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Health plans' claims for reimbursement from personal injury recovery: recent ERISA rulings, unanswered questions: healthcare plan reimbursement has been a contentious issue for plaintiffs' personal injury lawyers and plan counsel alike. The United States Supreme Court's recent Sereboff decision answered some questions, but others remain.

Generally, health insurance (or self-funded benefits) provided by an employer or an employee organization to the employees and their dependents is governed by the Employee Retirement Income Security Act ("ERISA"), 29 USC section 1001 et seq. Individual health insurance policies, group health insurance policies that are not employment related, church plans, and government plans are not governed by ERISA.

Personal injury lawyers and counsel for insurers are often confronted with an important ERISA-related question: if the benefit plan pays for a beneficiary's medical expenses arising out of an accident, under what circumstances can the plan obtain reimbursement from a later personal injury recovery by the beneficiary against the tortfeasor?

This article looks at an important recent United States Supreme Court case that answers some, but not all, reimbursement questions posed by ERISA, and reviews the law governing the common fund doctrine in Illinois that keeps attorney fees beyond the reach of ERISA liens.

An express reimbursement provision

The ERISA statute itself does not say whether a plan has a right of reimbursement, so we need to turn to the common law or to the terms of the plan for the answer.

There is no common law right of implied subrogation in hospital expense, health and accident, or similar insurance (as opposed to liability insurance). Instead, the policy trust have an express provision allowing the insurer to subrogate against the tortfeasor or to obtain reimbursement from the beneficiary's settlement with him or her. (1) Moreover, any provision or requirement of an ERISA benefit plan must be in writing. (2)

Accordingly, the ERISA benefit plan must contain an express subrogation or reimbursement provision for the plan to have a right to recoup its medical payments out of the beneficiary's personal injury recovery. The typical plan or policy contains such a provision, but the careful practitioner, representing either the plan or the beneficiary, will double check the plan document to make sure. If the plan document does not contain a reimbursement provision, the beneficiary's attorney should counsel his or her client against signing any separate reimbursement agreement.

Sereboff and "equitable relief"

Because ERISA is such a comprehensive and preemptive federal legislative scheme, the plan's reimbursement claim must fit within one of the very specific types of civil actions permitted by the statute. The only type of action tinder ERISA that the reimburseinent claim resembles is that provided by ERISA section 502(a)(3), 29 USC section 1132(a)(3), concerning a claim for equitable relief to enforce a term of the plan. That section provides:
 Section 1132 Civil Enforcement
 (a) Persons empowered to bring a civil action. A civil action may be
 (3) by a participant, beneficiary, or fiduciary (A) to enjoin any
 act or practice which violates any provision of this subchapter
 or the terms of the plan, or (B) to obtain other appropriate
 equitable relief (i) to redress such violations or (ii) to
 enforce any provisions of this subchapter or the terms of the
 plan.... (emphasis added).

Jurisdiction for claims under the foregoing provision lies exclusively in federal district court. 29 USC section 1132(e).

Because the benefit plan's claim to enforce the reimbursement provision seeks motley, i.e., reimbursement for the medical expenses paid by the plan, beneficiaries have challenged whether the claim can be allowed as one for "equitable relief." Arguably, the claim is for damages for breach of the reimbursement provision, a claim that plainly seeks legal, not equitable relief.

On the other hand, money can be part of an equitable claim for restitution, to enforce a lien, or under the equity cleanup doctrine. Not surprisingly, courts have struggled with the benefit plan's reimbursement claim and the circumstances under which it seeks "equitable relief" as opposed to legal damages.

Knudson and "relief typically available in equity." The United States Supreme Court first considered a benefit plan's reimbursement claim in the 2002 case Great-West Life & Annuity Ins Co a Knudsou. (3) Although Great-West claimed equitable restitution, the Court held that, despite the equitable labels used in the complaint, the facts of the case were such that the action sought only legal damages for breach of the reimbursement clause and, thus, was not permitted tinder ERISA.

Relying on its prior decision in Mertens v Hewitt Associates, (4) a case involving section 502(a)(3) but not a plan's reimbursement claim, the Court stated that "equitable relief" for purposes of section 502(x)(3) refers only to "those categories of relief that were typically available in equity." (5) The Court further stated that "not all relief falling tinder the rubric of restitution is available in equity" (6) and explained that, depending on the circumstances, restitution may be either legal or equitable:
 In cases in which the plaintiff ... could not assert title or right
 to possession of particular property, but in which nevertheless lie
 might be able to show just grounds for recovering money to pay for
 some benefit the defendant had received from him, ... the plaintiff
 had a right to restitution at law through an action derived from the
 common law writ of assumpsit. In such cases, the plaintiff's claim
 was considered legal because he sought ... to obtain a judgment
 imposing a merely personal liability upon the defendant to pay a sum
 of money.... In contrast, a plaintiff could seek restitution in
 equity, ordinarily in the form of a constructive trust or an
 equitable lien, where money or property identified as belonging in
 good conscience to the plaintiff could clearly be traced to
 particular hinds or property in the defendant's possession. (7)

In Knudsou the health plan had paid medical expenses for Mrs. Knudson, a beneficiary under the plan, relating to injuries she suffered in an automobile accident. The plan contained a provision giving it the right to recover from the beneficiary any amounts paid by the plan and recovered from a third party.

The Knudsons settled their tort case arising from the auto accident, and the petitioners (assignees of the health plan) sought to enforce the health plan's reimbursement provision. The settlement funds to which the petitioners claimed entitlement, however, were not in the Knudsons' possession, and the Knudsons were the sole defendants in the reimbursement action. The settlement of the Knudsons' tort action had resulted in the creation of a special needs trust to which most of the settlement proceeds had been directly paid by the tortfeasor. The balance of the settlement funds had been paid to the Knudsons' attorney, who took his fee and then disbursed the remainder to the Knudsons' other creditors.

The Court found that the petitioners sought some funds from the Knudsons, but not a particular fund that in good conscience belonged to the petitioners. (8) Accordingly, the kind of restitution the petitioners sought was legal relief, not equitable relief, and not permitted by ERISA.

Following Knudson, lower courts continued to struggle with health care plans' reimbursement claims and with whether such claims sought equitable relief as required by ERISA Section 502(a)(3). Some courts construed Knudson as establishing a "possession test," allowing reimbursement if the beneficiary was in possession of clearly identifiable funds from the personal injury settlement. (9) other courts read Knudson more broadly so as to bar plans' reimbursement claims as claims for legal damages because they do not seek the recovery of the actual benefits payments by the plan and, thus, do not seek equitable restitution. (10)

Sereboff: identifiable proceeds in the beneficiary's possession are subject to an equitable lien. The Supreme Court granted certiorari in Sereboff v Mid Atlantic Medical Services, Inc, (11) to resolve the disagreement.

The Sereboffs were involved in an auto accident and suffered injuries. Their health insurance plan, sponsored by Mrs. Sereboff's employer and covered by ERISA, paid the couple's medical expenses, totaling $74,869.37. The plan had a reimbursement provision requiring a beneficiary who receives benefits to reimburse the plan administrator, Mid Atlantic, from any tort recovery from a third party.

The Sereboffs sued several third parties for their injuries arising from the auto accident. On several occasions while the suit was pending, Mid Atlantic sent the Sereboffs' attorney correspondence asserting a lien on the anticipated proceeds from the suit. The Sereboffs' tort action eventually settled, but neither the Sereboffs nor their attorney sent any money to Mid Atlantic.

Accordingly, Mid Atlantic filed suit in federal district court to obtain its reimbursement. Because the Sereboffs' attorney had already disbursed the settlement proceeds to them, Mid Atlantic sought a temporary restraining order and preliminary injunction requiring the Sereboffs to retain and set aside at least $74,869.37 from the settlement proceeds. Pursuant to a stipulation, approved by the district court, the Sereboffs agreed to preserve that amount in an investment account pending a final decision on the merits.

The district court found in Mid Atlantic's favor and ordered the Sereboffs to pay Mid Atlantic the $74,869.37 with a reduction for Mid Atlantic's share of the Sereboffs' attorney's fees. The Sereboffs appealed, the fourth circuit affirmed, and the Supreme Court granted certiorari. In a unanimous opinion, the Court held that Mid Atlantic's recovery could properly be categorized as "equitable relief" and so was authorized by section 502(a)(3).

The Court first noted that the case differed from Knudson in that the settlement proceeds were in the Sereboffs' possession whereas in Knudson the funds had been placed in a special needs trust under California law. (12) That impediment to characterizing the relief as equitable was not present in Sereboff.

The Court employed a new analysis, however, to explain why Mid Atlantic's reimbursement was equitable relief. Relying on a case from the days of the divided law and equity bench, Barnes v Alexander, (13) the Court explained that the reimbursement provision of the ERISA plan caused an "equitable lien by agreement" to arise on the settlement proceeds as soon as those proceeds came into existence and that the lien followed the funds into the hands of the Sereboffs. (14) Such a lien by agreement had been enforced at equity in Barnes, which had involved an agreement between attorneys for one-third of the first attorney's future contingent fee expected in a case.

The Sereboffs objected that the reimbursement sought by Mid Atlantic did not meet the conditions for equitable restitution described in Knudson in that the funds in their possession could not be traced back to the plan. While acknowledging that equitable restitution generally requires strict tracing, the Court explained that an equitable lien by agreement, the sort at issue here and in Barnes, and an equitable lien as a matter of restitution are different species of relief. (15) The Court further explained that it discussed equitable and legal restitution in Knudson because restitution was the remedy claimed by the petitioner there.

Demonstrating how the Court often decides cases on very narrow grounds, the Court stated: "There was no need in Knudson to catalog all the circumstances in which equitable liens were available in equity; great-West claimed a right to recover in restitution, and the Court concluded only that equitable restitution was unavailable because the funds sought were not in Knudson's possession." (16)

Sereboff has clarified that, where the ERISA plan is enforcing its reimbursement provision against personal injury settlement proceeds that are still identifiable and in the beneficiary's possession, the recovery is "equitable relief" under section 502(a)(3) in the way of an equitable lien by agreement.

unanswered Sereboff questions. After Sereboff, it is important for the plan to act quickly. As soon as the beneficiary's tort action is settled, or even as it is about to settle, the ERISA plan should go to federal court and seek a TRO and preliminary injunction to freeze enough of the settlement proceeds still in the beneficiary's possession to reimburse the plan for the prior medical expenses and to assert a lien over those proceeds. But Sereboff left many questions unanswered.

In many situations, it may be possible for the beneficiary to argue that there no longer exists any identifiable fund upon which an equitable lien may be imposed. What if the tort recovery is commingled with other funds, and what if other persons (not the beneficiary) are additional owners of that account? What if the tort recovery is used to remodel the beneficiary's home to accommodate a disability arising from the accident? What if the tort recovery is simply spent to pay off debts? What if reimbursement to the ERISA plan would leave the beneficiary with little or nothing from the personal injury settlement?

ERISA Section 502(a)(3), 29 USC section 1132(a)(3), limits the plan's recovery to "appropriate equitable relief." (Emphasis added). The Sereboffs argued that reimbursement to the plan was not appropriate in their case because they were not made whole by the tort settlement. The Court declined to consider their argument, however, because it did not appear from the record that this distinct issue had been raised in the courts below. (17) Undoubtedly, the make-whole doctrine (18) and the issue of appropriate equitable relief will receive more attention in the wake of Sereboff.

The Court's decisions concerning ERISA section 502(a)(3), including Knudson and Sereboff, have been criticized by ERISA scholars as erroneously employing a very narrow view of "equitable relief" based on historical equity practice that was not intended by ERISA's drafters. (19) In the critics' view, the Court's narrow construction of "equitable relief" has not only hampered plan reimbursement efforts, but has undermined ERISA's main purpose of subjecting pension and benefit plans to the concept of trust law so as to protect the interests of participants and beneficiaries. In many cases, the narrow construction of "equitable relief" has left participants and beneficiaries with legitimate grievances without any remedy under ERISA, nor any remedy at all because of ERISA's preemptive effect. (20)

Reduction by a share of the beneficiary's attorneys' fees

other questions unanswered by Sereboff are whether the ERISA plan's reimbursement should be reduced by a share of the beneficiary's attorneys' fees in producing the personal injury recovery pursuant to the common fund doctrine and whether the plan document can be drafted to preclude this reduction. (21) Under existing Illinois and seventh circuit law, however, if the beneficiary's attorney is patient in taking his or her fee from the settlement, the plan's reimbursement will be reduced by a pro rata share of the attorney's fee irrespective of plan language to the contrary.

In Bishop v Burgard, (22) the Illinois Supreme Court held that the Illinois common fund doctrine is not preempted by ERISA and that the doctrine requires the health plan's reimbursement recovery to be reduced by a share of the beneficiary's attorneys' fees, even if the plan language seeks to avoid such reduction.

In that matter, Catherine Bishop sustained injuries in an auto accident with Burgard. Bishop was an employee of Wal-Mart and covered by the company's ERISA health plan. The plan incurred $8,576.30 in medical expenses for Bishop. Bishop sued Burgard and eventually accepted Burgard's settlement offer of $21,500. Bishop's attorney filed a petition for adjudication of lien in state court acknowledging that the plan claimed a lien in the amount of $8,576.30 but stating that the plan refused to reduce the lien by one-third to reflect attorney's fees owed pursuant to the Illinois common fund doctrine.

The plan moved to dismiss on the ground that ERISA preempted the state court lien adjudication petition, which was denied by the circuit court. Bishop and her attorney and the plan then cross-moved for summary judgment, with the plan attaching pertinent versions of the benefit plan containing reimbursement provisions requiring the beneficiary to bear all of her own attorney's fees.

The circuit court granted summary judgment to Bishop and her attorney, reducing the plan's lien by one-third pursuant to the common fund doctrine. The Illinois Appellate Court agreed with the circuit court to the effect that the lien adjudication petition was not preempted by ERISA, but the appellate court held that the circuit court erred in applying the common fund doctrine rather than the terms of the plan, which did not allow for a reduction for Bishop's attorney's fees. (23)

on appeal to the Illinois Supreme Court, the court held that the common fund doctrine is not preempted by ERISA and that the terms of the plan did not prevent its application. As to preemption, the court held that a claim for attorney fees based upon the common fund doctrine is not defeated by either the doctrine of conflict preemption or the doctrine of complete preemption in that the common fund doctrine is a law of general application that does not relate to or conflict with the ERISA plan (24) and because the doctrine of complete preemption, under ERISA section 502(a)(3), would only apply to claims by participants, beneficiaries, or fiduciaries. (25) A claim for fees pursuant to the common fund doctrine is an independent claim that belongs to the attorney, and the attorney is not a participant, beneficiary, or fiduciary of the plan.

For the same reason, the attorney is not bound by a provision in the plan that purports to shield the plan from having to pay a portion of the beneficiary's attorney's fees. (26) Accordingly, the Wal-Mart plan's reimbursement recovery was reduced by a share of Bishop's attorney's fees.

In Primax Recoveries, Inc v Sevilla, (27) the seventh circuit agreed with the Illinois Supreme Court in Bishop that the claim for common fund attorney's fees neither arises under nor is preempted by ERISA and that the claim belongs to the beneficiary's attorney. Because the attorney is not a party to the ERISA plan, nor a participant, beneficiary, or fiduciary under the ERISA statutory scheme, the attorney's common fund fee claim is not subject to plan language attempting to negate it.

In a subsequent case, however, Wal-Mart Stores, Inc Associates' Health and Welfare Plan v Varco, (28) the plan succeeded in recovering the entire amount it had paid in medical benefits, unreduced by a share of the beneficiary's attorney's fees. How did this happen? It happened because the beneficiary's attorney took his full one-third fee out of other funds in the settlement prior to the resolution of the plan's reimbursement claim. Thus, the settlement funds in the beneficiary's possession were not encumbered by any common fund fee claim still owned by the beneficiary's attorney. (29)

The lesson here for personal injury plaintiffs and their attorneys is that the attorney has to stay in the game and not take his or her full fee from the settlement until the reimbursement claim of the ERISA plan is resolved. Further, if the ERISA plan will not accept a reduction in its lien pursuant to the common fund doctrine, the personal injury plaintiff and his or her attorney should file a petition to adjudicate the ERISA plan's lien in state court, relying on Bishop.


An ERISA health plan needs to have a clear reimbursement provision in its plan document if it is to succeed in recovering the medical expenses that it has paid as a result of the beneficiary's accident. To enhance the amount of recovery, the plan document should include language disclaiming the make-whole doctrine so that the plan can be reimbursed to the fullest extent, regardless of whether the beneficiary has been fully compensated by the third party.

The plan document should also have a discretionary clause giving the plan administrator discretion to interpret and apply the terms of the plan. (30) The plan should closely follow the beneficiary's suit or claim against the third party in order to be in a position to assert its reimbursement rights before the settlement proceeds are dissipated. As an alternative to reimbursement, or as a fallback if reimbursement fails, some plans might consider adopting plan language to allow the plan to suspend the payment of future medical expenses until it has, in effect, recouped the prior amount paid, up to the amount of the beneficiary's recovery. (31)

The beneficiary and his or her attorney, on the other hand, should demand to see the plan document to assure themselves of the existence of the reimbursement provision and its terms. Don't rely on the summary plan description because the plan document itself is controlling.

The right to examine the plan document is guaranteed by ERISA section 104(b)(2), 29 USC section 1024(b)(2), and a penalty of up to $110 per day is available if the plan fails to provide the plan document within 30 days, pursuant to ERISA section 502(c)(1), 29 USC section 1132(c)(1), and the related Department of Labor regulations.

If the plan document contains a reimbursement provision, the beneficiary and his or her attorney need to determine what funds from the settlement might be "lienable" by the plan under Sereboff and whether there are arguments that the plan's reimbursement would not be "appropriate." Finally, in light of Varco, the beneficiary's attorney should not take his or her full fee out of the settlement until the plan's reimbursement claim is resolved.

(1.) Schultz v Gotlund, 138 Ill 2d 171, 561 NE2d 652 (1990) (hospital expense policy). See also American Family Ins Group v Cleveland, 356 Ill App 3d 945, 827 NE2d 490 (4th D 2005) (medical payments provision in automobile liability policy contained subrogation clause, without which reimbursement would not have been permitted).

(2.) 29 USC [section]1102(a)(1) ("Every employee benefit plan shall be established and maintained pursuant to a written instrument."); 29 USC [section]1102(b)(4) (every employee benefit plan shall "specify the basis on which payments are made to and from the plan."); Saret v Triform Corp, 662 F Supp 312, 316 (ND Ill 1986) ("The writing requirement is a central feature of ERISA, not a mere technicality. It secures to the plan's participants and administrators a clear understanding of their rights and obligations.").

(3.) 534 US 204 (2002).

(4.) 508 US 248 (1993).

(5.) Knudson, 534 US at 210, quoting Mertens, 508 US at 256.

(6.) Knudson, 534 US at 212.

(7.) Id at 213 (citations omitted).

(8.) Id at 214.

(9.) Mid Atlantic Medical Services, LLC v Sereboff, 407 F3d 212, 218-19 (4th Cir 2005); Wal-Mart Associates' Health & Welfare Plan v Willard, 393 F3d 1119, 1124-25 (10th Cir 2004); Bombardier Aerospace Employee Welfare Benefits Plan v Ferrer, Poirot & Wansbrough, 354 F3d 348, 356 (5th Cir 2003); Wal-Mart Stores, Inc Associates' Health & Welfare Plan v Varco, 338 F3d 680 (7th Cir 2003); Great-West Life & Annuity Ins Co v Brown, 192 F Supp 2d 1376, 1380-81 (MD ga 2002).

(10.) Providence Health Plan v McDowell, 385 F3d 1168, 1174 (9th Cir 2004); Qualchoice, Inc v Rowland, 367 F3d 638, 648-50 (6th Cir 2004); Westaff (USA) Inc v Arce, 298 F3d 1164 (9th Cir 2002).

(11.) 126 S Ct 1869 (2006).

(12.) Id at 1874.

(13.) 232 US 117 (1914).

(14.) Sereboff, 126 S Ct at 1875.

(15.) Id.

(16.) Id at 1876, relying on Knudson, 534 US at 214.

(17.) Id at 1877, FN2.

(18.) Concerning the make-whole doctrine and ERISA, see Cutting v Jerome Foods, Inc, 993 F2d 1293 (7th Cir 1993) (holding that the make-whole doctrine can be disclaimed by plan language and that the plan administrator with discretionary authority could interpret the language at issue so as to disclaim the doctrine). But see Hartenbower v Electrical Specialties Co Health Benefit Plan, 977 F Supp 875, 883 (ND Ill 1997) ("[A]lthough ERISA does not require that an employee welfare plan follow the make-whole doctrine, it should plainly state any intention not to do so."); Providence Health System-Washington v Bush, 461 F Supp 2d 1226 (D Wash 2006) ("While the discretion conferred upon the plan administrator is necessarily broad, it cannot be exercised in such a way as to abrogate important rights of the beneficiary [the make-whole doctrine] without so much as a hint that the parties intended such an outcome."). Id at 1236.

(19.) Colleen E. Medill, Resolving the Judicial Paradox of "Equitable Relief" Under ERISA Section 502(A)(3), 39 J Marshall L rev 827 (Spring 2006); John h. Langbein, What ERISA Means by "Equitable": The Supreme Court's Trail of Error in Russell, Mertens, and Great-West, 103 Columbia L rev 1317 (Oct 2003).

(20.) See McDonald v Household Intl, Inc, 425 F3d 424 (7th Cir 2005), where the plaintiff's employer inexplicably failed to enroll him in the company health plan and activate his coverage, resulting in the plaintiff being unable to fill his prescriptions for blood pressure medication and then suffering a stroke. The court held that "he cannot recover consequential damages in an ERISA action, at least as matters stand at present." Id 429-30 (emphasis added). The plaintiff's only "remedy" was his medical expense coverage once he became enrolled in the plan.

(21.) As reflected by the fourth circuit's opinion in Sereboff, the plan document required that the plan's reimbursement be reduced by a ratable share of the beneficiary's attorney's fees. Sereboff, 407 F3d at 220.

(22.) 198 Ill 2d 495, 764 NE2d 24 (2002).

(23.) Bishop v Burgard, 317 Ill App 3d 923, 741 NE2d 306 (3d D 2000).

(24.) Bishop at 501-502, 764 NE2d at 29-30.

(25.) Id at 503-506, 764 NE2d at 30-32.

(26.) Id at 506, 764 NE2d at 32.

(27.) 324 F3d 544 (7th Cir 2003).

(28.) Varco (cited in note 9).

(29.) Id, 338 F3d at 691.

(30.) See Cutting (cited in note 18).

(31.) See Northcutt v GM Hourly-Rate Employees Pension Plan, 467 F3d 1031 (7th Cir 2006).

James T. Nyeste <> practices in the areas of insurance law and coverage, ERISA claims, plaintiff's personal injury, and civil litigation generally. He is a past member of the ISBA Insurance Law Section Council.
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Author:Nyeste, James T.
Publication:Illinois Bar Journal
Date:May 1, 2007
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