ERISA Subrogation – Groundhog Day Revisited? by Richard Neuworth


Richard Neuworth has been a partner in the law firm of Leabu & Neuworth since it was founded in 1997. The firm’s focus areas are employment law, employee benefits and personal injury litgation.


In the movie, Groundhog Day, Bill


Murray is forced to relive the same un- pleasant events over and over again. The issue of subrogation of private employer health insurance plans that are governed by the Employee Retirement Income Se- curity Act of 1974 is forcing many practitioners to relive the same nightmare over and over again.


The vast majority of health insurance for adults under age 65 are offered through private employer sponsored plans. Of these plans, almost all are gov- erned by the Employee Retirement Income Security Act of 1974 (“ERISA”). The only exceptions to ERISA coverage are for self-employed individuals that pay their own health insurance premiums, re- ligious and other charitable institutions offering health insurance, or governmen- tal entities or agencies (federal, state and local), and instrumentalities of govern- ment agencies that offer health insurance (including Medicare and Medicaid). Effective representation of victims in personal injury cases with medical bills paid by the aforementioned ERISA health insurance plans is far more difficult for a


variety of reasons. The attorney must bal- ance factors such as whether or not medical expenses must be repaid to the health insurance plan, what attorney’s fees can be charged and retained from a settlement or verdict, (or escrowed indefi- nitely), what amounts a claimant may retain from settlement proceeds and/or verdict, and where to place such proceeds for post-settlement medical treatment that a claimant may need. Two recent developments have further complicated representation of claimants in personal injury cases and subrogated ERISA health insurance plans. First, many health insurance plans, particularly multiemployer and union health and wel- fare funds, are suffering severe financial problems due to an explosion of health care costs far in excess of the inflation rate. As a result, these plans have become far more aggressive in attempting to collect outstanding liens. Second, the Supreme Court and Fourth Circuit have both en- tered the fray of determining under what circumstances an ERISA health insurance plan may seek to recoup its outstanding liens from claimants.


In Great West v. Knudson, 122 S.Ct. 708 (2002), the Supreme Court decided that the health insurance plan could not bring a claim seeking to recoup its lien under ERISA, Section 502 (a)(3), against Ms. Knudson because the proceeds of Ms. Knudson’s settlement were not in her pos- session. Rather, the funds were being held in a special needs trust under California law. 122 S. Ct. 715. In addition, the plan was seeking a legal, not an equitable rem- edy, which was for monetary damages. As a result, the plan could not seek equitable relief under Section 502 (a)(3) of ERISA. In dicta, Justice Scalia observed that the Court was not expressing any opinion as to whether or not Great West could have intervened in a state tort action brought by the Knudsons, or whether a direct ac- tion by Great West against the Knudsons under state law, and asserting state law claims such as breach of contract, would have been preempted by ERISA. 122 S. Ct. 718. Significantly, Justice Scalia also observed that the Court was not decid- ing whether or not Great West could have obtained equitable relief against Ms. Knudson’s attorney(s) and the trustee of the Special Needs trust under ERISA or other federal remedies. 122 S.Ct. 718. After Great West was decided, the


Fourth Circuit also decided a series of cases that answered some of the impor- tant questions not previously decided by the Supreme Court. Specifically, in Mid Atlantic Medical Services, LLC v. Sereboff, 407 F.3d 212, 218-19 (4th


Cir. 2005), the


Fourth Circuit allowed a health insurer, MAMSI, to recover monies held by plain- tiffs in an investment account arising out of a settlement of litigation in state court in California. The plaintiff-Sereboffs filed a lawsuit in California concerning a per- sonal injury action arising out of an automobile accident. However, MAMSI, the Sereboffs’ health insurer through Ms. Sereboff’s employment with the Katzen Eye Group, had a standard subrogation clause requiring her to repay all monies paid for medical expenses arising of acts or injuries caused by third parties. Under


8 Trial Reporter


(Continued on page 10) Winter 2006


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