Since the Supreme Court’s 2002 decision in Great-West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), plan administrators in many states have been unable, for all practical purposes, to enforce reimbursement and subrogation provisions contained in their welfare plans. Some federal courts took a more relaxed view of Knudson and permitted plans to enforce their reimbursement and subrogation provisions under certain circumstances. Other courts, however, including the Ninth Circuit, which includes California, read Knudson strictly and effectively barred ERISA plans from recovering money previously paid out to plan participants who subsequently recovered from third parties who caused their injuries. Earlier this month, the Supreme Court published a new opinion, Sereboff v. Mid Atlantic Medical Services, Inc, 547 U.S. ___ (2006), 2006 WL 1310754, that should make it easier for ERISA plans to obtain reimbursement.
The Sereboff case stems from a car accident in which the Sereboffs were injured. At the time of the accident, they were covered by Mrs. Sereboff’s employer-sponsored health plan, which was administered by Mid Atlantic Medical Services, Inc. (“Mid Atlantic”). The Sereboffs sued the party that caused the accident and recovered $750,000, which was paid directly to them. Mid Atlantic requested reimbursement of the benefits paid as a result of the accident pursuant to a plan provision stating that benefits paid by the plan may be subject to reimbursement from “[a]ll recoveries from a third party (whether by lawsuit, settlement, or otherwise).” The Sereboffs declined to reimburse the plan, so Mid Atlantic sued. The parties agreed to set aside the contested amount in an investment account.
Section 502(a)(3) of ERISA allows a participant, beneficiary or fiduciary to sue “to obtain other appropriate equitable relief.” The issue in this case was whether the reimbursement sought by Mid Atlantic from the Sereboffs constituted equitable relief. The Court held that it did. In contrast to its decisions in Knudson and an earlier case, Mertens v. Hewitt Associates, in both of which the Court determined that the actions were for prohibited monetary or “legal” relief rather than injunctive or “equitable” relief, the Court found that reimbursement of benefits paid to the Sereboffs from a tort settlement constituted equitable relief because the funds sought were specifically identifiable funds in the possession of the participant (the part of the tort settlement which was set aside in an investment account).
The Court differentiated Sereboff from Knudson because in Knudson, the funds at issue were not under the control of the injured party, but rather were held in a “special needs trust” established under California state law. Beneficiaries of such trusts do not own the assets of the trust, nor do they have any control over them. The Court explained that in order for equitable restitution to be proper, the funds sought must be in the defendant’s possession. As the plan beneficiary in Knudson did not have access to the funds, permitting enforcement of a reimbursement provision in that case would have been tantamount to imposing “personal liability on [Knudson] for a contractual obligation to pay money-relief that was not typically available in equity. Knudson, 534 U.S. 204, 210 (2002).
The Sereboffs also argued that the remedy sought by Mid Atlantic was subrogation, and that limitations should apply to the imposition of equitable relief. Such limitations, they argued, include the notion that subrogation should not occur unless and until the participant has been made whole for his or her injuries. However, the plan contained language addressing this: “‘[Mid Atlantic’s] share of the recovery will not be reduced because [the beneficiary] has not received the full damages claimed, unless [Mid Atlantic] agrees in writing to a reduction.'” Sereboff, 547 U.S. ____ (2006), 2006 WL 1310754 at *9 (citations omitted). Furthermore, the Court found that the equitable nature of Mid Atlantic’s claim was not based on subrogation (which would take such an argument into account) but rather on an express agreement creating an equitable lien. According to the Court, subrogation claims are based on the theory that certain monies should go to the insurer, rather than on an express agreement between the parties. But because an agreement existed in this case, the Sereboffs could not invoke the defense that they had to be made whole before Mid Atlantic could recover.
The Court’s analysis clarified somewhat what it considers to be equitable relief. However, in a footnote, the Court declined to address what is considered “appropriate” equitable relief under ERISA. This leaves the door open for further litigation about whether a specific form of relief, even if it may be characterized as equitable, is “appropriate” under ERISA.
How does the Sereboff decision affect ERISA plans? Plans with valid reimbursement provisions now have clear precedent from the Supreme Court permitting them to enforce such provisions when the funds that they seek to recover are identifiable and owned by the beneficiary. Because of the emphasis the Court placed on these factors, plans should follow proceedings against third parties carefully in order to protect their own interest and review their reimbursement provisions to ensure that they provide a mechanism to see that both of these requirements are met.