Have you received a letter or phone call demanding that you repay money that you previously received in the form of long term disability benefits, short term disability benefits, or health benefits? This is a very unsettling experience that many claimants under ERISA unfortunately go through. Typically, what happens is benefits are paid to you or someone you know and then later a recovery is obtained from another source. For example, if you receive long term disability benefits of $2,000 per month and later receive social security disability benefits of $1,200 per month, the long term disability insurance company most likely will try and make you repay $1,200 per month going back many months. The basis for this is a provision in the policy or summary plan description. Many times when benefits are first paid, the insurance company will try to further support the contractual provision by requiring you to sign a reimbursement agreement. However, whether the reimbursement agreement is signed or not, the insurance company, in many instances, will aggressively pursue what it calls an overpayment. This effort to collect is called a reimbursement action.

Reimbursement actions involving employee benefits typically arise under the federal statute known as the Employee Retirement Income Security Act of 1974 (ERISA).[1]  Almost all employee benefit policies (which will be called plans in this article) will have reimbursement provisions in them.  These plans usually involve health insurance, short term disability benefits, long term disability benefits, and life and/or accidental death dismemberment benefits.  Many businesses now provide an array of such benefits.   Reimbursement or subrogation provisions in an employee benefit plan typically require that if the employee or dependant receives payment from other sources for which benefits have been paid, then the benefits must be repaid to the plan.

For decades reimbursement provisions have been in such plans, but the provisions never garnered much attention at the time of purchase of the plan.  This was due in part to a legal rule called the “made whole” rule. Under this rule, benefits did not have to be paid back or reimbursed to the insurance company or plan until the participant or beneficiary was made whole. This rule is still the default rule in the 11^th Circuit.[2]

Over time plans began to include language in an effort to bypass the “made whole” rule.  The provisions typically required that the plan was entitled to receive back all benefits paid before the injured plan participants received a penny irrespective of the “made whole” rule.  The fairness of such provisions has been debated for some time.  Employees argue that premiums were paid and value should be received.  They further argue that the reimbursement provisions often turn benefits into an illusory form of coverage.  On the other hand insurers argue they are only trying to keep costs down for everyone.

Unfortunately the facts of each case often dictate the perceived degree of unfairness.  For example, in an accident caused by an individual with low policy limits or in cases with liability issues, occasion for such unfairness is likely.  On the other hand, if a healthy recovery is obtained, it is argued that without reimbursement there is a double recovery.

            Usually when there is a reimbursement demand, you have long since spent the funds that you received since they were needed to live on. This is especially so when you have had to undergo a drastic reduction in income in order to survive. Even when receiving the benefits, you accumulate debt in hopes that when social security comes through, you will be able to use the social security funds for back payment to eliminate the debt. The insurance company, of course, will object and will want you to use the payment received to pay them instead. Therefore, understanding the framework to deal with reimbursement provisions is very important. It is wise to seek counsel to deal with these issues early on. There are some generally questions that counsel will need to answer in order to advise you.

I.          Does ERISA govern the plan?

The first step in evaluating a reimbursement of benefits issue is to determine whether the matter is governed by ERISA. When ERISA governs it preempts state law. Otherwise state law on subrogation will control. While it is safe to say that the majority of policies provided through an employer are governed by ERISA, it is not safe to assume that the plan or policy before you is so governed.  It is possible that the policy benefit is exempt from ERISA because it does not have sufficient employer involvement to be considered a plan established or maintained by the employer as part of the employment arrangement. For the example, where the employer makes no contribution towards the premiums and the insurer performs all administrative functions, an argument can be made that the employer is not maintaining the plan and therefore the matter is not governed by ERISA. 

            Principally, five elements must be established before ERISA governs a plan or policy benefit[3]:

1.                  There must be a plan, fund, or program;

2.                  It must be established or maintained;

3.                  This must be done by an employer engaged in interstate commerce or in an activity affecting interstate commerce;

4.                  The purpose of the plan is to provide benefits;

5.                  The recipients of the benefits are participants or their beneficiaries as defined by ERISA[4]

            According to the 11^th Circuit case Butero v. Royal Maccabees Life Insurance Company,[5] a key factor is whether the employer established or maintained the plan.  The following forms of evidence are evaluated to determine this: 1) the employer’s representations and internally distributed documents; 2) the employer’s oral representations; 3) the employer’s establishment of a fund to pay benefits; 4) actual payment of benefits; 5) the employer’s deliberate failure to correct known perceptions of a plan existence; 6) the reasonable understanding of employee; and 7) the employers intent.

            Additionally, ERISA at 29 U.S.C. § 1003(b) also exempts from its authority government plans, church plans, plans maintained solely to comply with worker’s compensation, unemployment, or disability insurance laws, plans maintained for non-resident aliens, or excess benefit plans. Church plans may opt into ERISA so investigation as to whether that has occurred may also be necessary.[6]

            Third, there is a “safe harbor” to avoid ERISA. The Department of Labor, in exercising its authority to provide regulations to further the statutory purposes, has adopted a safe harbor regulation, which may be found at 29 C.F.R. § 2510.3-1(j).  This safe harbor excludes from ERISA's gambit certain group insurance policies. The safe harbor criteria are:

1.       No contributions are made by an employer or employee organization;

2.       Participation in the program is completely voluntary for employees or members;

3.      The sole functions of the employer or employee organization with respect to the program are, without endorsing the program,  to permit the insurer to publicize the program to employees or members, to collect premiums through payroll deductions or dues checkoffs and to remit them to the insurer; and

4.      The employer or employee organization receives no consideration in the form of cash or otherwise in connection with the program, other than reasonable compensation, excluding any profit, for administrative services actually rendered in connection with payroll deductions or dues checkoffs.

 If an employer fails to satisfy each and every one of these provisions, the safe harbor is closed, and the plan or policy is governed by ERISA. Again, in most instances benefit plans will fall under ERISA, but it is not safe to assume that will always be the case.

II.        What does the reimbursement or subrogation language in the plan say?

            The 11^th Circuit made clear, approximately ten years ago in Cagle v. Bruner,[7]  that unless the ERISA plan language clearly precludes the operation of the “make whole” doctrine, the “make whole” rule of federal common law will apply.  As will be seen below, this common thread of looking carefully at the plan language is critical in ERISA cases.  The 11^th Circuit applies the doctrine of contra proferentem to construe ambiguous or vague plan language against the drafter.[8] After Cagle, one would think that every plan would clearly preclude application of the make whole doctrine but in practice some plans still exist.  In any event, the analysis does not end here, even if the contractual provisions are absolutely clear. The next issue to be addressed is whether those contractual provisions may be enforceable in a lawsuit.

III.       Can the plan sue to recover?

            If the insurance company is still paying you benefits, they have in their power the opportunity to withhold payment from you until the “overpayment” is paid. This forces you in the position in having to sue the insurance company. Insurance companies often take this position because ERISA only lets certain individuals or entities file suit to enforce its provisions. Generally only a participant, beneficiary, fiduciary, a state, or the Department of Labor may file suit.[9] An insurer must therefore be a fiduciary to file suit, but not every insurer will qualify.

Under 29 U.S.C. § 1002 (21)(A), a person is a fiduciary with respect to a plan if there is exercise of “any discretionary authority or discretionary control respecting management of such plan” ... or exercise of any “authority or controlled respecting management or disposition of its assets” ... or “discretionary authority or discretionary responsibility and the administration of such plan.” Typically, this will mean that an insurer paying benefits out of its own pocket and handling adjustment of the claim is a fiduciary.  However, fiduciaries and their responsibilities must be set forth in the plan in writing.[10]  Again, careful review of the plan is in order to make certain that the insurer does not disclaim or fail to claim its role as a fiduciary.

If the insurer is indeed a fiduciary, then ERISA allows only a limited form of redress: suit may be filed “to enjoin any act or practice which violates any provision of this title or 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 this title or the terms of the plan.”[11]  In fact such claims are only heard in a federal district court according to ERISA § 502(e).  It provides that “...the District Courts of the United States shall have exclusive jurisdiction of civil actions under this title brought by … a participant, beneficiary, fiduciary or any person referred to in § 101(f).”  However, participants and beneficiaries suing for benefits may file suit in state court or federal court as the same code provision provides “State Courts of competent jurisdiction and District Courts of the United States shall have concurrent jurisdictions of actions under paragraphs (a)(1)(b).”

            The United States Supreme Court in Great West Life and Annuity Insurance Company v. Knudson[12] found that a fiduciary may file suit, but not for legal relief.  The plan specifically contained a reimbursement provision which gave it a right to any recovery paid to the beneficiary by a third party.  The reimbursement provision also imposed personal liability on the participant or beneficiary if there was a failure to reimburse the plan after a recovery was obtained from a third party. In that case, the Knudsons had recovered $656,000 in a settlement against Hyundai and the amount of reimbursement sought by Great West was $411,000. The reimbursement action was deemed a contract action that sought a legal rather than equitable remedy.

            The Supreme Court had reason to visit the ERISA reimbursement issue again in Sereboff v. Mid-Atlantic Medical Services, Inc.[13] The Sereboffs recovered $750,000 from a tortfeasor, but refused to reimburse their health plan $75,000 in accident related medical bills.  The plan fiduciary filed suit and so the Sereboffs agreed to set aside the reimbursement amount of $75,000 pending a final court ruling.  The federal district court as well as the 4^th Circuit Court of Appeals ruled in favor of Mid-Atlantic.  The Supreme Court now affirmed finding that Mid-Atlantic sought reimbursement from “specifically identifiable” funds which were in the possession and control of the Sereboffs. The Supreme Court emphasized that not only must an equitable remedy be sought, but that the basis for the claim must also be equitable.

The Court further discussed the distinction between equitable liens as a matter of restitution and equitable liens involving an agreement or assignment. In instances involving restitution, the plan would need to trace the funds at issue to the fund against which the lien is asserted while an equitable lien by agreement or assignment does not require tracing of the funds. Because the plan provisions identified the fund that was the target of the lien as “all recoveries from a third party”, this was an equitable lien by agreement or assignment. Therefore it was not necessary to trace the funds. The Supreme Court however declined to address the issue as to whether the plan’s recovery should be compromised by the “make whole” doctrine to the same extent the Sereboffs compromised their personal injury action. This issue had not been raised in the lower courts, so the Supreme Court declined to address the issue.  This left in place the Cagle v. Bruner decision for the 11^th Circuit.

The 11^th Circuit provided further guidance regarding reimbursement actions in Popowski v. Parrot and Blue Cross Blue Shield of South Carolina v. Carillo.[14] In this opinion which actually involved two distinct cases, the court looked particularly at the plan language. In Popowski, the plan language specifically allowed reimbursement for “benefits paid on his or her behalf out of the recovery made from the third party or insurer.” This language was nearly identical to the language in Sereboff and so the 11^th Circuit had no difficulty allowing a reimbursement action under 29 U.S.C. § 1132(a)(3).

            However, in the Blue Cross part of the opinion, the court noted that the plan claimed a right to reimbursement “in full, and in first priority, for any medical expenses paid by the plan relating to the injury or illness...”, but did not specify that reimbursement was to be made out of any particular fund distinct from the beneficiary’s general assets. Therefore there had been no equitable lien by agreement or assignment established.  Again, careful attention to the plan language may mean the difference between paying back benefits or not. Even if the plan can’t sue or does not sue there are other concerns which should be taken into account.

IV.       Can the insurer retaliate in another manner?

            You will also want to know what else may occur if suit is not filed.  Some plans contain provisions allowing the insurer to terminate further coverage in the event that the participant or beneficiary does not cooperate in reimbursing the benefits paid.  Some have provisions allowing future benefits to be offset until full repayment has occurred. Many participants and beneficiaries may be placed in dire financial straits if they are in the midst of a health crisis and benefits are terminated or offset.  While this article will not undertake to analyze such instances, some claimants may be without needed coverage until after appeals with the company are exhausted, suit is filed, and litigation is resolved. 

The plan may also be amended to specifically exclude coverage for the employee’s ailment.  ERISA does not provide any substantive rights to health or welfare benefits.  The Supreme Court in  Curtiss-Wright Corp. v. Schoonejongen[15], has stated that plan sponsors "are generally free under ERISA, for any reason at any time, to adopt, modify, or terminate welfare plans." No cognizable claim will result if the plan sponosr decides to remove from its coverage the very ailment you suffer from.  The only challenge that may be made is as to the procedure followed in amending the plan.

In the unpublished opinon,  Chaudhry v. Neighborhood Health Partnership Inc.,[16]  the 11^th Circuit conceded that a claimant’s benefits could be reduced or restricted and that such was not an impermissbile form of retalitation. Chaudhry had previously obtained a ruling in her favor regarding the provision of plan benefits. The plan’s response was to amend the paln to cut back such benefits.  Retaliation in the form of restricting particular benefits was permissible in this case.

This would arise in the context in which counsel receives the client’s recovery and holds the funds in trust. It has been argued that this converts the attorney to a trustee with fiduciary duties owed to the plan and the insurer seeking reimbursement. However, in Chapman v. Klemick, 3 F.3d 1508 (11^th Cir. 1993), the court held that in spite of the fact that counsel held certain funds and trust for his client, it did not turn counsel into an ERISA fiduciary.  Particularly the Court noted, “an attorney has an ethical obligation to his or her client that does not admit of competing allegiances.” Id. at 1511.  The Florida Rules of Professional Conduct were cited in support of this holding. It would seem likely that under the Alabama Rules of Professional Conduct a similar result would be obtained given the same duty of loyalty owed to a client.

V.        Conclusion – Any Other Solutions?

            A number of defenses are obviously available for employees to consider raising. The “make whole” rule may yet be raised as a defense. Perhaps the issue of whether the relief sought in a reimbursement suit is “appropriate” equitable relief may be raised.  Of course, contractual arguments about ambiguity, vagueness, and contra proferentem abound.

It is also possible for state law to be changed to address that issue. A state statute that is “specifically directed toward” the insurance industry is not preempted by ERISA.  The ERISA savings clause found at 29 U.S.C. § 1144(b)(2)(A) does not preempt state laws specifically directed toward insurance agencies.  The Supreme Court in Kentucky Association Plans Inc. v. Miller, Commissioner of the Kentucky Department of Insurance, 538 U.S. 329 (2003) interpreted the savings clause and found that as long as the state law is “specifically directed toward entities engaged in insurance” ...and second “...the state law must substantially affect the risk pooling arrangement between the insurer and the insured.” There may be room for states to control some of the issues arising in reimbursement claims. Call your state insurance commission and legislators.

Lastly, our legislators in Washington, D.C. could be called upon to amend the ERISA statute. Call both senators and representatives. ERISA should not allow illusory coverage.  In the meantime, it will be up to our federal judges to further elaborate on reimbursement matters pertaining to the statute we affectionately call ERISA.

                                                                                    By: David P. Martin