In U.S. Airways v. McCutchen, the U.S. Supreme Court upheld the ability of U.S. Airways’ health plan to recover medical expenses that it previously paid to the injured party from a third party settlement, but remanded the case for application of the common fund doctrine with respect to attorney's fees. In so holding the Court upheld the express language of the plan, but utilized equitable principles to fill the “contractual gap” when the plan was silent as to the payment of attorney's fees. For plans seeking subrogation or reimbursement of medical expenses, the case offers the following drafting lessons to ensure that there is no “contractual gap” in a plan's language:
- The Court noted that ERISA enforces plan language and not the language of a Summary Plan Description (“SPD”). Often subrogation or reimbursement language is only found in the SPD. While the Court noted that neither party raised the issue, the Court’s comments emphasize the importance of plan documents including the subrogation and reimbursement provisions, or incorporating them by reference from the SPD, to ensure enforcement.
- Under the laws of many states, an insurer cannot seek reimbursement or subrogation until the injured party has been “made whole” for his or her injuries. Since ERISA preempts state law if the plan is self-insured, McCutchen tried to raise the “make whole” doctrine as an equitable defense under ERISA. The Court held that the express plan language ruled out the defense, even though the result was that McCutchen received nothing. Sponsors of self-insured plans should make sure that plan language refers to rights of subrogation and reimbursement and specifically states that the plan is entitled to recover on a “first dollar basis regardless of whether the claimant has been made whole for his or her injuries.”
- The Court held that specific contractual language will be enforced, but equitable principles may be utilized to fill a “contractual gap.” McCutchen was remanded for application of the common fund doctrine with respect to attorney's fees (that is, whether the plan should pay part of the attorney's fees that resulted in the recovery on its behalf). Therefore, draft specific language to avoid a “contractual gap” and possible remand. For example, the plan may wish to provide that the plan’s right to reimbursement or subrogation are net of reasonable costs and attorney's fees, such costs and fees not to exceed thirty percent of the gross amount sought by the plan. While the plan could in theory contractually refuse to pay any costs or attorney's fees, such an approach may be shortsighted. It would discourage participants from bringing third party suits, leaving the plan without any recovery unless it brought suit itself under its subrogation rights.
- Plan language should be drafted to avoid the “contractual gap” with respect to the dollar amount of the plan’s claim for reimbursement or subrogation. For example, the plan’s contractual claim should include not only the medical expenses paid by the plan, but the costs and expenses, including attorney's fees, incurred by the plan with respect to any claim for reimbursement or subrogation.
- Plan language should also be examined to avoid the “contractual gap” with respect to the source and right of repayment of the reimbursed or subrogated claim. For example, the plan’s right of recovery should extend to any amount paid with respect to, associated with, or stemming from the injuries incurred whether paid directly or indirectly to the injured party, his spouse, dependents, beneficiaries or estate, or whether held in trust or constructive trust for the benefit of the injured party, his spouse, dependents, beneficiaries or estate. The plan should further provide that amounts shall be recoverable regardless of whether the funds have been commingled with other assets and the plan may recover from any available funds, without the need to trace the source of the funds. The plan should also provide that in the event the injured party, his spouse, dependents, attorney, beneficiary, estate or other third party distribute funds without regard to the plan’s rights of subrogation or reimbursement, such individual or individuals will be personally liable to the plan for the amounts so distributed.
McCutchen indicated that a court will enforce a plan’s contractual language. Make sure your plan’s contractual language is broad and contains no “contractual gaps” to avoid having a court define the missing terms.