SCOTUS Releases Opinion in ERISA Subrogation Case

The United States Supreme Court has released its opinion in U.S. Airways v. McCutchen, No. 11-1285 (USSC April 16, 2013), a case that raised the issue of whether "equitable doctrines and defenses," such as the "common fund" doctrine and the "made whole" doctrine applied to subrogation interests governed by the Employees Retirement Income and Security Act of 1974 ("ERISA").

McCutchen was injured in a car accident and received $110,000 in a personal injury settlement - $10,000 from the defendant's liability insurer and $100,000 from his underinsured motorist insurance carrier.  His attorneys' fees were 40% of the recovery, leaving McCutchen with $66,000.  U.S. Airways had paid the medical bills incurred to treat the injuries in the accident, and demanded repayment of 100% of the monies it paid - $66,866.  When McCuthen refused to do so, U. S. Airways filed suit in federal court.

The USSC ruled that U.S. Airways had the right to enforce what it called an "equitable lien by agreement." and thus had a right to recover its money notwithstanding any argument that McCutchen was not made whole.

The issue of whether the U.S.Airways recovery should be reduced by the amount of money paid in attorney's fees to secure the recovery was a different story.  The Court found that the U.S. Airways plan was silent on whether the common fund doctrine applied and therefore the common fund doctrine applied.  The Court made it clear that a properly draft Plan could trump the common fund doctrine.  Here is a summary of the Court's language on this point:

The rationale for the common-fund rule reinforces that  conclusion. Third-party recoveries do not often come free: To get one, an insured must incur lawyer’s fees and ex­penses. Without cost sharing, the insurer free rides on its beneficiary’s efforts—taking the fruits while contributing nothing to the labor. Odder still, in some cases—indeed,  in this case—the beneficiary is made worse off by pursuing a third party. Recall that McCutchen spent $44,000 (rep­resenting a 40% contingency fee) to get $110,000, leaving  him with a real recovery of $66,000. But US Airways claimed $66,866 in medical expenses. That would put  McCutchen $866 in the hole; in effect, he would pay for the privilege of serving as US Airways’ collection agent. We  think McCutchen would not have foreseen that result  when he signed on to the plan. And we doubt if even US  Airways should want it. When the next McCutchen comes  along, he is not likely to relieve US Airways of the costs of  recovery. See Blackburn v. Sundstrand Corp., 115 F. 3d  493, 496 (CA7 1997) (Easterbrook, J.) (“[I]f . . . injured  persons could not charge legal costs against recoveries,  people like [McCutchen] would in the future have every reason” to make different judgments about bringing suit,  “throwing on plans the burden and expense of collection”).  The prospect of generating those strange results again  militates against reading a general reimbursement provi­sion—like the one here—for more than it is worth. Only if  US Airways’ plan expressly addressed the costs of recovery  would it alter the common-fund doctrine.

Opinion, Page 16.

Thus, lawyers representing plaintiffs now will need to scour the relevant documents to determine whether the common fund doctrine has been adequately trumped by the language of the Plan.  To be sure, there will be a rush by many Plans to re-write Plans with this decision in mind.  

As a lawyer who represents plaintiffs in personal injury and wrongful death litigation, we see more and more greed by those with subrogation interests.  That those insurers are permitted to receive money from another policy that the insured paid for - like an uninsured motorist insurance policy - is particularly offensive.

I happen to believe that a health insurer should be reimbursed the expenses it incurs that are later recovered as part of a recovery by the insured in a third-party claim.  And I believe that that the insured should not be able to structure a settlement in such a way that can defeat that interest.  But the common fund doctrine should apply in all cases, and the health insurer's recovery should be reduced to reflect a reduced recovery of the insured because of collectability issues, liability issues, etc.  Current law wrongfully favors the economic interests of employers and their health insurers at the expense of employees and their families.  The USSC has made it clear that it has deferred to Congress on the issue and the chances are virtually nil  that Congress will modify ERISA  to actually benefit an employee.


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Max Kennerly - April 16, 2013 9:13 PM

A horrid, unjustifiable opinion. Nothing in ERISA compelled this result; ERISA's language is largely a blank slate, and the SCOTUS has been more than happy to import general concepts of equity into its interpretation where it would hurt insureds.

The Third Circuit's rule made complete sense: freeloading insurers are entitled to pro rata reimbursement of their expenses, minus common fund attorney's fees. If the insurer doesn't like it, they can buy the plaintiff's claim through subrogation and pursue it themselves.

The sad part here is that the Court was 9-0 in giving the insurer an unjustifiable windfall, and 4 justices wanted to give the insurer more than 100% of the funds received by the insurer. Outrageous.

In the end, now I am going to be blunt with ERISA insurers: either they agree to a number upfront for their lien or I don't pursue the case and they can accept nothing. We've already had some of that in the past, but now we have to do it as a matter of policy.

Lori Parker - April 22, 2013 10:43 PM

As a layperson, I was appalled at this ruling. All of the laws concerning accident victims need to be overhauled. The whole purpose of accident insurance was to provide care for the accident victim. Where did that go? Somewhere on the long road of litigation, the accident victim got thrown into the gutter.

I personally believe that attorneys have a duty to push legislators in the right direction. I see too many attorneys not doing that, and I wonder why?

Regular folks unwittingly assume that "someone" is out there righting these wrongs...but they are misguided.

The entire force of personal injury attorneys really should be making a much more forceful and effective change in regards to the accident legislation.

This ruling speaks volume about what appears to be a neglect of effort on behalf of accident victims.

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