Supreme Court Rules for Health Plan that Sued Worker to Recover Medical Costs for Auto Accident

Published on Aug 26, 2013 at 2:51 pm in General Blogs.

The United States Supreme Court recently made a ruling that allowed a self-funded employer health plan to recoup its costs by taking all of an employee’s financial recovery from a personal injury lawsuit. US Airways v. McCutchen is an important decision that means that personal injury lawyers must question potential personal injury plaintiffs about the type of health insurance they have before starting the case.

The case started with an auto accident. James McCutchen suffered serious injuries in January 2007 when another driver lost control of her car and collided with McCutchen’s. McCutchen was an employee of US Airways at the time and a participant in its self-funded health plan. The plan paid $66,866 in medical expenses on McCutchen’s behalf.

McCutchen hired an attorney to seek recovery of all of his accident-related damages — estimated to exceed $1 million. McCutchen and the attorney agreed that the attorney’s fee would be 40 percent of the recovery. The attorney sued the driver responsible for the crash, but settled for only $10,000 because she had limited insurance coverage and the accident had killed or seriously injured three other people. McCutchen’s attorney also obtained a payment of $100,000 from McCutchen’s automobile insurer — the maximum amount available under his policy.

Altogether, McCutchen received $110,000 — and after deducting $44,000 for the lawyer’s fee – McCutchen’s share was $66,000.

When US Airways learned of McCutchen’s recovery, it demanded reimbursement of the $66,866 it had paid in medical expenses. In support of its claim, US Airways relied on a statement in the summary plan description that it had to be reimbursed for amounts it paid for money recovered as a result of the negligence, willful conduct or other actions of a third party.

When McCutchen did not comply, US Airways sued him under the Employee Retirement Income Security Act of 1974 (ERISA), which authorizes health-plan administrators to bring a civil action to obtain appropriate relief to enforce the terms of the plan.

McCutchen offered two defenses to US Airways’ request for a lien on the $66,866 it demanded: 1) that, absent over recovery on his part, US Airways’ right to reimbursement did not kick in; and 2) that US Airways had to contribute its fair share to the costs he incurred to get his recovery, so any reimbursement had to be reduced by 40%, to cover the contingency fee.

Rejecting both arguments, the District Court granted summary judgment to US Airways on the ground that the plan clearly provided for full reimbursement of the medical expenses paid.

But, the federal appellate court threw out the decision for US Airways, explaining that traditional “equitable doctrines and defenses” applied to ERISA lawsuits. The court held that the principle of unjust enrichment overrode US Airways’ reimbursement clause because the clause would leave McCutchen with less than full payment for his medical bills and would give US Airways a windfall given its failure to contribute to the cost of obtaining the third party recovery.

But the U.S. Supreme Court vacated the appellate court’s decision and sent the case back to the lower court. The nation’s top court held that in a legal action based on an equitable lien by agreement–such as this one–the ERISA plan’s terms govern. Ordinary contract interpretation principles support this con¬clusion, the court said. Courts construe ERISA plans, as they do other contracts, by looking to the terms of the plan as well as to other manifestations of the parties’ intent.

The court also relied on a 2006 case, Sereboff v. Mid Atlantic Medical Services, in making its decision. In that instance, a health-plan administrator brought a similar lawsuit under ERISA. Mid Atlantic had paid medical expenses for the Sereboffs after they were injured in a car crash. When they settled a tort suit against the other driver, Mid Atlantic claimed a share of the proceeds, invoking the plan’s reimbursement clause. The court held that Mid Atlantic’s legal action sought “equitable relief,” as required under ERISA.

Sereboff’s logic dooms McCutchen’s argument that two equitable doctrines meant to prevent unjust enrichment–the double recovery rule and common-fund doctrine–can override the terms of an ERISA plan in such a suit, the court said.

But, the court noted that its holding had two parts — one favoring US Airways and the favoring McCutchen. First, in an action brought under ERISA based on an equitable lien by agreement, the terms of the ERISA plan govern. But second, the common-fund rule applies to US Airways’ reimbursement provision. Under the common fund doctrine, a participant in a lawsuit who creates or increases a fund to which others also have a claim is entitled to recover litigation costs and attorney’s fees from that fund. The rule is founded on the concept that one who preserves or protects a common fund works for others as well as for himself and that the others who will benefit form the fund should pay their fair share of expenses, including reasonable attorney’s fees. As a result, the nation’s top court vacated the lower court’s decision and sent the case back for further legal proceedings.

Baltimore, Md.-based Belsky, Weinberg & Horowitz has been fighting for the victims of personal injury, auto accidents and negligence for many years. Call us at 410-234-0100 or email us for a free consultation and let us help you.



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