Supreme Court Provides Further Guidance on Reimbursement Rights of ERISA Plans

In Sereboff v. Mid Atlantic Medical Services, Inc., the Supreme Court resolved a split in the circuits and held that the reimbursement provisions commonly found in medical plans are enforceable under ERISA in the right circumstances. In the course of answering that question, however, the Court raised other questions that will need to be resolved in future cases. In the meantime, employers may want to consider whether revisions of their medical plans would be advisable to put them in the best position to win such cases.

The facts in Sereboff are typical of ERISA plan reimbursement cases. The Sereboffs were covered under a medical plan provided by Ms. Sereboff's employer. When they were injured in a car accident, the plan paid approximately $75,000 in medical expenses on their behalf. The Sereboffs sued the driver of the other vehicle and settled that case for $750,000. The plan sought to recoup from that settlement the $75,000 that it had paid for medical expenses, pursuant to a plan provision that required a participant to reimburse the plan if the participant recovered money from a third party as a result of an incident for which the plan provided medical treatment. The Sereboffs refused to pay, noting that in Great-West Life & Annuity Insurance Co. v. Knudson, the Supreme Court had refused to enforce a similar reimbursement provision.

Knudson arose on slightly different facts, however. In Knudson, the settlement funds were being held in a "special needs trust" that was not a party to the plan's lawsuit seeking reimbursement. The plan in Knudson was attempting to obtain reimbursement from the participant, even though the participant did not have the settlement funds. The Supreme Court held that the plan's reimbursement claim was barred, because the section of ERISA under which such suits are brought only authorizes "appropriate equitable relief," and the plan was seeking legal relief (money damages from the participant) rather than equitable relief (a share of the settlement funds).

The Sereboff decision easily distinguished Knudson, noting that the "impediment to characterizing the relief in Knudson as equitable is not present here." Because the Sereboffs did have possession of the settlement funds (they were holding those funds in an investment account pending resolution of the plan's reimbursement claim), the Court held that the plan's lawsuit sought equitable relief and could be brought under ERISA.

The Sereboffs went on to argue that if the relief sought by the plan was equitable, then the plan should also be bound by the equitable "make-whole" doctrine. That is a doctrine developed in the insurance law context which holds that an insurance company is not entitled to a share of the settlement proceeds until the insured has been "made whole" for all of his or her losses. The Court held that the subrogation cases were "beside the point" because the plan's reimbursement claim was really based on the theory of "equitable lien based on an agreement," rather than subrogation. In response to the Sereboffs' argument that the make-whole doctrine should still apply – i.e., that ERISA authorizes "appropriate" equitable relief and relief to the plan is not "appropriate" unless the participant has been made whole – the Court refused to consider that argument because it was made for the first time on appeal. Thus, that is a key issue that will need to be resolved in future reimbursement cases.

Furthermore, some plans expressly use the term "subrogation" to describe their right to reimbursement. After Sereboff, it would seem that such a plan could nevertheless argue that its claim was really based on the theory of "equitable lien by agreement," but that is not entirely clear. Similarly, a plan sometimes brings its own lawsuit against the individual or entity that caused the accident, rather than waiting for the participant to obtain a recovery. That is a more traditional subrogation case. After Sereboff, it is not entirely clear whether such a case would be based on a theory of subrogation or equitable lien by agreement, and what defenses might apply.

In short, Sereboff answered one key question but raised a number of other issues. After Sereboff, an employer sponsoring an ERISA plan is well-advised to review the plan's subrogation and reimbursement language and to make any changes that are necessary to put the plan in the best position to enforce its right to recovery.