**This article has been updated to include the U.S. Supreme Court's decision in US Airways v. McCutchen, which is also discussed in What US Airways v. McCutchen Means for Your 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 U.S.C. 1001, et seq. which governs most employee health plans. Many ERISA plans rely on preemption principles to 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 7 Steps to Approaching Lien Claims 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 are far reaching. The intent is to provide broad highlights relevant to attempts to negotiate ERISA liens, but as noted below, this is an extremely complicated area of law and there are practitioners who specialize in understanding the intricacies that are beyond the scope of this article.
Under section 502(a)(3) of ERISA, 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 U.S.C. 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 U.S.C. 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 Corp. v. Holliday (1990) 498 U.S. 52 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. "[I]f 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 subject to state law regulation.
For example, in California, many attorneys 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.
For a more in-depth discussion on this topic, see Deem and Deemer: ERISA Preemption Under the Deemer Clause As Applied to Employer Health Care Plans with Stop-Loss Insurance; Legislative Reform.
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 in the possession of the defendant: "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 not address 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.
C. US Airways v. McCutchen -- When Plans Exclude Equitable Defenses
The U.S. Supreme Court made the job of settling ERISA liens significantly more difficult with the opinion it issued in US Airways v. McCutchen (2013) 133 S. Ct. 1537, which answered a previous question left open by the Sereboff case. It held that in a section 502(a)(3) reimbursement action under ERISA based on an equitable lien by agreement, the ERISA plan's terms govern, and equitable principles will not override the language of the contract.
"Neither general unjust enrichment principles nor specific doctrines reflecting those principles--such as the double-recovery or common-fund rules invoked by McCutchen--can override the applicable contract."
Equitable defenses should still be available when the plan language is silent. While "equitable rules cannot trump a reimbursement provision, they may aid in properly construing it," wrote Justice Kagan. Because US Airways' plan was silent as to allocating attorney's fees, the Court held that the common fund doctrine applied as the default rule.
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 and whether the plan is insured or self-funded.
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 a discussion on negotiating those claims.
The contract language will be instructive on several issues, including: 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, then it may not fit under the rule set forth in Sereboff.
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.
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.
For a related discussion on this topic in the context of Medicaid liens, see State Medicaid Liens Limited by U.S. Supreme Court in Wos v. E.M.A. But see this discussion of the passage of Section 202 of the Bipartisan Budget Act and its effect on the holdings of these cases.
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, as many attorneys in California do. 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 may apply, as described below.
If the plan is self-funded and fits under the rule of Sereboff, the federal law of ERISA applies. If the language of the plan specifically excludes application of common fund or make whole doctrines, you will be stuck with the language of the plan, per the holding of US Airways v. McCutchen. Obtaining reductions will be far more difficult, if not impossible. However, you can use your negotiating skills, 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.
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.
As stated above, US Airways v. McCutcheon held that the common fund doctrine serves as the default rule if the plan is silent on this issue.
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:
If the settlement was reduced because the plaintiff was at fault for a percentage of their damages, use this to negotiate the lien down.
See, Arkansas Dept. of Health and Human Services v. Ahlborn, (2006) 126 S. Ct. 1752. 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.
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.
Made Whole Doctrine
The made whole doctrine is a principle of equity that generally limits the ability of an insurer to exercise its right of subrogation until the insured has been fully compensated or made whole. The interpretation of the rule may vary depending on the jurisdiction.
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, after US Airways v. McCutchen, this argument will be foreclosed if there is plan language to the contrary. However, if the plan language is silent on this issue and does not waive this defense, this argument should be available.
The common fund doctrine may be available depending on your jurisdiction.
"[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." US Airways v. McCutchen citing Boeing Co. v. Van Gemert (1980) 100 S.Ct. 745.
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.
Note that in light of US Airways v. McCutchen, this argument will not be available against self-funded plans that specifically waive this defense. Importantly though, if the plan is silent on this issue, US Airways v. McCutchen specifically holds that the common fund rule is the default.
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 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 building rapport with the lien claimant, and appealing to their common sense is just as important. Generally, people recognize that getting paid something now is much better than risking it all and ending up with nothing.
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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. 7 Steps to Approaching Lien Claims in Personal Injury Cases
5. How to Deal with Medicare Liens in Personal Injury Cases
6. Negotiating Tips for Health Insurance Liens in Personal Injury Cases
7. What US Airways v. McCutchen Means for Your Personal Injury Cases
8. State Medicaid Liens Limited by US Supreme Court in Wos v. E.M.A
*Laws are continually changing, and every case requires independent up-to-date research specific to your jurisdiction. This article is intended to highlight general concepts, and is not meant as an exhaustive discussion, nor a guarantee of a particular result.*