Insured Health Plan Cannot Recover Benefits Paid When Mich. Law Bars No-fault Recovery

Posted on by Adam Russo, J.D., Russo and Minchoff

Virtually all employer-sponsored health plans in effect today provide that the benefits they pay are subject to reimbursement from both fault and no-fault auto liability insurance proceeds. Indeed, in just about every reported case we have seen, federal courts have ruled in favor of self-funded ERISA health plans allowing recovery of the benefits they paid by from no-fault auto liability policies. A very interesting decision by a U.S. District Court in Michigan tells us that the result is not the same if the employer’s ERISA health plan is insured. The case is Horrell v. CEC Entertainment, Inc., 2011 WL 4954031 (W.D. Mich., Oct. 19, 2011). The Facts

On Dec. 31, 2006, John Horrell and his young daughter Olivia, were at a Chuck E. Cheese restaurant operated by CEC Entertainment, Inc. (hereafter CEC). The restaurant’s exit door was ajar, allowing Olivia to leave the restaurant by herself and walk by herself along a busy road where an automobile struck her, causing very serious permanent injuries. She was covered by her father’s employer’s group health plan, which was underwritten by Priority Health (a Michigan insurer). As of the date of the court’s decision, her health care cost more than $379,000.

On Sept. 14, 2009, her father sued CEC in a Michigan court, alleging negligence because the exit door was ajar and there was no warning of the danger that posed to minor patrons. The complaint did not seek recovery for any of Olivia’s medical expenses, which had been paid for or provided by Priority Health through its HMO, but it did seek damages of $7 million for other losses arising from the accident. On Oct. 15, 2009, CEC removed the case to the federal district court. On July 21, 2011, the court allowed Priority Health to intervene in the lawsuit to assert its equitable claim for reimbursement or subrogation for the benefits it paid or provided under the terms of its policy. Following informal court proceedings, all parties to the lawsuit agreed that the court had sufficient information to allow it to decide a motion for summary judgment. 

The Decision

Two insurance policies covered Olivia’s medical expenses: the Priority Health policy and the no-fault auto insurance policy of the driver of the vehicle that struck her. The Horrells and CEC argued that when Priority Health paid or provided health insurance benefits arising from an auto accident that was also covered by the no-fault auto insurance company, Priority Health was bound by provisions of Michigan’s No-Fault Insurance Act (Mich. Comp. Laws Sections 500.3101 through 3179). The court interpreted Section 3116 of that Act to prohibit a no-fault insurer from seeking reimbursement of medical expenses from the proceeds of a personal injury lawsuit against a non-motorist tortfeasor. 

The court pointed out that several opinions by the Michigan Court of Appeals have interpreted that provision to mean that an injured person’s health insurance is deemed primary when the no-fault insurer charges a reduced premium for its coverage. The purpose of the No-Fault Insurance Act was to reduce or contain the cost of no-fault insurance by allowing no-fault insurers to charge a lower premium for policies that are, by their terms, secondary to health insurance. 

The Priority Health plan included a well-drafted subrogation and reimbursement provision stating that it had a right to assert a lien for reimbursement against underinsured or uninsured motorist coverage (among other coverages), and that its rights would apply in a case such as this one. 

After reviewing several of those decisions relating to the No-Fault Insurance Act, the district court concluded that the Act bars a health plan’s recovery of the benefits it paid or provided unless it ERISA preempts it. Thus, when a person is injured in an automobile accident and is entitled to personal protection benefits under a no-fault policy, he or she is protected from reimbursement claims from insurers that are directed by state law to provide coverage in lieu of no-fault benefits. The court noted that the case law clearly provides that when another insurer (in this case, Priority Health) “stands in the shoes” of a no-fault insurer, Section 3116 of the No-Fault Insurance Act restricts that insurer’s rights of reimbursement. 

However, the district court noted that the Michigan Court of Appeals wrote all of the decisions applicable, and the Michigan Supreme Court had not issued any opinions related to this particular issue. When federal district courts attempt to interpret state law, published opinions of intermediate courts of appeal might not be controlling, but those courts cannot disregard those opinions if they are convinced by “other persuasive data that the highest court of the state would decide otherwise.” The district court concluded that there was no persuasive evidence that the Michigan Supreme Court would reject those holdings of the Michigan Court of Appeals. 

Accordingly, the court held that Priority Health stands in the shoes of a no-fault insurer and is therefore subject to the strictures of Section 3116, and thus has no enforceable claim under the provision of its policy for subrogation or reimbursement because the claim is barred by Michigan law. It therefore granted summary judgment against Priority Health. 

Implications

It is important to remember that the overwhelming majority of reported cases involving subrogation and reimbursement involve self-funded ERISA health plans. Those cases have firmly established that ERISA preempts state laws applicable to those health plans. However, state laws govern insured (not self-funded) health plans, so when an employer-sponsored plan that is subject to ERISA is insured, ERISA preemption simply does not apply. 

Thus, when a state such as Michigan provides that auto liability insurance will be secondary to other health insurance, provisions in an insured health insurance policy to the contrary will not be enforceable. But if the health plan is self-funded, ERISA preempts the application of a law similar to the Michigan No-Fault Act.

Failure to Sign Subrogation Agreement Allows Plan to Deny Health Benefits

Posted on by Adam Russo, J.D., Russo and Minchoff

Just about every self-funded ERISA health plan provides that it is entitled to subrogation and reimbursement of the benefits paid by the plan from tort settlement or judgment proceeds. In addition, just about every such plan requires the plan participant to sign a subrogation and/or reimbursement agreement. Attorneys who represent plan participants seeking to recover damages from third parties are learning that if a tort settlement/judgment does not exceed plan benefits paid, they are at risk of not being paid fees for their work. These attorneys realize that the best way to ensure that they will receive their fees, while representing the best interests of their clients, is to work out some settlement whereby their clients and the plans share the settlement or judgment proceeds, while they receive their fees and costs. Often, such negotiations do not work out, so what can happen when they don’t? A recent decision by a U.S. District Court in Florida indicates that both the plan participant and the attorney can end up with nothing. The case is Schwade v. Total Plastics, Inc., 2011 WL 5459649 (M.D. Fla., Nov. 10, 2011).

The Facts

Kristy Schwade, an employee of Total Plastics, Inc., was covered by its self-funded ERISA health plan. In May 2007, Schwade noticed that something was profoundly wrong with her 5-month old son. It turned out that he was the victim of shaken baby syndrome, and as a result, suffered profound brain damage. His daycare provider pleaded guilty to aggravated child abuse. From that time on, her child was hospitalized for more than two months and required continuous medical attention until he died at the age of four. 

Total Plastics’ summary plan description (SPD) included a subrogation provision entitling the plan to recover whatever a plan participant is entitled to receive as benefits up to the full extent of benefits paid or provided by the plan. It also required the plan participant to “execute documents (including a lien agreement and papers and do whatever else is necessary to protect the Plan’s [subrogation] rights.” It also stated that if a plan participant refuses to sign a supplemental subrogation agreement after submitting a claim, “the Plan has no obligation to make any payment for any treatment required as a result of the act or omission of [the plan participant].” It also included a three-year limitation on any lawsuit brought against it. Schwade did not sign any such agreement. 

The plan paid benefits for her child’s medical condition for about two months (in an amount stated in the opinion to be between $26,000 and $35,000). The plan followed up with a request that she sign the required agreement and complete a questionnaire. In doing so, it included a warning (in solid capital letters) that her failure or refusal to executive the document would relieve the plan of any and all legal, financial or contractual obligation for any expenses incurred by her. When she did not respond, the plan administrator stopped paying benefits and kept contacting her for updated information. Schwade quit her job in August 2007. 

In June 2008, her attorney asked the plan administrator for information about her claim, and was told that she had to sign the subrogation agreement before the plan “can determine benefits.” The plan’s subrogation agreement again warned about the consequences of her failing to sign it, but nothing further happened. In November 2008, Schwade’s attorney proposed that the plan split any net recovery after payment of costs and attorney’s fees. He warned: “Without the foregoing agreement the Plan and Total Plastics essentially has [sic] no chance of a recovery.” The attorney renewed this “offer” in March 2009 and December 2009, but nothing further occurred between Schwade and the plan. Schwade then sued the daycare provider, the daycare center and others. 

In November 2007, Tampa Hospital, which treated Schwade’s son, sued her for $600,000. Schwade removed the case to federal court along with a third-party complaint against Total Plastics for more than $1.4 million of plan benefits, despite the fact that the plan had a $1 million maximum liability for any individual plan participant. The federal court remanded the hospital’s claim back to the state court, but retained the action against Total Plastics. It then considered a motion for summary judgment. 

The Decision

Regarding the plan’s subrogation agreement, the court recognized that recoupment of plan expenditure is crucial to the financial viability of self-funded ERISA plans. It noted that the 11th U.S. Circuit Court of Appeals held that “having such agreements in hand before paying benefits provides significant protection to [plan] assets.” The court found that Schwade provided no persuasive justification for failing to sign the subrogation agreement. It then found that her argument that the plan would be unjustly enriched if it was not required to pay a pro rata share of the attorney’s fees incurred in obtaining a tort recovery was without merit. Based on previous court decision, the court concluded that: 

Indeed, it would be inequitable to permit the [plaintiffs] to partake of the benefits of the Plan and then, after they had received a substantial settlement, invoke common law principals to establish a legal justification for their refusal to satisfy their end of the bargain. 

The court further noted that by attempting to drive a hard bargain with an ERISA plan for attorney’s fees, Schwade violated the existing bargain and left her son with no benefits. It further concluded that the plan was not seeking a windfall in demanding the right to full reimbursement, because it had to remain financially sound to help other employees pay for medical hardship. It said that the plan’s subrogation right was justified because the plan’s express terms of the plan allowed such action. 

The court also agreed with the plan’s argument that, because Schwade never appealed its refusal to pay benefits, her lawsuit was barred under the plan’s three-year limitation to sue. It noted that a plaintiff cannot bring a lawsuit in a federal court until the administrative remedy in an ERISA plan SPD is exhausted. It also found that two minor defects in the plan’s handling of its denial of benefits were “technical deficiencies in an ERISA claim procedure [that] do not hinder effective administrative review” of her claims. Accordingly, it granted the plan’s motion for summary judgment, and closed the case. 

Implications

Based on current precedents related to ERISA claims, this decision appears to be correct. However, if the reasoning of the 3rd Circuit in US Airways v. McCutchen (discussed on page 3 of this Newsletter) becomes applicable, the issue of the entitlement of a self-funded ERISA plan to full reimbursement without sharing of attorney’s fees might have to be revised. However, it remains to be seen whether the case law will change based on that decision. 

Schwade’s attorney adopted a very aggressive strategy of negotiating with Total Plastics and clearly was unsuccessful. Most self-funded ERISA plans are not inclined to look on such tactics favorably. But, if equitable defenses become available to ERISA plan participants under the approach used in US Airways v. McCutchen, that approach may not be deemed to be aggressive, and may become mainstream. 

The court’s opinion indicates that Florida Medicaid ended up assuming the cost of Schwade’s son’s medical care. Generally, Medicaid’s benefits are far less than what health plans would pay, resulting in much lower payments to his medical providers. And if Schwade had been successful in achieving a tort recovery, there is no doubt that Medicaid would have priority on any reimbursement for the benefits it paid.

Five Year Limitations Period For COBRA Notification Lapse

Posted on by Roy D. Harmon III, J.D., LL. M., Harmon & Major, P.A.

. . . the magistrate judge followed the lead of the Fifth Circuit in Lopez ex rel. Gutierrez v. Premium Auto Acceptance, 389 F.3d 504, 507-510 (5th Cir. 2004) and cases cited therein which analogized such COBRA notice claims to unfair settlement practices claims. Such analogy is necessary, as the COBRA provision does not contain its own statute of limitations provision. DelCostello v. Int’l Brotherhood of Teamsters, 462 U.S. 151, 158, 103 S. Ct. 2281, 76 L. Ed. 2d 476 (1983)(where no express statute of limitations, borrow most closely analogous statute of limitations from state law).

Gilbert v. Norton Healthcare, Inc., 2012 U.S. Dist. LEXIS 17553 (W.D. Ky. Feb. 10, 2012)

The ERISA statutory scheme is many things, but one thing it is not.  It is most definitely not the “‘comprehensive and reticulated statute’” (Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134 (1985)) that the federal judiciary has proclaimed.

For example,  nothing is more basic to a remedial statute than the limitations period that defines its reach.   As with other federal statutes, so with ERISA:

As is often the case in federal civil law, there is no federal statute of limitations expressly applicable to this suit.   In such situations we do not ordinarily assume that Congress intended that there be no time limit on actions at all; rather, our task is to “borrow” the most suitable statute or other rule of timeliness from some other source. We have generally concluded that Congress intended that the courts apply the most closely analogous statute of limitations under state law.

Del Costello v. Int’l Bhd. of Teamsters, 462 U.S. 151 (U.S. 1983)

In Gilbert v. Norton Healthcare, Inc., the district court considered the question of the limitations period for a claim against a plan administrator for failure to comply with the notification provisions of the Consolidated Omnibus Recovery Act (”COBRA”), 29 U.S.C. § 1166.   The magistrate judge, in an opinion approved by the district court, first turned to the  Kentucky Unfair Claims Settlement Practices Act.  That statute did not have a limitations period either.

The statutory default provision provided a 5-year limitations period for any “action upon a liability created by statute, when no other time is fixed by the statute creating liability.”   The Court approved the use of that limitations period.

Note: The period for advancing COBRA notice violations ranges from a parsimonious one year period to five years depending on the federal circuit.