United States: Sereboff v. Mid-Atlantic Medical Services: Welfare Plans May Maintain Some Reimbursement Claims Against Participants and Beneficiaries Under ERISA

A health plan may enforce a reimbursement provision against a participant who receives benefits and later recovers from a third party in tort, the U.S. Supreme Court recently ruled in Sereboff v. Mid Atlantic Medical Services, Inc., 126 S.Ct. 1869 (May 15, 2006). The unanimous decision illuminates a previously unclear area of employee benefits law, and provides welfare plan sponsors and fiduciaries with reassurance that reimbursement clauses can be enforced, if the right circumstances exist and the clause is properly drafted.

Medical plans and other welfare benefit plans frequently provide health care for participants and beneficiaries who are injured by third-party tortfeasors. When the participants or beneficiaries recover against the third parties in tort actions, plan fiduciaries sometimes assert claims to a portion of those recoveries. To allow such recoveries, welfare benefit plans have:

• provided that such recoveries are owed to the plan, up to the amount the plan expended (reimbursement provisions); and/or

• afforded the plan the right to succeed to the participant’s or beneficiary’s claims against the tortfeasor (subrogation provisions).

Prior to 2002, employee benefits lawyers treated reimbursement and subrogation provisions as enforceable under section 502(a)(3) of the Employee Retirement Income Security Act of 1974, as amended (ERISA), 29 U.S.C. §1132(a)(3), which allows a plan fiduciary to obtain "appropriate equitable relief" to enforce the terms of a plan. In Great West Life & Annuity Insurance Co. v. Knudson, 534 U.S. 204 (2002), however, the Supreme Court indicated that ERISA fiduciaries could not sue plan participants and beneficiaries for monetary relief under §502(a)(3).

In Great-West, the plan beneficiary was rendered a quadriplegic in an accident. She recovered a $650,000 settlement from the tortfeasor, $256,745.30 of which was allocated to a Special Needs Trust to provide her with medical care. Most of the remaining recovery was disbursed to pay attorneys’ fees and costs. Using the medical plan’s reimbursement provision, Great-West, as the plan’s assignee, sought payment of $411,157.11 of any proceeds that the beneficiary had recovered from the tortfeasor. The Supreme Court ruled that Great-West could not recover under section 502(a)(3), because Great-West’s claim was not for "equitable relief." Rather, Great-West’s claim would "impose personal liability ... for a contractual obligation to pay money – relief that was not typically available in equity." Id. at 210. A claim for money due and owing under a contractual provision, the Court observed, was "quintessentially an action at law." Id. (citation omitted).

Nor could Great-West recover under a theory of "restitution." The Court explained that "not all relief falling under the rubric of restitution is available in equity." Id. at 212. Equitable restitution, as opposed to restitution at law, could be sought "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 funds or property in the defendant’s possession." Id. at 213. The funds paid to the Special Needs Trust and the beneficiary’s attorney could not be the subject of an equitable lien because they were no longer in the beneficiary’s possession. Id. at 214.

After Great-West, many welfare plan sponsors revised their reimbursement and subrogation clauses to incorporate the lessons of that case. Left unanswered, however, was whether the federal courts would ever uphold a plan’s claim for reimbursement, restitution or subrogation as seeking "equitable relief" under ERISA §502(a)(3). The Circuit Courts of Appeals divided over what sorts of plan claims against participants and beneficiaries – if any – qualified as claims for "equitable relief."

The federal appellate courts’ confusion over the reach of ERISA section 502(a)(3) continued during the next four years, until the issue reached the Supreme Court again in Sereboff. Mr. and Mrs. Sereboff were participants in a health insurance plan administered by Mid Atlantic Medical Services, Inc. when they were injured in a car accident. The plan paid the Sereboffs’ medical expenses, totaling $74,869.37. The plan contained a reimbursement clause: When a participant or beneficiary was "sick or injured as a result of the act or omission of" a third party, and the participant or beneficiary "receive[d] benefits" under the plan, the plan required the participant or beneficiary to "reimburse" Mid Atlantic for those benefits from "[a]ll recoveries from a third party (whether by lawsuit, settlement, or otherwise)."

The Sereboffs sued several third parties for their injuries resulting from the car accident. Shortly afterward, Mid Atlantic sent the Sereboffs’ attorney a letter asserting a lien on the anticipated proceeds for medical expenses the plan had paid. After the Sereboffs recovered a settlement of $750,000, Mid Atlantic sued them under ERISA section 502(a)(3). Mid Atlantic sought a temporary restraining order and preliminary injunction requiring the Sereboffs to retain and set aside $74,869.37 to cover its claims. The district court ultimately approved a stipulation under which the Sereboffs agreed to "preserve" a portion of the settlement funds in an investment account pending a final decision on the merits of Mid Atlantic’s claim.

In contrast to its decision four years earlier in Great-West, the Supreme Court held that Mid Atlantic could maintain a claim for equitable relief against the Sereboffs:

First, the funds sought by Mid Atlantic were in the Sereboffs’ possession. In contrast, the funds in Great-West had already been disbursed. See Sereboff, 126 S.Ct. at 1874.

Second, Mid Atlantic’s suit sought recovery "through a constructive trust or equitable lien on a specifically identified fund" that had been segregated by the parties’ stipulation. Mid Atlantic was not seeking to recover "from the Sereboffs’ assets generally, as would be the case with a contract action at law." Id.

Sereboff furnishes useful lessons for welfare plan sponsors and fiduciaries who wish to recoup monies expended by the plan. These include the following:

• If appropriately crafted, a reimbursement provision in a welfare plan is enforceable.

• Welfare plans’ reimbursement provisions should provide for an equitable lien over any sums recovered from third parties on account of a participant’s or beneficiary’s injury, up to the amount expended by the plan. When participants or beneficiaries seek a tort recovery, the plan’s counsel should notify them that this lien will be asserted and enforced.

• Welfare plans should provide that the plan is entitled to a constructive trust on funds recovered from tortfeasors by the participant or beneficiary.

• Litigators who represent welfare plan fiduciaries asserting reimbursement or subrogation claims should seek a court order segregating the disputed assets before they are dissipated.

Plan sponsors should examine their reimbursement and subrogation provisions in light of Sereboff to ensure that they are taking appropriate advantage of the opportunities presented by the Supreme Court’s decision.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.