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Ninth Circuit Limits Recovery By Benefit Plans

July 9, 2012

By Randi J. Ensley & Thomas I. Kramer


Employee benefit plans subject to the federal Employee Retirement Income Security Act may, from time to time, seek to recover funds from participants. For example, a health or disability plan (especially one that is self-insured) might provide that it is entitled to recover all benefits it has paid for a particular injury out of any funds the participant recovers for that injury from some other source (like from automobile insurance covering either the participant himself or herself or some other driver), and might even provide that the plan need not pay any of the fees or costs the participant incurred to obtain a recovery from the other source.

On June 20 and 22, 2012, the U.S. Court of Appeals for the Ninth Circuit (which covers Oregon, Washington and seven other western states), in two unrelated cases (Bilyeu and Rose), restricted plans’ rights to recover funds from participants. These decisions inject uncertainty and increased costs into the possible recovery available to benefit plans. The two cases separately held that:
  • No recovery is permitted if the funds the plan seeks to recover are not an identifiable fund, but rather are just part of the participant’s or beneficiary’s general assets; and
  • Express terms of an ERISA plan, such as terms described above, which provide for recovery without cost to the plan, may be overridden by the ERISA provision limiting plans’ right of recovery to “appropriate equitable relief.”

The Underlying Facts – Bilyeu Case
Leah Bilyeu was covered by her employer’s insured long-term disability plan subject to ERISA. When she became disabled, she signed an agreement with the insurer, Unum, under which Unum agreed not to reduce her benefits for amounts she might receive from other sources and Ms. Bilyeu agreed to reimburse Unum if she did receive such other benefits. Unum cut off Ms. Bilyeu’s benefits after 24 months, claiming, over her objection, that hers was a mental disability subject to the plan’s 24-month limit on benefits for such a disability. When Unum and Ms. Bilyeu were unable to resolve their differences, Ms. Bilyeu sued for benefits and Unum claimed reimbursement for amounts equal to the Social Security disability benefits Ms. Bilyeu received.

The Holding – Bilyeu Case
The Ninth Circuit rejected Unum’s claim for reimbursement, despite Ms. Bilyeu’s written agreement to repay, and despite contrary decisions by the First, Third, Sixth, Seventh and Eighth Circuit Courts of Appeal. The Ninth Circuit held that ERISA permits recovery by a plan only if there is an identifiable fund of money from which to take the recovery. That holding left Unum with nothing to recover, for these reasons.
  • Ms. Bilyeu had already, without fraud, spent the benefits she had received from Unum, so she no longer had an identifiable fund of money.
  • The Social Security disability benefits, which equaled the amount of Unum’s claimed recovery, are not assignable, so that could not be considered the identifiable fund of money.
  • Any state-law claim by Unum based on the contract Ms. Bilyeu signed would probably be preempted by ERISA.

The Underlying Facts – Rose Case
Rhonda Rose was employed by CGI and covered by its ERISA-governed self-insured medical plan. The plan included a subrogation and reimbursement clause that expressly gave the plan the right to full reimbursement for medical expenses paid on behalf of a participant or beneficiary from any funds recovered for the participant or beneficiary from a third party, regardless of whether the participant or beneficiary was made whole by the recovery.

In 2003, Ms. Rose was seriously injured in a car accident. The parties stipulated that her personal injury claim was at least $1.75 million, but Ms. Rose recovered only a combined total of roughly $375,000 from the third-party tortfeasor and her underinsured motorist coverage, meaning roughly 21% of Ms. Rose’s total damages.

Between 2007 and 2010, the plan paid approximately $32,000 in medical expenses incurred as a result of Ms. Rose’s injuries related to the accident. The plan claimed that it was entitled to recover all of the $32,000 it had paid in benefits, with no reduction for any part of the attorneys’ fees and costs Ms. Rose incurred in getting the $375,000 recovery. Ms. Rose claimed that, despite the clear plan provisions authorizing recovery without reduction, the plan should be permitted to recover as “appropriate equitable relief” only roughly 21% of the benefits paid (since she recovered only roughly 21% of her losses), and should pay its share of the cost of that recovery.

The Holding – Rose Case
The Ninth Circuit agreed with Ms. Rose. Rejecting the clear plan language, the court held that it was necessary to consider that Ms. Rose was not “made whole” by her recovery to determine what recovery by the plan would constitute “appropriate equitable relief.” This holding is consistent with that reached by the Third Circuit in US Airways v. McCutchen, but contrary to the conclusion reached by four other Circuit Courts. On June 25, 2012, the Supreme Court agreed to review the Third Circuit’s decision in the McCutchen case. If the Court reverses the Third Circuit’s decision, the Ninth Circuit’s holding in the Rose case may be short-lived.

Conclusions and Recommendations
In light of these two decisions, sponsors and fiduciaries of employee benefit plans (especially health or disability plans that are self-insured) may want to take the following steps.
  • Review their plan provisions regarding subrogation and reimbursement.
  • Withhold benefits or create a fund from which reimbursement may be taken.
  • When negotiating reimbursement, remember that a court might deny reimbursement because there is no fund from which to take the reimbursement, or limit reimbursement to its notion of “appropriate equitable relief.”
  • Watch for further developments regarding the split in the Circuits over the no-existing-fund holding in Bilyeu and the Supreme Court’s review of the “appropriate equitable relief” holding in McCutchen, on which Rose relied.

Bullard Law will continue to track and report on developments relating to this issue. Please contact us with questions about these matters or any other labor, employment and benefits issues.