Equitable Rules Cannot Override Clear Terms of ERISA Plan

By Robyn Hagan Cain on April 18, 2013 | Last updated on March 21, 2019

"Principles of fairness" won't come between an employer health insurance plan and its chance to recover damages from a third party.

In a 5-4 decision this week, the Supreme Court ruled that equitable rules cannot override the clear terms of an ERISA plan, Thomson Reuters reports. If a contract gives a health plan administrator the right to full reimbursement from funds recovered from third parties, federal courts cannot use principles of fairness to rewrite the contract terms to reserve the reimbursement for the plan participant.

In 2007, James McCutchen, an employee of U.S. Airways and a participant in the company's self-funded health plan, was severely injured in an automobile accident. The plan paid $66,866 in medical expenses from McCutchen's injuries. McCutchen obtained a $10,000 settlement from the driver at fault, and $100,000 in underinsured motorist coverage from his own auto insurer. McCutchen's attorneys received 40 percent of that amount as a contingency fee, leaving McCutchen with $66,000, (slightly less than the ERISA plan amount).

U.S. Airways later demanded reimbursement of its full payment, arguing that it was entitled to that amount under the terms of the plan.

The ERISA plan stated, "If the Plan pays benefits for any claim you incur as the result of negligence ... of a third party, the Plan will be subrogated to all your rights of recovery. You will be required to reimburse the Plan for amounts paid for claims out of any monies recovered from a third party, including, but not limited to, your own insurance company."

McCutchen raised two fairness arguments against the company's claims. First, he pointed out that the amounts he recovered from the other parties were only a fraction of his total damages. Second, he claimed that, if the company was entitled to reimbursement, it should shoulder its share of the attorneys' fees.

The district court rejected those arguments, and granted summary judgment to US Airways because the plan stated that the company was entitled to recover the full amount it had paid.

The Third Circuit disagreed, holding that ERISA Section 502(a)(3) authorizes courts to use equitable principles to rewrite contractual language and refuse to order participants to reimburse their plan for benefits paid, even where the plan's terms give it an absolute right to full reimbursement. That put the Philadelphia-based appellate court at odds with the Fifth, Seventh, Eighth, Eleventh, and D.C. Circuits.

This week, the Supreme Court vacated and remanded the Third Circuit ruling, holding that the ERISA plan's terms govern in a §502(a)(3) action based on an equitable lien by agreement. Neither general unjust enrichment principles nor specific doctrines reflecting those principles -- such as the double-recovery or common-fund rules that McCutchen invoked -- can override the applicable contract.

The decision wasn't a total loss for McCutchen: Since that the health plan contract did not specify how to divide the responsibility for attorneys' fees in ERISA reimbursement cases, the Court agreed to apply fairness considerations and force US Airways to share McCutchen's legal costs, Thomson Reuters News & Insight explains.

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