June 29, 2006

New Hope for Health Plan Subrogation Provisions

For years, employers have designed their ERISA health plans to include subrogation provisions. Under the typical subrogation provision, a plan claims the right to recoup health benefit payouts for injuries to participants when those participants ultimately recover damages from others who were responsible for the injuries. About four years ago, however, the Supreme Court dampened employers' hopes of enforcing plan subrogation provisions. The Court decided that an insurance company, Great-West Life, that had paid significant benefits to a health plan participant, Jannette Knudson, for injuries arising out of a car accident could not obtain reimbursement from funds Ms. Knudson won in her lawsuit against the car manufacturer. The Court concluded that, because the lawsuit recovery was paid to various entities other than Ms. Knudson (including a special needs trust for Ms. Knudsen's benefit), the kind of relief that Great-West sought was not available.

A recent Supreme Court decision gives employers new hope of enforcing their health plan subrogation clauses. In the new case, also involving a car accident, the Court decided that an employer-sponsored health plan could seek repayment from funds Joel and Marlene Sereboff received from their lawsuit against several third parties. Unlike Ms. Knudsen's case, the recovered funds were paid directly to the Sereboffs, and when the plan filed its subrogation action, the Sereboffs continued to hold the funds in an investment account. The Supreme Court ruled, in a unanimous decision, that the health plan's subrogation clause created an "equitable lien [on the lawsuit proceeds] established by agreement" and that the plan could bring an effective action against the Sereboffs to recover the plan's benefit payments.

The new Sereboff decision did not directly overrule the Supreme Court's Knudson decision, and it leaves some uncertainty about when subrogation provisions will be enforceable and when they will not. Was continued possession of the recovered funds the key difference between the two cases? Was it the slightly different legal theory that the plan raised in the second case? Or does the Sereboff case effectively overrule the Great-West case without saying so?

That uncertainty may not be resolved for several years, as lower courts wrestle with these issues, and it may take yet a third Supreme Court decision to clarify matters. But in the meantime, employers should do everything they can to take advantage of the Sereboff decision, including reviewing the subrogation provisions in their health plan documents and the procedures they follow in identifying subrogation opportunities and pursuing recoveries.

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