Supreme Court Limits ERISA Reimbursement Rights: Insurers Will Need to be Diligent

On January 20, 2016, the United States Supreme Court held that an ERISA plan could not satisfy its reimbursement rights from a participant’s general assets. ERISA plans’ reimbursement rights are now so limited that participants, who are the insureds for plans funded by insurance, should be expected to seek to avoid reimbursing funds. So, insurers of ERISA plans will have to take prompt actions to enforce a plan’s reimbursement rights, including possibly intervening in an insured’s lawsuit against third parties.

The Montanile Facts and Holdings

In Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 136 S. Ct. 651 (2016), the Supreme Court considered the common circumstances that arise when a health plan pays medical expenses after an insured is in an accident. After a drunk driver hit Montanile, he sued the driver and received a $500,000 settlement. The plan had paid about $120,000 for his initial medical care. After subtracting costs and attorneys’ fees, Montanile’s attorneys held about $240,000 from the settlement.

The Board of Trustees (the “Board”) as the plan’s fiduciary sought reimbursement. Montanile’s attorney informed the Board that he would distribute the remainder of the settlement funds to Montanile unless the Board objected within 14 days. The Board did not do so. Montanile’s attorney distributed the funds. Six months later, the Board sued Montanile. By that time, though, Montanile had spent almost all of the settlement funds.

The District Court held that the plan was entitled to reimbursement from Montanile’s general assets. The Court of Appeals for the Eleventh Circuit affirmed, holding that the plan can recover out of a participant’s general assets when the insured dissipates specifically identified funds. The Supreme Court agreed to review the case to resolve the law as to when an ERISA fiduciary can enforce an equitable lien against a defendant’s general assets.

The Supreme Court reversed the Eleventh Circuit and remanded the case for further proceedings. Based on the plan language, the Supreme Court held that “[t]he Board had an equitable lien by agreement that attached to Montanile’s settlement fund when he obtained title to that fund” and that his “commingling a specifically identified fund – to which a lien attached – with a different fund of the defendant’s did not destroy the lien. Instead, that commingling allowed the plaintiff to recover the amount of the lien from the entire pot of money.” On the other hand, the Supreme Court held that “recovery out of Montanile’s general assets – in the absence of commingling – would not have been ‘typically available’ relief” under ERISA.

The Court also said that, “[b]ecause the lower courts erroneously held that the plan could recover out of Montanile’s general assets, they did not determine whether Montanile kept his settlement fund separate from his general assets or dissipated the entire fund on nontraceable assets. . . . A remand is necessary so that the district court can make that determination.” See Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 WL 850877 (Mar. 4, 2016) (vacating judgment in favor of plan and remanding to district court for determination of “whether Montanile mixed the settlement fund with his general assets”).

What Are the Practical Consequences in Light of Montanile?

In light of Montanile, plan insureds, and their lawyers, will have incentives to spend, hide, and otherwise avoid reimbursing funds. Two recent cases that reached the Federal Circuit Courts of Appeal illustrate some of the problems.

In Central States, Southeast and Southwest Areas Health and Welfare Fund v. Lewis, 745 F.3d 283 (7th Cir. 2014), a plan insured’s lawyer had notice of the plan’s lien but distributed the settlement proceeds from a lawsuit to the insured and himself. The Seventh Circuit affirmed the order requiring the participant and his lawyer to restore $180,000 to the lawyer’s client trust fund account, the finding against the participant’s lawyer of civil contempt for not doing so, and the order to submit information to the General Counsel of the State Bar of Georgia for possible disciplinary proceedings against the lawyer. Under the holding in Montanile, it is doubtful this monetary relief would have been appropriate.

In Airtran Airways, Inc. v. Elem, 767 F.3d 1192 (11th Cir. 2014), cert. granted, vacating judgment, 136 S. Ct. 979 (2016) (remanding “for further consideration in light of Montanile”), the plan participant and her lawyer “conspired to hide and disburse settlement funds she received after a car accident.” In AirTran Airways, the Eleventh Circuit held the settlement funds were “specifically identifiable,” and the plan participant's dissipating the funds thus could not destroy the lien that attached before the dissipation. Id. at 1198. The Eleventh Circuit affirmed a judgment in favor of the plan for over $100,000 for medical care and awarded attorney’s fees and costs in favor of the plan. Because the funds could not be traced, however, under the holding in Montanile, the monetary relief would not have been appropriate. See Montanile v. Board of Trustees of the National Elevator Industry Health Benefit Plan, 2016 WL 850877 (Mar. 4, 2016) (recognizing that the result in Airtran Airways was wrong under the Supreme Court’s Montanile holding).

The Supreme Court’s Montanile opinion perhaps raises more questions than it answers. In circumstances where an insured should reimburse a plan, when can an insurer recover? Recovery is appropriate when the funds at issue can be identified, but identifying money often is not practical. Based on the opinion, an insurer can still recover if it can identify a bank account where the funds are held, even if commingled with other funds. Or an insurer can still recover if it can trace the funds to other assets: examples might be stocks, a car, or other identifiable asset. But how does one “trace” liquid assets? Perhaps more important, how can an insurer avoid having the funds spent on non-traceable assets?

What Should an Insurer Do in Light of Montanile?

The result in Montanile will embolden some insureds to avoid reimbursing plans. For insurers, the dollars lost might be big. What should an insurer do?

A first step should be to make sure the plan documents, which probably means the insurance policy and the certificate, have strong, helpful language. The plan documents should not only provide for subrogation and reimbursement, but also require insureds to notify plan fiduciaries of claims against third parties and otherwise to cooperate. The plan documents should provide that not cooperating has consequences, such as offsets against future benefits or terminating coverage for misconduct, but imposing these consequences might raise other issues. The plan documents might specify that the participant and his lawyer are plan fiduciaries as to any recovery (i.e., plan assets) that should be returned to the plan.

As the fiduciary in Montanile protested, without being able to recover from general assets, recovery from an insured will be hard and costly. An insurer will first have to decide if the amount at issue is worth pursuing. A $500 reimbursement would rarely be worth the effort; a $500,000 reimbursement would almost always be. In between these two, an insurer would have to make a judgment call.

Once an insurer has notice of a potential claim worth pursuing, the insurer needs to take steps to avoid having the funds dissipated. In Montanile , the insured had signed a reimbursement agreement affirming his obligation under the plan language to reimburse the plan from any recovery. That step was a good one, but apparently did not work. Having the insured’s lawyer sign such an agreement is advisable. If the insured or the lawyer will not sign, or the insurer is concerned that the lawyer will not comply with an agreement he or she signs, then intervening in a pending lawsuit or filing a separate lawsuit, before the settlement funds are even received, would need to be considered.

In light of the Supreme Court’s Montanile decision, insurers of plans governed by ERISA must be diligent to protect their rights of subrogation and reimbursement. If one hesitates, remedies may be lost.

Republished with permission. This article first appeared in an ALFA International Insurance Update on April 19, 2016.