69 The Alabama Lawyer 45 (2008). Taking Benefits Back: Reimbursement Under ERISA.

• Author: BY DAVID P. MARTIN

The Alabama Lawyer

2008.

69 The Alabama Lawyer 45 (2008).

Taking Benefits Back: Reimbursement Under ERISA

Taking Benefits Back: Reimbursement Under ERISABY DAVID P. MARTIN Mrs. Shank was employed stocking shelves at Wal-Mart in a small town in Missouri.i As part of her employee benefit package she was covered under a Wal-Mart health plan. Only a few months after her coverage commenced, a semi-trailer truck plowed into the driver's side of her minivan, leaving her incompetent with major brain trauma and the need for round-the-clock medical care. Her health plan paid out over $460,000 in medical bills. Mrs. Shank and her husband filed suit against the trucking company, but it only had $1 million in liability limits. The case was resolved, and after legal fees and expenses were deducted, Mrs. Shank received $417,000, which was put in a special trust to be used for her medical care.

However, in August 2005, Wal-Mart sued the Shanks, seeking reimbursement for over $469,000 in medical costs. The Shank's attorney tried to negotiate a compromise to compensate Wal-Mart for some amount. Counsel argued that since Mrs. Shank wasn't fully compensated for her damages, Wal-Mart proceeded with its lawsuit and won before the district court. On appeal, the 8th circuit affirmed the district court's ruling. The Shank family was obviously decimated by this accident, but now the benefits received were due to be paid back. Mrs. Shank remains in need of medical care, but the burden for that care will now fall completely on governmental programs and taxpayers.

Sooner or later you are likely to experience the anger, frustration or discomfort of a demand for return of employee benefits paid. Perhaps the demand will be made against a client, a firm employee, a friend, a family member, or you, the reader. The demand for reimbursement of benefits has long plagued attorneys litigating personal injury claims. Counsel for plaintiff and defendant alike are frequently faced with concerns over reimbursement claims that often threaten to destroy a settlement. As a result of recent court decisions, attorneys are likely to encounter a reimbursement demand. It is hoped this article will give you a framework in order to provide some answers or guidance.

Reimbursement actions involving employee benefits typically arise under the federal statute known as the Employee Retirement Income Security Act of 1974 (ERISA).(fn1) Almost all employee benefit policies (which will be called plans in this article) will have reimbursement provisions in them. These plans usually involve health insurance, short-term disability benefits, long-term disability benefits, and life and/or accidental death dismemberment benefits. Many businesses now provide an array of such benefits. Reimbursement or subrogation provisions in an employee benefit plan typically require that if the employee or dependent receives payment from other sources for which benefits have been paid, then the benefits must be repaid to the plan.

For decades, reimbursement provisions have been in such plans, but the provisions never garnered much attention at the time of purchase of the plan. This was due in part to the common law "make whole" rule. Under this rule, benefits did not have to be paid back or reimbursed to the insurance company or plan until the participant or beneficiary was made whole. This rule is still the default rule in the 11th Circuit.(fn2)

Over time, plans began to include language in an effort to bypass the "made whole" rule. The provisions typically required that the plan was entitled to receive back all benefits paid before the injured plan participants received a penny irrespective of the "made whole" rule. The fairness of such provisions has been debated for some time. Employees argue that premiums were paid and value should be received. They further argue that the reimbursement provisions often turn benefits into an illusory form of coverage. On the other hand, insurers argue they are only trying to keep costs down for everyone.

Unfortunately, the facts of each case often dictate the perceived degree of unfairness. For example, in an accident caused by an individual with low policy limits or in cases with liability issues, occasion for such unfairness is likely. On the other hand, if a healthy recovery is obtained, it is argued that without reimbursement there is a double recovery.

Reimbursement issues also arise in short-term and long-term disability claims. For example, your client became disabled and with your assistance the plan insurer paid long-term disability benefits. You obtained a fee out of the recovery. However, a year later your client obtained a recovery from a retirement disability benefit through a prior employer, and then obtained a Social Security Administration disability benefit. Under an offset provision of the plan, the long-term disability benefit may be retroactively reduced. In fact, the offset may completely eliminate the benefit activating the minimum benefit provision in the plan. The plan now may only pay $100 per month, and this is retroactive!

Now the plan or insurer demands repayment of the overpayment...