Reimbursement Clauses in Insurance Contracts are Challenged

On November 27, 2012, the Supreme Court of the United States heard oral argument in the matter of U.S. Airways, Inc. v. McCutchen. The question is simple — can an insurer require an ERISA beneficiary to reimburse it for health coverage payments made if the individual recovers money from the responsible party? In the usual circumstance, the individual is “made whole” by a recovery from the tortfeasor for his injuries and has enough to pay back the health insurer for the medical payments. But that does not always occur. If the injured person does not fully recover for his damages, must he still turn over money to the insurer who is contractually liable to pay for other benefits, such as medical coverage or disability benefits?

McCutchen was catastrophically injured in a car accident, but paid only a small sum from the case since the tortfeasor carried meager insurance. Despite the small settlement which did not fully compensate him for his damages, U.S. Airways claimed reimbursement out of the settlement proceeds for the full amount that it had paid on McCutchen’s behalf. It relied on the plan’s subrogation reimbursement provision which required reimbursement for any amounts recovered from a third-party tortfeasor. U.S. Airways also refused to pay its share of attorney fees associated with obtaining the resolution of the underlying case. See the Third Circuit’s Opinion at 663 F. 3d 671 (3d. Cir. 2011).

The Third Circuit overturned the District Court’s ruling based on equitable principles. Even though the plan gave U.S.Airways the contractual right to collect every dollar it had spent regardless of whether McCutchen or his attorney received a dime, the Court held that “appropriate equitable relief” under Section 502(a)(3) necessarily meant that any equitable remedy of reimbursement available to the insurer “must, absent other indication, be deemed to contain the limitations upon its availability that equity typically imposes.” The Third Circuit found that it would be unjust to require McCutchen to reimburse the full cost of his medical bills because it would leave him without full compensation for his medical expenses and would provide a windfall to the Plan.

On certiorari, McCutchen argues that by allowing insurers only “appropriate equitable relief” under Section, 502(a)(3), ERISA is intended to prohibit enforcement of plan terms that offend principles of fairness and equity. State law historically limits reimbursement rights. See Perreira v. Rediger, 169 N.J. 399 (N.J. 2001). In Perreira, amicus briefs were filed with the New Jersey Supreme Court by Health Plans arguing that the Court is not free to substitute its own views of what is fair for the words of the plan and further, that the plans incorporated reasonable expectations of reimbursement claims into its pricing of plan rates and premiums.

We at Bonny G. Rafel are experienced in protecting our client’s disability benefits from third-party lienholders. If you are concerned about the effect of a third party settlement or award on your benefit amount, we are able to provide consultation to help protect your rights.

-By Sara E. Kaplan, Esq. and Bonny G. Rafel, Esq.