Subrogation's Tightening Grip on ERISA Claimants
Since the Supreme Court decision last year in Sereboff v. MAMSI, 126 S.Ct. 1869 (2006), ERISA plan administrators have been more aggressive about chasing plan participants and beneficiaries to get reimbursed for medical expenses those plans have paid out. The common scenario is that a plan participant is severely injured in an accident through the fault of some other person. She requires extensive and expensive medical treatment. The ERISA plan pays the bills. She then pursues the wrongdoer who caused the injury and recovers funds to compensate her for her injuries, part of which includes payment of her medical expenses. The ERISA plan finds out about the recovery and brings suit to be reimbursed the money it has paid out.
Problems arise for the participant if (as is often the case) the amount recovered is not sufficient to completely compensate her for her injuries. In addition, often the ERISA plan argues that it has no obligation to share in any costs the participant has incurred to obtain the recovery, such as the fees and costs the participant must pay her personal injury attorney. How do the courts resolve these competing interests?
Sereboff gave a leg up to ERISA plan administrators by allowing them to assert equitable liens against the proceeds of the participant's recovery against the wrongdoer who caused the injuries. Since that case was decided over a year ago, many District and Circuit courts have expanded Sereboff to provide even more power to ERISA plan administrators.
The latest example of this type of abuse of participants is a ruling from the U.S. Court of Appeals for the Eighth Circuit last week in Admin. Committee of Wal-Mart v. Shank, ___ F.3d ___, 2007 U.S. App. LEXIS 20927 (8th Cir. 2007). Deborah Shank was a Wal-Mart employee and participated in Wal-Mart's medical benefits plan. She was catastrophically injuried in an auto accident and Wal-Mart paid over $450,000 in medical expenses on her behalf. Thereafter she, through her guardian, retained a personal injury lawyer to obtain what recovery was available to compensate Deborah from the negligent third party who caused the accident. In the end there was a significant settlement, $700,000. But, given the severity of her injuries and losses, this was a small portion of Deborah's total damages. After payment of attorney fees and costs, the net amount, $417,000, was placed in a special needs trust, a separate fund controlled by an independent trustee who was charged with disbursing the funds in the account only for Deborah's benefit.
When Wal-Mart found out about the settlement, it claimed that the plan documents gave it the right to get all its medical expenses back out of Deborah's personal injury recovery. The Eighth Circuit agreed, ruling that the ERISA plan had no obligation to contribute anything toward Shank's cost of getting the recovery. Compounding the absurdity, the court allowed Wal-Mart to be reimbursed its entire claim from the first dollar Shank had obtained in her personal injury claim until it had been paid back everything. The core question left open by the Supreme Court in Sereboff, and that the Eighth Circuit resolved in draconian fashion, was whether the money sought by Wal-Mart was "appropriate" equitable relief under ERISA. The decision gave Wal-Mart everything it asked for. The end result for Deborah Shank? She didn't end up with a nickel out of the personal injury claim.
Shank illustrates that, when dealing with unwary participants and their counsel, ERISA plans may be able to get away with playing "gotcha." But it doesn't have to be that way.
ERISA plan claimants and their attorneys need to deal with ERISA subrogation and reimbursement claims up front, before they go after third party personal injury recoveries. Claimants must make clear that their willingness to pursue personal injury claims depends on the willingness of ERISA plans to deal reasonably with the claimant and their attorneys about how a limited recovery in a personal injury case will be distributed. Taking this proactive approach will exert tremendous pressure on administrators of the ERISA plan. As a practical matter, it is impossible for ERISA plans to pursue personal injury claims against third party tortfeasors without the active participation and cooperation of the claimant, the party who has suffered the physical injury. If there is the real prospect that Deborah Shank and her attorney will end up working for nothing, why would they ever pursue the personal injury claim in the first place? No claimant's attorney in their right mind would do so without first getting the agreement from Wal-Mart that it will contribute a proportionate share of its recovery for attorney fees. In addition, Deborah's guardian will have no reason to pursue the claim on Deborah's behalf unless he is assured that, if the recovery is limited and it is not completely reimbursed, Wal-Mart will split any recovery with Deborah in a way that makes it worth the efforts to pursue the personal injury claim.
This type of circumstance where funds are limited is quite common in personal injury situations. Persons and entities claiming the right to be reimbursed out of tort claims that are too small to get everyone paid their losses in full have been around for generations. It's very clear what the fair, the equitable, remedy is in that situation: each interested party must sacrifice a portion of their claim in a way that makes it worth everyone's while to continue to hold wrongdoers accountable in a personal injury setting and pursue compensation from tortfeasors. Three way splits of recoveries into equal thirds between the claimant, their lawyer and the party claiming reimbursement are a very common way of dealing with these situations. They have been for decades.
It is difficult for me to understand what possible long term benefit is provided to any of the parties involved by the obtuse, radical solution the Eighth Circuit renders in Shank. While the court characterizes its resolution of the competing claims between the parties as "appropriate equitable relief" under ERISA, it is nothing of the sort. The court might just as validly have equated the nutritional value of spinach to the plastic bag you use to carry it home from the store.
I have to keep reminding myself that federal judges are generalists and often simply don't have the experience in a particular specific area of law to see the forest rather than get hung up looking at specific trees. Unfortunately, Deborah Shank had three myopic judges on her case.