Tips for Negotiating ERISA Liens in Personal Injury Cases
ERISA liens are quickly becoming one of the biggest sources of frustration for personal injury attorneys. ERISA is the Employee Retirement Income Security Act of 1974, 29 USC 1001, et seq. which governs most employee health plans. Many ERISA plans assert that they are under no obligation to reduce their lien claims, and purport that they are entitled to their entire reimbursement claim regardless of the circumstances of the case. Needless to say, this does not bode well for clients, who may end up with very little out of their personal injury settlement, particularly if the third party has a limited policy.
How can you tackle these ERISA liens and try to negotiate them down?
Before we begin the discussion on ERISA, remember, as advised in the article How to Approach Liens in Personal Injury Cases, make sure to negotiate lien claims BEFORE you finalize the third party settlement. Reiterate that everyone needs to get on board so that the settlement offer can work, and everyone can get paid something. After the settlement is finalized, you have lost your leverage to gain significant reductions.
Tip #1: Understand the Law Governing ERISA Plans
First, understanding the case law that abounds in this complicated area of law is paramount. This summary is not intended to be exhaustive, as the commentary and case law on this issue is far reaching. The intent is to provide the highlights that are relevant to attempts to negotiate ERISA liens.
Under 29 USC 502(a)(3)(B), a civil action may be brought by a fiduciary to obtain appropriate equitable relief to redress violations of the plan or to enforce any provisions of the subchapter or the terms of the plan. See, 29 USC Section 1132(a)(3).
A. Self-Funded v. Insured Plans and the Savings Clause of 29 USC 1144
Generally, federal law governing ERISA plans preempts state law. However, under 29 USC 1144(b)(2)(A), referred to by many as the "saving clause," an exception exists to the rule of federal preemption. This clause states that "nothing in this title shall be construed to exempt or relieve any person from any law of any State which regulates insurance."
The "deemer" clause, 29 USC 1144 (b)(2)(B), states that an employee benefit plan governed by ERISA shall not be deemed an insurance company, an insurer, or engaged in the business of insurance for purposes of state laws purporting to regulate insurance companies or insurance contracts.
What affect do these clauses have?
FMC v. Holliday (1990) 498 U.S. 52 is the seminal case on this issue. It held that the "deemer clause" exempts self-funded ERISA plans from state laws that regulate insurance within the meaning of the saving clause. State laws that directly regulate insurance are "saved" but do not reach self-funded employee benefit plans because the self-funded plans may not be deemed to be insurance companies, other insurers, or engaged in the business of insurance for purposes of such state laws. Id, at 61. If a plan is insured, a State may regulate it indirectly through regulation of its insurer and its insurer's insurance contracts; if the plan is uninsured, the State may not regulate it. Id, at 64.
The take away from FMC is that if the plan at issue is self-funded, then only the federal law of ERISA will apply. If the plan is an insured plan, it is also subject to state law regulation.
For example, in California, many make the argument that in the case of an insured plan, the "savings clause" allows California Civil Code section 3040 to apply, which limits the amount a lien claimant can recover from a third party settlement.
B. Sereboff Case and the Right of Self-Funded ERISA Plans to Seek Reimbursement Out of Personal Injury Settlements
In Sereboff v. Mid Atlantic Medical Services, Inc., (2006) 547 U.S. 356, the Supreme Court affirmed that a self-funded ERISA plan could enforce reimbursement provisions under federal law and that an action for the same was equitable in nature and could therefore proceed under section 502(a)(3)(B) against the person holding the funds under the theory of constructive trust or equitable lien.
Sereboff discussed the significance that the plan was seeking funds from a specific identifiable source. "It [the plan] sought its recovery through a constructive trust or equitable lien on a specifically identified fund, not from the Sereboffs' assets generally, as would be the case with a contract action at law." Id, at 363.
The court did leave open an important issue: whether relief sought was "appropriate equitable relief" under 502(a)(3) when the language in the plan did not allow for reductions pursuant to the "make whole" doctrine. See, Id, at 369, fn. 2.
Therefore, although self-funded ERISA plans are authorized to recover on their reimbursement claims, it is important to remember that these claims are equitable in nature and therefore equitable defenses should be, and can be asserted.
C. New Case Law on "Appropriate Equitable Relief"
In June 2012, the Ninth Circuit issued its decision in CGI Technologies and Solutions v. Rose (2012) 683 F.3d 1113, which considered the scope of "appropriate equitable relief" under section 502(a)(3). The court held that when seeking "appropriate equitable relief," a lien asserted by a self-funded ERISA plan is subject to traditional equitable principles regardless of plan language that specifically disallowed common fund and make whole reductions.
"Both the make-whole doctrine and the common fund doctrine are rooted in concerns about unjust enrichment, a traditional principle of equitable relief." Id, at 1121 (citing Boeing Co. v. Van Gemert, (1980) 100 S.Ct. 745, (common fund rule); Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1119-20 (9th Cir. 2010) (make-whole rule). The court also relied on Cigna Corp. v. Amara, 131 S.Ct. 1866 (2011), which stated that contract reformation is within the equitable powers of the district court. Id at 1879.
The court then remanded the case to the District Court to determine "appropriate equitable relief" and directed the District Court to apply traditional equitable principles including traditional equitable defenses.
The Third Circuit is also in agreement that claims for "appropriate equitable relief" under section 502(a)(3) are subject to traditional equitable defenses regardless of plan language to the contrary. See, U.S. Airways, Inc. v. McCutchen, 663 F. 3d 671 (3rd Cir. 2011) ("The importance of the written benefit plan is not inviolable, but is subject -- based upon equitable doctrines and principles -- to modification and, indeed, equitable reformation under Section 502(a)(3)." (Id, at 679 citing Cigna Corp v. Amara, supra, 131 S.Ct. at 1879).
On the other hand, there are several circuits that disagree, holding that the express language of the plan governs, and that full reimbursement according to the plan terms that disclaims traditional equitable defenses such as make whole and common fund is appropriate equitable relief under section 502(a)(3). See, e.g., Zurich Am. Ins. Co. v. O'Hara, 604 F.3d 1232, 1238 (11th Cir.2010); Admin. Comm. of Wal-Mart Stores, Inc. Associates' Health & Welfare Plan v. Shank, 500 F.3d 834, 839 (8th Cir.2007); Administrative Committee of Wal-Mart Stores, Inc. Assocs.' Health & Welfare Plan v. Varco, 338 F.3d 680, 691-92 (7th Cir.2003); Bombardier Aerospace Employee Welfare Benefits Plan v. Ferrer, Poirot and Wansbrough, 354 F.3d 348, 361 (5th Cir. 2003); Wal-Mart Stores, Inc. Assn of ocs.' Health and Welfare Plan v. Wells, 213 F.3d 398, 402 (7th Cir.2000).
This issue seems ripe for review by the U.S. Supreme Court, but at the current time, there are at least two circuits that recognize the application of equitable principles despite plan language to the contrary.
Tip #2: Be Sure to Explain to the Client that ERISA Liens Can Be Difficult to Negotiate
Setting expectations for your client is key. Let them know that ERISA liens can be difficult to negotiate, and that success in reducing the lien claims will depend greatly on the plan language, whether the plan is insured or self-funded, and which federal circuit's law is applicable.
Tip #3: Read the Contract
Obtain a copy of the contract language and read it carefully. Be sure that the contract is in fact an ERISA governed plan, as the lien claimant argues. If it is not governed by ERISA, and is instead an HMO or PPO, see the article on Negotiating Health Insurance Liens in Personal Injury Cases, for tips on negotiating those claims.
The contract language will be instructive on several issues: 1) the type of plan -- either self-funded or insurance plan; 2) whether the lien claimant may seek reimbursement only from the third party settlement or from settlement funds obtained pursuant to Uninsured Motorist cases or Underinsured Motorist cases (1st party claims); 3) whether the plan language identifies a specific source for recovery; and 4) whether the plan language waives the make whole or common fund doctrines.
Tip #4: Narrow the Claim
When you read the contract language, determine the parameters of the plan's claim for reimbursement. First, make sure they have a right to the claim that they are making.
Second, know what settlement funds the plan can go after. Most contract language limits recovery to 3rd party cases, and do not have a right to settlement funds from Uninsured Motorist cases or Underinsured Motorist cases (1st party claims). However, note that some plans do include recovery from all sources so be sure to check what the contract entitles them to.
The plan language will specify the source from which it can recover. If it is not a specific source, i.e. the settlement funds, note that under Sereboff, the plan will not be allowed to pursue the claim under ERISA.
Additionally, the contract language will reveal whether the insurer has contracted around certain defenses, such as the "make-whole" or common fund doctrines. These will be discussed in more detail below, but it's important to be aware, at the outset, whether these arguments are going to be available to you.
If the contract does not allow for make whole or common fund, do not despair. All is not lost, but it may be much more difficult to get the claims settled.
Tip #5: Reduce for Unrelated and Unreasonable Charges and Obtain Credit for Co-pays
Review the itemization of charges for any unrelated charges or double billing, and have these charges removed.
Also, review the charges to make sure that the charges are reasonable. This may be difficult, considering that most charges on any medical bills seem exorbitant these days, but once you have reviewed a slew of medical bills, you start to get a feel for pricing for certain services in the geographical area that you practice. When it comes time to negotiate, raise the issue of reasonableness, and if the defendant in your case is raising the issue, advise of that as well.
Importantly, be sure to obtain a credit for co-pays made by your client. These should be subtracted from the total lien claim of the health insurer.
Tip #6: Reduce for Actual Recovery of Medical Bills
If certain medical bills are not part of the settlement offer, obviously, argue that they should not be included in the lien claim.
Additionally, if you have a case where the policy limits are smaller than the value of your case, and the amount of wage loss exceeds or makes up a large portion of the policy limits, or the limits are so small that the amount is less than the value for pain and suffering, make the argument that some, if not all, of the medical bills have not been recovered, and therefore the lien claimant cannot seek reimbursement for the same.
See, Arkansas Dept. of Health and Human Services v. Ahlborn, 126 S. Ct. 1752 (2006), "The statute does not sanction an assignment of rights to payment for anything other than medical expenses -- not lost wages, not pain and suffering. . ." While it is a Medicaid case, the rationale is compelling as an equitable argument. That is, the lien claimant cannot seek reimbursement for moneys obtained for items other than the medical bills it paid for.
Tip #7: Determine What Law Applies and Whether Equitable Defenses Are Available
If the plan is an insured plan, then make the argument that under the "savings clause" state laws regulating insurance are applicable. For example, under California Civ. Code section 3040, the lien claim would be limited for comparative fault and common fund, and common law principles of the make whole doctrine would apply, as described below.
If the plan is self-funded, the federal law of ERISA applies. If the language of the plan does not contain a waiver for common fund or make whole reductions (and any other defenses), then argue that those should apply those doctrines to reduce the claim. See, Barnes v. Indep. Auto. Dealers Ass'n of Cal. Health & Welfare Benefit Plan, 64 F.3d 1389 (9th Cir.1995).
If the language of the plan specifically excludes application of common fund or make whole and you are in the Ninth or Third Circuits (or another circuit that has not ruled on this issue), use CGI Technologies and US Airways, Inc. v. McCutchen to argue that equitable defenses are applicable, even if the plan states otherwise.
If the language of the plan specifically excludes application of common fund or make whole and you are in the Fifth, Seventh, Eighth or Eleventh Circuits, you may be stuck with the language of the plan. Obtaining reductions will be far more difficult. However, you can use your negotiating skills and raise the circumstances of the case prior to settlement, and argue that your client might walk away from the case if the plan is not willing to reduce their claim.
Tip #8: Argue that Equitable Defenses Reduce the Lien Claim
As appropriate (see Tip #7), use the following equitable arguments to reduce the lien claim:
Specific Identifiable Fund
Sereboff emphasized the fact that the plan language focused on recovering from a specific identifiable fund, distinct from the plaintiff's assets and because of that fact, and therefore the action was permissible as equitable relief under ERISA. Should there not be similar language, make the argument that such a claim would not be appropriate under ERISA as it would not be seeking equitable relief.
If the settlement was reduced because the plaintiff was at fault for a percentage of their damages, use this to negotiate the lien down.
Ahlborn, supra, 126 S. Ct. 1752 (2006) is helpful in making this argument. There, the court reduced the lien claim to one-sixth of the amount because the recovery by the plaintiff in that case was only one-sixth of the value of the case due to plaintiff's comparative fault, as evidenced by the stipulation of the parties. Id.
If you have an insured plan, use the applicable statutory scheme to make this argument, For example, in California, Cal. Civil Code section 3040(e) provides for a reduction for the percentage of comparative fault on the part of your client, if certain conditions are met:
"Where a final judgment includes a special finding by a judge, jury, or arbitrator, that the enrollee or insured was partially at fault, the lien subject to subdivision (a) or (b) shall be reduced by the same comparative fault percentage by which the enrollee or insured's recovery was reduced."
If there is no special finding and the lien claimant pushes back on this, you can ask the third party's adjuster or counsel to put in writing that their settlement offer reflects the percentage of fault assigned to your client.
Make Whole Doctrine
"It is a general equitable principle of insurance law that, absent an agreement to the contrary, an insurance company may not enforce a right to subrogation until the insured has been fully compensated for her injuries, that is, has been made whole." Barnes v. Indep. Auto. Dealers Ass'n of Cal. Health & Welfare Benefit Plan, 64 F.3d 1389, 1395 (9th Cir.1995).
Thus, if the third party has a limited policy, and your client is not going to be made whole by the settlement, make the argument to the lien claimant that the settlement does not fully compensate your client for their injuries or damages.
As stated above, there is a greater chance of success in making this argument against a self-funded plan if the plan language is silent on the issue, or if the plan has language excluding make whole and your circuit recognizes application of the doctrine anyway, i.e. the Third and Ninth Circuits under U.S. Airways v. McCutchen and CGI Technologies, respectively. However, it is worth making the argument in other jurisdictions, in an appeal to common sense, as the case may not be worth pursuing for your client if the plan will not agree to any reductions. Just prepare yourself and your client that it may be an uphill battle.
Under the common fund doctrine, "a litigant or a lawyer who recovers a common fund for the benefit of persons other than himself or his client is entitled to a reasonable attorney's fee from the fund as a whole." Boeing Co. v. Van Gemert 100 S.Ct. 745, (1980).
That is, the lien claims must be reduced by the same percentage for attorney fees as the client is being charged, and the lien claimant must reduce for their proportionate share of the costs incurred by your client.
If you have an insured plan, again, use the applicable statutory scheme. In California, this reduction is reflected in California Civ. Code section 3040(f) which states: A lien subject to subdivision (a) or (b) is subject to pro rata reduction, commensurate with the enrollee's or insured's reasonable attorney's fees and costs, in accordance with the common fund doctrine.
Again, your success in making this argument against a self-funded plan is greater if the plan language is silent on the issue, or if the plan has language excluding common fund and your circuit recognizes application of the doctrine anyway, i.e. the Third and Ninth Circuits, under U.S. Airways v. McCutchen and CGI Technologies, respectively. However, it is worth making the argument in other jurisdictions, in an appeal to common sense as the case may not be worth pursuing for your client if the plan will not agree to any reductions. Again, prepare yourself and your client that it may be an uphill battle.
Tip #9: Know When You Are in Over Your Head
This is an extremely complicated area of law, and the consequences for improperly handling an ERISA lien are steep. Your client could end up with little and possibly nothing if the ERISA lien does not have to be reduced and there are not sufficient funds to go around.
There are many practitioners who focus solely in this area of law, and are well versed in the intricacies that it involves. Know when to bring in an attorney specialized in this area, and do so before it is too late.
Tip #10: Common Sense and Courtesy Should Prevail
As with any liens, a little knowledge and a lot of common sense and courtesy go a long way in this area of law. Innovative legal theories and arguments can take you part of the way, but some of my best results in lien negotiations came because I built rapport with the lien claimant, and appealed to their common sense. Generally, people recognize that getting paid something now is much better than risking it all and ending up with nothing.
For further discussion on liens, please see:
1. The FindLaw Guide to Negotiating Liens in Personal Injury Cases
2. Negotiating Tips for Hospital Liens in Personal Injury Cases
3. Negotiating Tips for "Med Pay" Claims for Reimbursement
4. Tips for Negotiating ERISA Liens in Personal Injury Cases
5. 7 Steps to Approaching Lien Claims in Personal Injury Cases
6. How to Deal with Medicare Liens in Personal Injury Cases
7. Negotiating Tips for Health Insurance Liens in Personal Injury Cases
8. What US Airways v. McCutchen Means for Your Personal Injury Cases
9. State Medicaid Liens Limited by US Supreme Court in Wos v. E.M.A.
Anne O'Donnell is a recovering litigator who is now currently a Senior Writer for legal professional content at Findlaw.com. She practiced for 10 years in civil litigation in San Francisco.