We have previously written about personal injury settlements in self-insured ERISA health plan cases here. In July 2012, the Ninth Circuit ruled that self-insured ERISA health plans could not be reimbursed from personal injury settlements until the injured person had recovered all of his or her costs and his or her attorney had been paid in full. Unfortunately, the U.S. Supreme Court reversed the decision of the Ninth Circuit. Consequently, injured persons with self-insured ERISA plans must reimburse their health-care providers before they receive any funds. However, the Supreme Court held that attorneys are still entitled to their fees.
ERISA stands for “Employee Retirement Income Security Act” and is a federal law. One portion of the law allows certain employers to create a self-insured health care plan whereby the employer directly provides health care insurance for its employees. Self-insured ERISA plans usually state that the employer is entitled to be reimbursed for any medical expenses it pays if the insured employee later recovers from a third-party. Thus, if a person is injured in an accident and has $50,000 in medical bills, the ERISA plan is entitled to the $50,000 before the injured person gets any money or his or her attorney is paid. Under the terms of the ERISA plan, this would even apply if the funds the injured person received were not for medical expenses. In the above example, if the injured person received $25,000 for medical expenses and $25,000 for pain and suffering from a third-party, the ERISA plan would still be reimbursed $50,000, leaving the injured person with no recovery. This is contrary to how almost all personal injury settlements work under state rules. However, since ERISA is a federal law it overrides the state rules and regulations.
In the case of CGI Technologies and Solutions v. Rose, the Ninth Circuit held that that this right to reimbursement was overruled by the equitable doctrines of Make Whole and Common Fund. Under the Make Whole Doctrine, the injured person does not have to reimburse his or her medical costs until he or she has received his or her claims for lost wages, pain and suffering, etc. Under the Common Fund Doctrine, the attorney that represents the injured person is entitled to attorneys’ fees on all the funds collected, even if they are later reimbursed to another party. This is to prevent a third-party from freeloading on the injured person’s attorney to collect a settlement. Consequently, after the Rose case, the attorney would get paid first, the injured person second and the self-insured ERISA employer third. This was consistent with the rules for all other personal injury settlements.
However, in 2013, the U.S. Supreme Court held differently in U.S. Airways Inc. v McCutchen. The court stated that a self-insured ERISA plan was a contract between two parties, namely the employer and employee. Because the contract was clear as to the manner of reimbursement, the rules of the contract held. Moreover, the equitable doctrines of Make Whole and Common Fund did not apply because, generally speaking, equity cannot override the plain language of a contract. However, the court held that the contract was not clear about attorneys’ fees. Consequently, the court had to rely on the equitable notion of Common Fund. Thus, the court determined that attorneys’ fees should be paid on all funds collected. Consequently, after the Supreme Court ruling, an injured plaintiff must first pay his attorney on all funds collected, second he must reimburse his employer for all medical expenses paid and only then can he keep any monies for his lost wages or pain and suffering.
This ruling is potentially devastating to injured people. Indeed, the plaintiff at issue in US Airways was required to pay all the funds he recovered after attorneys’ fees to his employer, leaving him with no money for his effort. If you are an employee insured by your employer in a self-insured ERISA plan or an attorney representing such a client, it is important to think through case strategy so you do not inadvertently recover solely for the employer.