From the Edito r
A Dearth of Common Sens e
T his issue of BLJ contains an excellent a rticle by Nancy Ross and
Michael Graham on the recent Supreme Court decision in GreatWest & Annuity Insurance Company v. Knudson, dismissing an
action by a health plan insurer against a plan pa rticipant for reimbursement of medical costs incurred after a car accident . The Court
addressed the impo rt ant issue of what is considered appropriate
equitable relief under ERISA Section 502(a)(3) . I would like to take a
few steps back from the complex legal principles involved, and ask,
"What was Great-West thinking in bringing this action? "
. In a nutshell, Janet Knudson became a quadriplegic in a 1992
auto accident . She was covered by her husband's employer's health
plan, which paid $411,157 in medical bills . The health plan had a
typical subrogation provision entitling the plan to reimbursement of
its payments for medical expenses from any amounts recovered by a
participant from a third parry . Janet and her lawyers were no doubt
aware of the subrogation rules when they settled Janet's negligence
action against the car's manufacturer for $650,000 . The settlement
was divvied up $256,745 to a Special Needs Trust to pay for Janet's
future medical care; $373,426 to pay legal fees and costs ; $5,000 to
reimburse California Medicaid ; and the remaining $ 13,828 to reimburse Great West, the plan's stop -loss carrier . Failing to block the
state court settlement of the negligence action, Great-West sued Janet
to recover the full $411,157 it had paid out on her behalf. GreatWest, as assignee of the plan's subrogation rights, argued that it was
entitled to recover from Janet under ERISA Section 502(a)(3) as appropriate equitable relief.
Without knowing the difference between law and equity (does
anyone?), without knowing anything about ERISA and, for that mat ter, without ever having gone to law school, what chance would you
give an insurance company suing a qua dri plegic? Add to this the fact
that the recovery sought was more than Janet's Special Needs Trust
received, so that to recover fully, Great-West would have had to
empty the Trust (by this point Janet is presumably broke) and eat
into over 40 percent of her legal fees and costs . That would have left
nothing for Janet, as well as significantly reduced fees, after expenses, for the lawyer who had negotiated the set tlement .
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VOL . 15, NO. 2, SUMMER 2002
© 2002 Aspen Publishers, Inc .
"This article was republished with permission from Benefits Law Journal, Vol . 15, No. 2, Summer 2002),
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From the Edito r
The Supreme Court ruled for Janet 5 to 4, holding that since she
was not in possession of any of the funds recovered, Great-West's
claim was for legal damages, not equitable relief . And legal damages
were not available under ERISA .
Stiffing the Pla n
is typical of subrogation cases in that a health plan participant is injured in an accident : the plan pays the medical bills, the
participant retains a lawyer and recovers money from a third parry,
and the plan then attempts to enforce its subrogation right to be reimbursed from the recovery for the medical bills it already paid .
There are cases in which the participant's injuries are not serious,
or the recovery greatly exceeds the actual medical costs, yet the par ticipant tries to stiff the plan from sharing in the "windfall ." Alternatively, as in Janet's situation, though the injury is serious and the
recovery is relatively paltry, the plan wants its money even though it
will leave little, if anything, for the participant or lawyer .
Plan participants who are victims of a serious accident understandably get quite ornery when their health plan tries to dig deeply
into their recovery . When the plan tries to grab the entire settlement
and a chunk of the lawyers' fees to boot, the dispute can get downright nasty. One can hardly blame Janet, who faces a life of extreme
difficulty and significant medical expenses, for trying to skirt the
Plan's subrogation rules . Whatever your opinion of plaintiffs law
yers, they generally work on contingency and invest their own time
and money in taking a tort action . They cannot be expected to work
for nothing and deserve to be paid when there is a recovery .
Employee morale is another factor that should enter into an
employer's calculus in handling subrogation situations . (In Knudson,
the suit was brought by the stop-loss carrier, which presumably was
not concerned with the employer's relationship with its employees .)
Clearly, an employer that attempts to collect most or all of an
employee's recovery for a serious or even fatal injury does not inspire loyalty or trust among coworkers or enthusiasm for the
employer's benefit programs . In most participants' minds, a plan's
payment of medical expenses incurred in an accident is an entitlement, and any settlement with a third party is regarded as fair recom pense for the pain, suffering, and the trauma of the incident .
To be sure, health plans and insurers have legitimate interests in
protecting their rights to subrogation . But Knudson is not a case of
an unscrupulous participant recovering a large sum of money for a
Knudson
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From the Edito r
minor mishap and refusing to fulfill his obligation to the plan . This,
and many other subrogation cases that reach court, involve people
who have genuinely suffered .
I suspect that a great deal 'of ERISA litigation could be avoided if
plans took a reasonable position from the start . Instead of arguing for
full recovery before anyone else gets a dime, plans should recognize
the legitimate interest of the participant (who, after all, is the victim)
and the plaintiff's lawyer in any recovery . In other words, if the plan
is willing to share, participants will be less likely to attempt to stiff
the plan entirely. Indeed, some courts have applied variations of the
"make-whole" and "common fund" doctrines to force the plan to pay
its share of legal fees . Knudson originated in the Ninth Circuit where
subrogation claims routinely have been dismissed . In many instances
the plan was left without any remedy because ERISA can be found to
preempt any state action to collect . As a result of Knudson, participants throughout the country will be more likely to skirt the
subrogation rules, especially if they can quickly pocket the recovery
or steer it to the protection of a trust or other friendly third party .
But health plans and insurers are not without tools to protect
their `interests . Plans need to become more involved in participants'
tort actions . In the past, plans typically have left the participants to
do all the work, swooping in at the end of the process to grab their
share . Even before Knudson, this practice had the potential to lead to
litigation. Now plans wishing to protect their subrogation rights may
need to be involved from the start .
The legally soundest, but least practical tactic, would be for the
plan to bring its own action against the tortfeasor . (Technically,
subrogation only includes such a direct suit .) This may be feasible if
the amount at stake is large and the plan administrator is set up to
handle tort litigation . But most employers are not looking to expand
their legal department's duties or get into the nitty-gritty of the accident. Similarly, a joint action by the plan and the participant would
satisfy ERISA, but would be difficult to arrange and, in any event,
would be fraught with conflict of interest issues .
Instead, plans will need to monitor tort actions from the start and
be prepared to move quickly against the correct party before a recovery is locked away . It may be necessary to revise health plan
SPDs and plan documents to impose a constructive trust on any recovery . Plan documents also may need to be reworded to support an
argument that the payment of health care costs that are reimbursed
by a third party are not covered and to characterize the plan's action
against the participant as one to recover an overpayment of benefits .
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From the Editor
Also, plans that require participants to sign repayment agreements
should review these agreements carefully to enhance the plan's constructive trust arguments and chances of sharing in the participant's
successful tort action . Most importantly, plans should exercise common sense and, yes, a degree of compassion . Injured participants
cannot be expected to undergo the time, hassle and tribulation of
depositions, medical exams, and everything else that goes with litiga tion simply to protect the plan's interests .
Moreover, attempting to obtain the portion of the recovery allocated for attorneys' fees only will inspire Machiavellian schemes to
ensure that the plan gets nothing . Even in minor accidents, plans
should be prepared to share any recovery with participants and their
lawyers . In grievous situations where the participant truly has suffered great trauma, pain and hardship, the plan seriously should con sider settling for less than it technically might be entitled to .
Otherwise, the plan risks an outcome similar to Knudson: no recovery, high legal fees, and bad press .
David E. Morse
Editor-in-Chief
Kirkpatrick & Lockhart LLP, New York, NY
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