that the great majority of auto accidents that cause serious, permanent injuries are like the Shank case: they involve negligent drivers on the other side of the table with liability insurance coverage that is not sufficient to fully compensate the injured party. And it is extremely rare for injured persons to pursue and get money from the individual assets of a negligent wrongdoer. Ninety nine percent of the time the payment you end up with is, at most, the insurance policy limits. In that situation it is the plaintiff, rather than the self-funded plan or health insurer, that holds the cards and can dictate that they get a significant share of the proceeds. Think not? Try to force an uncooperative plaintiff to go through the time and energy to pursue a personal injury claim. It’s not going to happen. It doesn’t matter how ironclad is the language in the ERISA plan document. Unless the ERISA plan provides the injured plaintiff with a financial incentive to pursue a third party recovery, she will walk away from the claim.
In short, while the effect of Shank was to eliminate the doctrine of equitable subrogation in the Eighth Circuit, it does not, by a long shot, mean ERISA plans have the ability to compel participants to pursue and recovery personal injury claims and then turn all that money over to the ERISA plan. But Shank's elimination of the doctrine does considerably strengthen the hand of the ERISA plan to drive a harder bargain with participants than if equitable subrogation was in place.