Subrogation Claims: Views from the Plaintiff and Defense Bars

David P. Martin & Kristen S. Cross

Author Kristen S. Cross is a defense attorney who regularly handles ERISA
litigation and bad faith claims for life, health and disability insurance companies.

Author David P. Martin is a Plaintiff’s attorney who regularly represents plan
participates in ERISA cases. He has the privilege of hosting a blog dedicated to issues
arising for individuals covered under ERISA insurance policies and their attorneys. He
also participates on a trial lawyers’ list serve assisting other lawyers with subrogation
and reimbursement issues.

The following are a list of “frequently asked questions” submitted by lawyers
through the blog and list serve and basic answers to those questions with a perspective
from both sides of the bar.

1. Does ERISA apply to my case?

The first step in evaluating a reimbursement or subrogation claim is to determine
whether the matter is governed by ERISA. Most lawyers know that when ERISA
governs, it preempts state law. More often than not, ERISA will govern if an employee
benefit is involved. There are exceptions, however.

For example, 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. 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. So a brief
analysis in each case is in order.

Principally, five elements must be established before ERISA governs a plan or
policy benefit (29 U.S.C. § 1003(a) and 29 U.S.C. § 1144(a)):
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.

According to the 11th Circuit case Butero v. Royal Maccabees Life Insurance
Company, 174 F.3d 2007 (11th Cir. 1999), there are seven factors to be considered in
determining whether an employer has established or maintained a plan: 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 employer’s

There is also 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
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

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.

Third, ERISA at 29 U.S.C. § 1003(b) 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. See, American Ass’n of Christian Schools
Voluntary Employees Beneficiary Ass’n Welfare Plan Trust by Janney v. U.S., 850 F.2d
1510, 1516-7 (11th Cir. 1988). Only the plan administrator can make this election. Again,
in most instances benefit plans will fall under ERISA, but it is not safe to assume that
will always be the case.

Plaintiff’s Practice Pointer:
It is important, prior to litigation, to require the plan administrator and claim
administrator to take a position as to whether a matter is governed by ERISA. ERISA
requires that certain fiduciary obligations be met as well as document disclosure
obligations. State law may not require as much. Accordingly, if the matter is governed by
ERISA then demand should be made for claim documents and plan documents before
presenting a response to a demand for reimbursement or subrogation. This will then
allow plaintiff’s counsel to determine what is in the best interest of the client as to how
to proceed. If state law presents a better remedy, plaintiff’s counsel may do more
investigation and determine if there are facts reflecting that the matter should be
governed under state law rather than ERISA. On the other hand, if ERISA presents the
best remedy then this contention may not wish to be contested.

Defendant’s Practice Pointer:
By the time an insurer refers a case to its attorneys to seek reimbursement or
subrogation, it is very likely that it will have already made its own determination of
whether ERISA applies. Should an issue of ERISA applicability arise, however, the best
source of information is the employer itself. No one knows better than the employer
what the employer did to establish or maintain the plan at issue. Although the file you
receive from your client will have a copy of the applicable policy and/or a summary plan
description, the employer can provide other helpful information. For example, the
employer’s Form 5500 should show that the employer considered its plan as an ERISA
plan. Likewise, documents showing the employer’s contribution toward premiums are
significant. More importantly, communications between an employer and its employees
may tend to show that a plan was put together with the employer’s input and for the
benefit of its employees. Marketing materials for the plan and information provided to
employees regarding the plan are helpful in demonstrating not only that the employer
established and maintained the plan, but also that the employee was aware of the
employer’s involvement. Also, well written marketing materials will clearly indicate to
the insured that the employee benefit plan is governed by ERISA.

2. What is the difference between a reimbursement action and a subrogation action?

Subrogation rights allow an insurer to “stand in the shoes” of a participant or
beneficiary to seek recovery from a third party. Reimbursement, on the other hand,
arises as a contractual right when an insurance policy specifically allows the insurer to
seek reimbursement for benefits it has paid on behalf of a participant or beneficiary if
there recovery from a third party. A good discussion on the distinction is found at
Unisys Medical Plan v. Timm, 98 F.3d 971, 973 (7th Cir. 1996).

3. Can a claim fiduciary or plan administrator sue to recover benefits paid?

Yes, if the policy language expressly allows such recovery. The ERISA statute at
29 U.S.C. § 1132 limits who may bring a cause of action under ERISA and what causes of
action may be brought:
“(a) Persons empowered to bring a civil action
A civil action may be brought–
(1) by a participant or beneficiary–
(A) for the relief provided for in subsection (c) of this section, or
(B) to recover benefits due to him under the terms of his plan, to enforce
his rights under the terms of the plan, or to clarify his rights to future
benefits under the terms of the plan;
(2) by the Secretary, or by a participant, beneficiary or fiduciary for
appropriate relief under section 1109 of this title; …”
[This pertains to liability for breach of a fiduciary duty.]
“(3) by a participant, beneficiary, or fiduciary (A) to enjoin any act or
practice which violates any provision of this subchapter 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 subchapter or the terms
of the plan;”

[There are 6 more subsections in the statute but they only provide a cause
of action only to the Secretary of Labor or a state.]

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” or “to obtain other appropriate
equitable relief” 29 U.S.C. §1132(a)(3). Suit can only be heard in a federal district court
according to ERISA § 502(e) which 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).” So suit can be
brought in federal court, but the causes are limited.

The United States Supreme Court, in Martens v. Hewitt Assoc., 508 U.S. 248, 256
(1993) initially explained that § 502(a)(3)(B) authorized suit to be filed for “those
categories of relief that were typically available in equity,” and conversely, did not
support claims at law for “compensatory damages.” Later in Great West Life and
Annuity Insurance Company v. Knudson, 534 U.S. 204 (2002) the Court clarified that a
fiduciary may file suit for equitable relief, 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 re-visited the ERISA reimbursement issue again in Sereboff
v. Mid-Atlantic Medical Services, Inc., 126 S. Ct. 1869 (2006). 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 4th Circuit Court of Appeals ruled in favor of MidAtlantic.
The Supreme Court 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. The 11th Circuit has
addressed the issue of the make whole rule in Cagle v. Bruner, 112 F.3d 1510 (11th Cir.

Plaintiff’s Practice Pointer:
Subrogation and reimbursement claims are typically troublesome in personal
injury actions. As soon as plaintiff’s counsel realizes that health insurance benefits or
other forms of benefits were paid then it would be advisable to obtain a copy of the
summary plan description. This request should be made in writing on behalf of the
plaintiff and directed to the plan administrator as well as the claim administrator if that
is a different entity. By requesting this information in writing, it sets the stage for a
statutory penalty claim in the event there is reluctance or refusal to provide the
summary plan description and other plan documents. This could be an added claim that
will provide leverage at a later point in time in the negotiations and is actionable under
29 U.S.C. § 1132(c). The statutory penalty is up to $110 per day but this is discretionary
with the court. Obviously, the worse the facts the more likely a significant penalty

After the plan documents are obtained, then they should be scrutinized as to all
provisions that touch on the reimbursement or subrogation rights of the plan
administrator or claim administrator. The plan document will control those rights. Once
the rights are ascertained and if there is a significant concern that the recovery may
involve reimbursement provisions (which likely there will be), then consideration
should be given to whether the entity seeking reimbursement should be joined in any
litigation or negotiations. Some attorneys have taken the strategy of putting this entity
on notice that the recovery being sought will not include any medical bills and so that
entity should intervene in the action if it has any desire to protect its rights. The success
of this approach will be dependant often on the plan language relating to the
reimbursement provisions.

Defendant’s Practice Pointer
When advising a client as to whether it should sue to enforce a reimbursement
provision of a policy, there are two critical considerations. The first is the language of
the policy. In cases where an insurer has successfully pursued reimbursement, the
policy at issue has unequivocally provided that if the insured recovers compensation
from a third party, the insured must repay the insurer.

Another important consideration is the action, if any, the insurer has already
taken to preserve its rights to seek reimbursement and to ensure that the plaintiff’s
attorney who is representing the insured in a tort action is fully aware of the insurance
company’s claim to reimbursement. The sooner that the insured is put on notice that
the insurance company intends to seek reimbursement, the better. Once a settlement in
a tort action has been obtained and the settlement funds have been dispersed, it is much
more difficult for the insurer to show that there is an identifiable fund or res from which
it is seeking reimbursement.

Finally, and perhaps most importantly, be sure to sue the right party when
seeking reimbursement. The primary distinction between Knudson and Sereboff is that
in Knudson the funds recovered from the tort-feasor had been put into a special needs
trust and were not, therefore, in Knudson’s possession. Because the insurer in Knudson
had sued, not for the imposition of a constructive request or equitable lien on a
particular fund, but instead the imposition of personal liability (a legal remedy), the U.S.
Supreme Court had determined that the claim was not allowed under Section 502(A)(3).
In Sereboff, the U.S. Supreme Court determined that this “impediment” to
characterizing the remedy sought as equitable was not present in the Sereboff case
because Mid-Atlantic sought “specifically identifiable” funds that were in the Sereboff’s
possession. Have you sued the party with possession of the funds identified by the
policy provisions for reimbursement?

4. After Sereboff what is sufficient to have an equitable lien by agreement?

The 11th Circuit provided further guidance regarding reimbursement actions in
Popowski v. Parrot/Blue Cross Blue Shield of South Carolina v. Carillo. 461 F.3d 1367
(11th Cir. 2006). 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 11th Circuit had no difficulty allowing a reimbursement action under
29 U.S.C. § 1132(a)(3).

In the Blue Cross part of the opinion, however, 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

Now the district courts in the 11th Circuit are grappling with reimbursement
issues under this precedent. In Mattox v. Life Ins. Co. of N. Am., 536 F. Supp. 2d 1307
(N.D. Ga. 2008), the court ruled that the insurance company could recover previously
overpaid benefits which arose due to the plaintiff’s belated award of Social Security
benefits. The plaintiff argued that the insurer’s claim should be dismissed because the
only money the plaintiff had to pay back the “overpayment” was the plaintiff’s ongoing
Social Security benefits.

The plaintiff relied on a provision of the Social Security Act, 42 U.S.C. § 407
which provides: “(a) The right of any person to any future payment under this
subchapter [the Social Security Act] shall not be transferable or assignable, at law or in
equity, and none of the moneys paid or payable or rights existing under this subchapter
shall be subject to execution, levy, attachment, garnishment, or other legal process, or to
the operation of any bankruptcy or insolvency law. (b) No other provision of law,
enacted before, on, or after April 20, 1983, may be construed to limit, supersede, or
otherwise modify the provisions of this section except to the extent that it does so by
express reference to this section.”

The court countered explaining that the insurance company was not seeking the
Social Security benefits themselves, but instead was seeking to recover the LTD
payments that were already made. The court further explained:
One court has held that an insurance company’s attempt to impose a
constructive trust on a claimant’s future Social Security disability
payments would violate § 407(a). See Ross v. Pa. Mfrs. Ass’n Ins. Co., No.
Civ. A. 1:05-0561, 2006 WL 1390446, at *8 (S.D. W.Va. May 22, 2006).
However, the better reasoned opinions that have addressed this issue hold
that § 407(a)’s prohibition is not triggered by this kind of reimbursement
provision because the insurance company “seeks the amount it overpaid
[the claimant rather than] any of [the claimant’s] Social Security benefits.”
Gilcrest v. Unum Life Ins. Co. of Am., No. 05-CV-923, 2006 WL 2251820,
at *2 (S.D.Ohio, Aug. 4, 2006). The fact that Mattox may have to use her
Social Security disability benefits to repay the amount LINA has overpaid
her does not alter the Court’s analysis. See, e.g., Dillard’s Inc. v. Liberty
Life Assurance Co. of Boston, 456 F.3d 894, 901 (8th Cir.2006).
However the court then concluded “Finally, because this Court has already ruled
that LINA must reinstate Mattox’s LTD Benefits, LINA can exercise its right to reduce
her future LTD payments to recoup the amount it has overpaid Mattox.” Id. at 1327.

In Herman v. Metropolitan Life Ins. Co., 689 F. Supp. 2d 1316, 1317-1318, (M.D.
Fla. 2010) the court had evidence before it that Herman dissipated the long term
disability benefits that had been paid in the past, and thus there were no traceable funds
in the possession of the beneficiary, and any recovery must come from social security

MetLife had argued:
…restitution in this case provides an equitable remedy. However, whether
restitution “is legal or equitable depends on the ‘basis for [the plaintiff’s]
claim,’ and the nature of the underlying remedies sought.” Great-West Life
& Annuity Ins. Co. v. Knudson, 534 U.S. 204, 213, 122 S. Ct. 708, 151
L.Ed.2d 635 (2002). Restitution is available under Section 1132(a)(3) “not
to impose personal liability on the defendant but to restore to the plaintiff
particular funds or property in the defendant’s possession.” Knudson, 534
U.S. at 214, 122 S. Ct. 708. Thus, MetLife’s restitution claim is equitable if
the parties’ Agreement Concerning Long Term Disability Benefits
“specifically identifie[s] a particular fund, distinct from the [plaintiff’s]
general assets, … and a particular share of that fund to which [MetLife is]
entitled.” Sereboff v. Mid Atl. Med. Servs., 547 U.S. 356, 364, 126 S. Ct.
1869, 164 L.Ed.2d 612 (2006); see also Dillard’s Inc. v. Liberty Life
Assurance Comp. of Boston, 456 F.3d 894, 900-01 (8th Cir.2006). Metlife
objects that Metlife need not “submit evidence of an identifiable fund that
remains ‘intact’ and in Plaintiff’s possession to prevail on its
Id., at 1317-1318.

The court explained however that, “[i]n Sereboff, . . the fund sought by the
fiduciary remained in a separate account maintained by the defendant; Sereboff fails to
address the imposition of a constructive trust or equitable lien over a dissipated fund.”
Id. Here the court had a declaration that she no longer possessed the funds that were
paid, and only her monthly Social Security check was a source of income.

The court concluded:
Because no identifiable fund exists, MetLife seeks to recover a money
judgment (which would allow MetLife to levy on the plaintiff’s general
assets) and not the transfer of title to an existing fund in the possession of
the plaintiff. See Administrative Comm. For the Wal-Mart Stores, Inc.
Associates’ Health & Welfare Plan v. Horton, 513 F.3d 1223, 1229 (11th
Cir.2008) (“Under Knudson, Sereboff, and the other authorities cited
above, the most important consideration is … that the settlement proceeds
are still intact, and thus constitute an identifiable res that can be restored
to its rightful recipient.”).
Id., at 1318.

In the case Ray v. Sun Life, __ F. Supp. 2d __, 2010 WL 4812806 (N.D. Ala.
2010), the court dismissed without prejudice a counterclaim brought by Sun Life at the
summary judgment stage. However, the reason for a dismissal was that “…the court
does not have enough information to know whether the funds in the instant case meet
the features of equitable restitution as explained in Sereboff. For example, even
assuming that the terms of the plan and reimbursement agreement established an
equitable lien, the court does not know whether the recovery sought is from Ray’s assets
generally or from an identifiable fund or from a fund not in Ray’s possession.” Id at *24.

Plaintiff’s Practice Pointer:
The approach in Herman is a sound strategy to follow. An affidavit should be
obtained from the plaintiff as to the non-existence of any of the sought benefits as well
as any other assets other than the Social Security benefit. It is important to submit facts
which reflect that the plaintiff has no funds identifiable relating to the previously paid
monies. If the client is destitute, such facts should also be made known in the record
both for legal and practical matters. If a plan knows that the plaintiff is likely to file
bankruptcy in the event of a successful judgment, it can tend to make the entire point

Defendant’s Practice Pointer:
As noted above, when the reimbursement issue relates to reimbursement from a
tort recovery for previously paid medical bills, the sooner the insured and/or the
attorney representing the insured in a tort action is notified that the insurer is seeking
reimbursement from any tort recovery, the better. An insured who was advised early on
of the insurer’s intent to seek reimbursement has little justification for having spent
monies owed to the insurer. An insurer who can point to settlement proceeds as an
identifiable fund from which it should be reimbursed is in a strong position.

When the issue arises in the context of a disability policy under which the insured
has been overpaid because of a retroactive Social Security award, the issue of the
insured’s financial status is trickier. The most effective time for asserting an
overpayment claim is prior to the time the Social Security Administration has made a
lump-sum payment for past-due benefits and to lay claim to reimbursement from that
lump-sum payment. Most disability insurance companies are fairly diligent in
monitoring the status of an insured’s claim for Social Security disability and in reserving
a right to seek reimbursement for overpayments. Moreover, if the payment of disability
benefits is ongoing, an insurer can recoup its overpayment by reducing future benefits.

When a situation arises where, for whatever reason, there are no future disability
payments from which to withhold overpayment amounts (such as when the maximum
benefit period is reached before the award of Social Security Disability benefits), the
insurer has to make a business decision about pursuing litigation to recover an
overpayment. Depending on the amount of the overpayment, litigating to recover the
overpayment may not make sense from a cost-benefit analysis.

5. What other equitable redress is available to the claim fiduciary or the plan administrator?

Restitution is a form of redress that has been previously allowed under 29 U.S.C.
§1132(a)(3) in the 11th Circuit. For example, in Willett v. Blue Cross and Blue Shield of
Alabama, 953 F.2d 1335, 1342 (11th Cir. 1992) referenced that “The beneficiaries may
seek compensation from Blue Cross for any injuries they suffered as a result of Blue
Cross’s (the insurer) alleged failure to cure Mays’ (the plan sponsor’s) breach”. In that
case, the plan sponsor failed to inform plan participants about the suspension of
medical coverage due to non-payment of premiums and the Court recognized that Blue
Cross may have had a duty to remedy the plan sponsor’s breach if it had been aware of
the breach. It appears that if Blue Cross had been aware of the employer’s breach of its
duty to notify it employees of the suspension of coverage, it could have been required to
do what was necessary to place the claimants in the position as if the breach had never
taken place, which is a form of restitution.

Disgorgement of profits is another cause of action which was found to be
available in Herman v. South Carolina National Bank, 140 F.3d 1413, 1422 (11th Cir.
1998), cert denied 525 U.S. 1140 (1999). In that case, the liability encompassed the fruit
of the wrongful conduct.

Another form of equitable relief is reinstatement. In Seals v. Amoco Corp., 82 F.
Supp. 2d 1312, 1324 (M.D. Ala. 2000), affirmed 245 F.3d 795 (11th Cir. 2000) the
plaintiffs were given incorrect retirement information and the plan administrator
concealed the mistake regarding payment of benefits. Accordingly, the plaintiffs sought
to have their participation in the plan reinstated. While the court found that the
plaintiffs had adequate relief under 29 U.S.C. § 1132(a)(1)(B) in that particular case, it
did note that reinstatement may be suitable in some instance under the Supreme Court
case of Varity Corp. v. Howe, 516 U.S. 489 (1996).

Plaintiff’s Practice Pointer
When the plaintiff is attempting to assert some form of equitable relief, careful
thought should be given as to what is necessary to place the plaintiff back in a status quo
position. Courts have been more receptive to efforts by plaintiffs to seek redress to place
the plaintiff in the position as if the wrong had never occurred as opposed to seeking
extra contractual damages. A cure should be given also during the claim process and
prior to suit being filed to avoid any actions that would give rise to a defense of “unclean
hands”. Those who seek equity must do equity.

Defendant’s Practice Pointer
The facts of Willett v. Blue Cross and Blue Shield of Alabama, 953 F.2d 1335,
1342 (11th Cir. 1992), cited above, were not well-developed enough for the district court
or appellate court to make a determination as to whether the insurer had knowledge
that the employer had breached its fiduciary responsibilities under ERISA. Regardless
of the remedy a plan participant is seeking, be it for benefits under the plan or one of the
equitable remedies discussed in this section, it is obviously important to have a good
understanding of the responsibilities delegated to the plan administrator (typically the
employer) and those assigned to the insurer. If an insured wants to have participation
in a plan reinstated, then the insurer necessarily has to be involved in the resolution of
the matter, regardless of whether the insured is at fault. The attorney for the insurance
carrier needs to tread especially carefully where both the insurer and employer are sued
together in an action in which the insured seeks to have coverage under a policy restored
and/or to be compensated for lost coverage. As happened in Willett, these situations
most often arise when coverage is changed and an employee does not receive notice of
the change in coverage from either the insurer or the employer. While the insurer may
have legitimate reason to disavow responsibility for having advised individual insureds
of any changes to the plan, the insurer may also have a business interest in maintaining
a good relationship with the employer.

6. How does the “make whole” rule work with ERISA reimbursement and subrogation?

The 11th Circuit made clear, over ten years ago in Cagle v. Bruner, 112 F.3d 1510
(11th Cir. 1997), that unless the ERISA plan language clearly precludes the operation of
the “make whole” rule, 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 courts are to construe the plan as written. If there is ambiguity then
the lack of clarity should allow application of the make whole rule. The 11th Circuit
applies the doctrine of contra proferentem to construe ambiguous or vague plan
language against the drafter. See, Lee v. Blue Cross & Blue Shield of Ala., 10 F.3d 1547
(11th Cir. 1994), Florence Nightingale Nursing Services v. Blue Cross & Blue Shield of
Ala. 41 F.3d 1476 (11th Cir. 1995), and Jones v. American General Life & Accident
Insurance Co. 370 F.3d 1065 (11th Cir. 2004). 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 clear. The next issue to be addressed is whether those contractual provisions may be
enforceable when the plan language does not expressly provide that the plan gets first
and every dollar of reimbursement for payments tendered. See, e.g., Smith v. Life
Insurance Company of North America, 2006 WL 2842529 (N.D. Ga.); Providence
Health System-Washington v. Bush, 2006 WL 3249199 (W.D. Wash.).

Plaintiff’s Practice Pointer:
The best approach here is to ascertain how the plaintiff’s medical bills are being
paid or whether the plaintiff is receiving any other form of benefit early on in the case or
even before counsel accepts the case. If benefits have been paid, then plan documents
should be obtained immediately to ascertain if the common fund rule is excluded from
operation in the plan. This may have a direct bearing on whether to proceed or accept
the case. If it does have allocation then plaintiff’s counsel should notify the plaintiff and
have a discussion on this issue as to how to proceed. It appears that it is best to notify
the plan of the representation and further that plaintiff’s counsel will not proceed with
the case absent some negotiation. There have been cases where the plan received the
majority of a recovery. Theoretically, it is possible that the plaintiff could receive
nothing from a recovery. There is no point in a plaintiff proceeding with litigation if that
is the case.

Defendant’s Practice Pointer:
It is clear from cases such as Zurich American Insurance Company v. O’Hara,
604 F.3d, 1232 (11th Cir. 2010), that if the policy at issue has unambiguous language
allowing the insurer to seek reimbursement regardless of whether the insured has been
“made whole” by proceeds received from a third party tortfeasor, then the made whole
doctrine will not apply. Although the outcome in these cases may not always seem fair
from the insured’s perspective, the outcome is, nevertheless, one which is anticipated by
the policy language and which is contemplated by ERISA. For a great discussion of the
rationale for allowing policy provisions which specifically give an insurer to seek
reimbursement even in situations where the insured has not been made whole, see
O’Hara, 604 F.3d at 1237-38.

7. How does the common fund rule work with ERISA reimbursement and subrogation?

The 11th Circuit hasn’t specifically ruled on the common fund rule. However,
there is a good argument that the common fund rule will be the default rule just as the
“make whole” rule is the default rule as announced in Cagle v. Bruner. In Gaffney v.
Riverboat Servs. of Indiana, Inc., 451 F.3d 424, 466-67 (7th Cir. 2006) the issue
regarding the common fund rule was succinctly stated when the court noted that to
“allow [the insurer] to obtain full benefit from the plaintiff’s efforts without contributing
equally to the litigation expenses would be to enrich [it] unjustly at the plaintiff’s
expense.” It is likely, however, that the 11th Circuit would find that if the plan precludes
using the common fund rule then the plan will be followed. If the plan is silent the 11th
Circuit ruling in Cagle is likely to be followed as to what should be the default rule here.

One Georgia Court did follow this likely course in HCA v. Clemmons, 162 F.
Supp. 2d 1374, 1380 (M.D. Ga. 2001). The court held that the common fund doctrine
was inapplicable because the plan specifically stated that Clemmons would be
responsible for any legal fees she incurred pursuing the damage claim against the third
party tortfeasor.

Plaintiff’s Practice Pointer
Years ago this area was less aggressive and most matters could be negotiated.
However, now it is common for an insurer to insist that it receives the first dollar and
every dollar off the top of any recovery. Again, counsel is well advised to obtain all plan
documents and carefully analyze the plan language. The strategy will be similar to the
Practice Pointer set out above.

8. If the claimant refuses to repay benefits can future benefits be affected?

Again this question is largely dependent on the plan language. Some plans
contain a provision 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. It is
therefore incumbent upon counsel to disclose the risks involved and the potential for

A plan provision that is often seen in healthcare plans is the right of the health
insurance provider to “re-decide” claims. For example, it may retroactively find that
benefits that it paid are no longer payable. Rather than going against the claimant,
which can be legally difficult, the provider will instead seek reimbursement from each of
the medical providers who actually receive the monies. In fact, if there is a regular flow
of business between the medical provider and the insurance company then it is likely
that the monies will automatically be offset from reimbursement for other claims. This
then places the medical provider in the position of going against your client and of
course ERISA does not apply in that circumstance.

The plan may also be amended after an event to specifically exclude future
coverage. ERISA does not provide any substantive rights to welfare benefits. The
Supreme Court in Curtiss-Wright Corp. v. Schoonejongen, 514 U.S. 73, 78 (1995) opined
that plan sponsors “are generally free under ERISA, for any reason at any time, to adopt,
modify, or terminate welfare plans.” In the unpublished opinion, Chaudhry v.
Neighborhood Health Partnership Inc., 2006 U.S. App. LEXIS 10546 (11th Cir. 2006)
the 11th Circuit conceded that a claimant’s benefits could be reduced or restricted and
that such was not an impermissible form of retaliation. Chaudhry had previously
obtained a ruling in her favor regarding the provision of plan benefits. The plan’s
response was to amend the plan to cut back such benefits. Retaliation in the form of
restricting particular benefits was permissible in this case.

Plaintiff’s Practice Pointer:

Plaintiff’s counsel is wise to ascertain early on in a case whether benefits were
paid by an ERISA governed plan. Obtaining all necessary documents early on with a
written request made on behalf of the claimant is vital and necessary and a close and
detail review of those documents will greatly assist in developing a strategy. Inviting the
plan into litigation or negotiations is almost always the best approach. The “sleeping dog
rule” does not apply. Ignoring the problem is the worst strategy to follow and may well
result in a claim against counsel especially if needed health insurance benefits or other
forms of benefits are cut off or terminated. Malpractice? You make the call.

9. What defenses are available to equitable claims?

Reimbursement or subrogation claims under the ERISA statute are equitable by
nature and therefore the typical defenses that would be asserted against an equitable
claim should be available. These would include unconscionability, unclean hands,
laches, fraud, the statute of limitations, coercion and duress. Other defenses may also be
applicable such as a limitation of action provision in plan documents, contractual
language in the reimbursement agreement barring the relief, or the pro rata law sharing
doctrine annunciated by the United States Supreme Court in Medicaid reimbursement

First of all as to the pro rata sharing law doctrine, the Supreme Court in Arkansas
Department of Health and Human Services, et al v. Ahlborn, 126 S. Ct. 1752 (2006) held
that Medicaid reimbursement was limited to only 1/6th of the state’s payment for
medical bills when the insurer only collected 1/6th of total damages. The timing of this
decision is most interesting given it was only a few weeks prior the Supreme Court’s
decision in Sereboff which interpreted the ERISA statute and in particular the phrase
“appropriate equitable relief”. While not specifically defining exactly what constitutes
appropriate equitable relief, an exchange during oral argument between Justice Stevens
and counsel was most revealing.

JUSTICE STEVENS: Well, are you – do you contend it’s always applied
first to the medical damages? In other words, supposing there was –
instead of the $750,000 settlement, it had been $100,000 here. $75,000
was medical, and they had a lot of substantial other claims, pain, suffering,
loss of earnings, and so forth. Would you always get your full amount if –
if the amount of the settlement is over the amount of the medical expense?

MR. COLEMAN: I think we would be entitled to it under the – the terms
of the plan.

JUSTICE STEVENS: You think that’s the equitable rule?

MR. COLEMAN: Obviously, in – in doing these things, there’s a practical
side on – on the business side when they work these things out. But the
reason that claim would settle for $100,000 again speaks to the strength
of their claim for other kinds of damages.

JUSTICE STEVENS: Well, it might be because – it might be because
there’s contributory negligence, all sorts of things. They might have
compromised at 20 cents on the dollar across the board. Why should you
get 100 cents when they – when the rest of the recovery only gets 20 – 20

MR. COLEMAN: Again, it’s – it’s because of the nature of the allocation.

JUSTICE STEVENS: That’s equitable in your view? What?

MR. COLEMAN: It is because –

JUSTICE STEVENS: You think that’s the equitable rule.

MR. COLEMAN: Yes. Courts in equity in – in – modern courts in equity
in – in analyzing these types of – of claims have permitted these types of
allocation –

JUSTICE STEVENS: And some do, but some do not I think.
Transcript of Oral Argument at 33-34, Sereboff, 126 S. Ct. 1869 (No. 05-260),
available at
Sereboff was argued on March 28, 2006.

Another defense specifically worthy of mention is the statute of limitations or a
limitation of action provision in plan documents. The 11th Circuit follows most other
circuits in adopting the most closely analogous state statute for the federal statute of
limitation in the absence of a provision in a plan document. See Blue Cross and Blue
Shield v. Sanders, 138 F.3d 1347 (11th Cir. 1998) in which the court held that a claim
under 29 U.S.C. § 1132(a)(3) was most analogous to a simple contract action thus
utilizing Alabama’s six year statute of limitation. The 11th Circuit has also made it clear
that it will utilize a plan limitation of action provision in a plan document before looking
to a state law statute of limitation. In Northlake Regional Medical Center v. Waffle
House Systems Employee Benefit Plan, 160 F.3d 1301 (11th Cir. 1998), the 11th Circuit
enforced a 90 day limitation of action provision in a plan document. Depending on the
language in the plan, it is possible that efforts to seek reimbursement of matters past
that limitation of action period may be barred. Again, that will be an inquiry that is
particularly sensitive to the contractual language in the plan document.

Another potential defense is violation of the claim procedure in the plan
document or violation of the claim procedure regulation at 29 C.F.R. § 2560.503-1.
Usually plan documents outline what information must be included in a plan decision.
Some subrogation claims may be asserted without meeting the requirements of the plan
such as referencing pertinent plan provisions and setting out the right of an appeal and
a right to a copy of all plan documents. Additionally and irrespective of the plan
documents, the claim procedure regulation as to welfare and pension benefits sets out
certain threshold requirements that must be met. A careful review of the letter making a
claim for subrogation in comparing it against the claim procedure regulation may
provide another defense.

The reason this is critical is because a failure to exhaust administrative remedies
is a viable defense in the 11th Circuit. See Variety Children’s Hospital, Inc. v. Century
Medical Health Plan, Inc., 57 F.3d 1040, 1042 (11th Cir. 1995). In such instances, the
claim is dismissed as the court is theoretically without jurisdiction to rule on the claim
until all administrative or claim remedies have been exhausted.

10. Can the attorney for the claimant or plan be sued?

In the case Useden v. Acker, 947 F.2d 1563 (11th Cir. 1991) cert. denied 508 U.S.
959 (1993), the 11th Circuit indicated that it was reluctant to extend fiduciary duty status
under ERISA to attorneys advising the plan or plan participants. In this particular case,
there was an argument that a combing of legal advice with business observations should
cause the conference of fiduciary status on plan attorneys but the court declined to go
that far.

Likewise counsel for a plan participant, may also be concerned as to whether an
attorney holding funds for a client may be sued as some sort of fiduciary. 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 (11th Cir. 1993), the court held that in spite of the fact that counsel
held certain funds in 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 Georgia and Alabama Rules of Professional Conduct there would be a similar
result, given the same duty of loyalty owed to a client.

There is some concern however as to whether there is an ethical violation for
claimants’ attorneys as to holding monies in dispute. For example, ABA Model Rule 1.15
(D) (2002) as well as the Iowa Rules of Professional Conduct 32:1.15 (2005) appear to
require counsel to hold disputed funds in the attorney’s trust account and notify an
ERISA lien holder of a settlement. This is certainly noteworthy but should be less of a
concern at least for the present time in the 11th Circuit.

Plaintiff’s Practice Pointer:
The duty of loyalty to your client should not place an attorney in the position of
violating the law or acting unethically. Understanding the law and the available
arguments however in asserting a client’s position to the fullest extent is both necessary
and reasonable. The whole problem in this minefield lies with the fact that the benefits
often provided to employees can be illusory. For example, in the long term disability
context, it seems unnecessary that there should be an offset for Social Security Disability
benefits when most individuals who are disabled for any significant period of time are
likely to obtain Social Security Disability benefits as well. Why not simply write the
policy to avoid any offset for the Social Security Disability benefit to begin with.
Otherwise, it should be disclosed to employees that such policies may only provide a
minimum benefit of $50 or $100 or 10% of their earnings as is often seen. I have seen
instances in which an employee was paying approximately $35 per month for a benefit
that only provided $50 per month. That is not the bargain the employee was paying to

Defendant’s Practice Pointer:
Responding to the Plaintiff’s Practice Pointer above, this Defendant’s practitioner
notes that Group disability insurance plans often provide individuals who would not
qualify for individual long term disability coverage the chance to have disability
coverage, even if the coverage may not be the Cadillac of disability insurance coverage.

Disability coverage is always optional and an employee typically has a range of monthly
benefit amounts from which to choose. The benefits of a disability policy are not
illusory if the policy or summary plan description explicitly provides that monthly
benefits will be offset by other sources of income, which it almost always does. The best
defense in a case where a plaintiff claims to have been unaware of offsets is to establish
that the insured received a copy of the policy or summary plan description. While it is
important to have written discovery and deposition questions which go directly to the
issue of whether the insured received written notification of any offset provisions, here
again, the employer can be a great source of information. Most HR departments can
answer questions and/or provide documents concerning how policies/summary plan
descriptions are disseminated to employees.

With any type of policy, when battling an insured who claims not have been
aware of how claims would be adjusted or how benefits would be offset, check to see
whether the insured has made a prior claim for benefits. Although benefits under a
health policy may change like the wind, benefits under a disability policy usually remain
constant. If a dispute over coverage arises at a point after benefits have been
adjudicated under a prior claim, the claim file relevant to the earlier claim is likely to
have correspondence from the insurer to the employee delineating relevant policy
provisions. A plaintiff’s claim that he or she did not receive a copy of the summary plan
description when the policy initially went into effect or did not know how offsets would
be calculated can become irrelevant if the insurer has provided policy information in
connection with a prior claim.