Insurer may take share of damages award, Supreme Court rules.

A health insurance plan can recover the medical expenses it paid to a claimant who sues and collects damages from a third party responsible for the in jury, a unanimous U.S. Supreme Court recently ruled. (Sereboff v. Mid Atlantic Med. Servs., Inc., 126 S. Ct. 1869 (2006).)

The decision drew a sharp reaction from trial lawyers, who see it as another in a long line of rulings that have harmed consumers and blunted the ability of the civil justice system to remedy injury.

"The Court has empowered the insurance industry to be first in line all the time, providing these giant corporations with another opportunity to further enrich themselves before a successful plaintiff receives the compensation a judge or jury decides they deserve," said ATLA President Ken Suggs.

"Under this ruling, the giant insurance companies get paid twice--first from the premiums, deductibles, and copays they collect and then from the damages--sticking the person who filed suit or the taxpayer with the bills."

After Maryland residents Joel and Marlene Sereboff were injured in an auto accident in California, Mid Atlantic Medical Services, Inc. (MAMSI), the administrator of Marlene's company health plan, paid them $75,000 in medical benefits. The Sereboffs filed a tort action in state court for compensatory damages, and MAMSI asserted a claim to a lien on a portion of their recovery.

The Sereboffs were eventually awarded a $750,000 settlement, and MAMSI filed suit under the Employee Retirement Income Security Act (ERISA) for reimbursement of the benefits it had paid. Under ERISA [section] 502 (a) (3), a fiduciary can bring a civil action to obtain "appropriate equitable relief" to enforce the terms of the plan.

Writing for the Court, Chief Justice John Roberts analyzed whether the claim historically would have been equitable during "the days of the divided bench"--when there were separate courts of law and equity--and concluded that MAMSI's request to recover the funds was equitable.

Some lawyers were surprised by the decision because the Court had held in Great-West Life & Annuity Insurance Co. v. Knudson that a restitutionary remedy would not have been equitable. (534 U.S. 204 (2002).) Akey difference, however, was that the funds in Great-West were not in the claimant's possession--they had been placed in trust under California law. In this case, MAMSI sought identifiable funds that were within the Sereboffs' possession and control.

John Stein, who practices law in San Jose, California, and represented the Sereboffs, said the decision could have an impact on trial practice. Ira successful plaintiff's compensation is depleted or lost because the insurer is reimbursed first, it may not be "economically feasible" for trial lawyers to represent personal injury clients, and "they simply will walk away from these types of cases," Stein said.

Roger Baron, a law professor at the University of South Dakota who has written about subrogation and reimbursement issues in personal injury claims, said the Court's decision was narrow, holding only that a claim for contractual reimbursement could be the basis for an action for an equitable lien. "An unresolved issue is whether a beneficiary still can raise equitable defenses to that reimbursement action," he said.

He cited existing case law that might now be relevant in reimbursement actions. For example, the Court has recognized laches as an equitable defense and has held that a court of equity will not act in a manner that will "aid in the enforcement of a forfeiture" or act to help a plaintiff who has "unclean hands," he said.

The case has been remanded to the Fourth Circuit to decide whether equitable defenses will be allowed.