“A” gets hit by a drunk driver and incurs $121,044 in medical expenses. The ERISA Plan agrees to pay the expenses if “A” contractually agrees to reimburse the Plan for any recovery obtained as the result of any legal action or settlement. “A” then recovers $500,000 in a settlement with the drunk driver. “A” pays his attorneys $260,000 and immediately spends the $240,000 on food and travel. Can the ERISA Plan recover its $121,044 from “A’s” general assets?
The Supreme Court, applying principles of equity, reached an absurdly inequitable result in Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, holding that the Plan can only recover its $121,044 payment from the insured’s $240,000 recovery if it can identify which of the insured’s assets are specifically traceable to the $240,000. If the funds were dissipated on nontraceable assets – food and travel, the Plan has no recovery. As Justice Ginsberg noted, the Supreme Court had the opportunity to simplify this area of law and do the right thing, i.e. pay the Plan as agreed. Instead, the Supreme Court’s decision creates an incentive for secret settlements and quick squandering of assets. This advisory provides recommended steps for ERISA Plans to take to maximize their ability to effectively protect their reimbursement rights.
Implications of Decisions
After Montanile, Plan fiduciaries must closely monitor subrogation claims and one thing is certain – the Supreme Court’s opinion will complicate Plan drafting and reimbursement agreements and will lead to increased litigation with an incentive for secret settlements. An additional problem for ERISA plans is the recovery of plan overpayments. Montanile suggests that such overpayments cannot be recovered from the participant’s general assets, which, if true, will make the recovery of plan overpayments extremely difficult and even more expensive.
Steps to Take Now
Plans should re-examine their subrogation and reimbursement language to ensure that the Plan has the right to first dollar reimbursement from any third-party recovery or settlement, and the Plan language also deals with attorney fees and costs associated with such a claim. The Plan should require that the participant notify it within 30 days of any claim that may give raise to a claim for subrogation or reimbursement. The Plan should require that the participant execute a reimbursement agreement that requires 21 days advance notice to the Plan before there is a disbursement of proceeds. Also, one approach to avoid the asset tracing requirement of Montanile would be to modify the Plan and the reimbursement agreement to require that the participant contractually personally guarantees the reimbursement from the participant’s general assets.
Plaintiffs may attempt to argue that such an agreement is unenforceable or a prohibited transaction, but the Plan will argue that it is merely enforcing a contractual guarantee that does not implicate ERISA. The Supreme Court, in Lockheed v. Spink, 517 U.S. 882, previously approved the payment of early retirement benefits conditioned on an employment release, so there is authority for adding additional conditions before a distribution is made. Finally, the Plan should work closely with its claims administrator to ensure that: (i) subrogation claims are identified; (ii) reimbursement agreements have been executed; (iii) notice of the claim has been given to all parties; and (iv) liens have been filed or the Plan has joined the lawsuit.