South Dakota State Medical Holding Company, Inc. v. Hofer: a deferential standard of review permits ERISA administrators to contravene their fiduciary obligations.

• Author: Druley, Delia M.

1. INTRODUCTION

   In July 2007, the federal district court in the Western Division of South Dakota considered South Dakota State Medical Holding Co. v. Hofer, (1) in which an ERISA plan sought to enforce a subrogation provision against a plan beneficiary. (2) The beneficiary, Janet Hofer, survived a terrible motorcycle accident with her husband, Terry Hofer, and suffered serious injuries. (3) Her medical bills, which DakotaCare initially paid, totaled over $400,000. (4) After Mrs. Hofer recovered $250,000 from her husband's motorcycle insurance policy, however, DakotaCare pursued the subrogation rights it had written into the plan documents and ultimately recovered the entire settlement. (5)

   The Employee Retirement Income Security Act (ERISA) governs employee benefit plans across the nation, with nearly 50 million employees enrolled in such plans. (6) Congress enacted the statute in 1974, after a decade long study of pension plan abuses. (7) ERISA seeks to protect the interests of workers by imposing "minimum standards ... assuring the equitable character of such plans and their financial soundness." (8)

   Recently, reimbursement provisions in ERISA plans have been in the news because of the decision in Administrative Committee of Wal-Mart v. Shank. (9) The Shank case illustrates the terrible outcomes common in subrogation actions. (10) Deborah Shank was a Wal-Mart employee who survived a car accident that rendered her permanently disabled. (11) Her health insurance policy through Wal-Mart paid nearly $500,000 in medical expenses. (12) Shank eventually recovered $700,000 in a lawsuit against the tortfeasor, though $417,477 was all that remained after paying attorneys' fees and court costs. (13) Wal-Mart asserted its right to recoup the award based on a subrogation provision in the policy and subsequently recovered all the remaining money, leaving Shank destitute. (14) The United States Supreme Court denied the Shanks' petition for certiorari on March 17, 2008. (15) However, due to public outcry, Wal-Mart eventually reversed itself and returned the balance to the Shanks. (16)

   Sadly, for the Hofers, there was no public outcry against DakotaCare to compel it to abandon its claim for reimbursement. (17) The district court awarded DakotaCare the $250,000 settlement Janet Hofer received after being injured in the motorcycle accident. (18) Relying on Eighth Circuit case law, the district court upheld DakotaCare's right of subrogation without considering the protective purposes of ERISA or the fiduciary duty it imposes. (19) The court reviewed the plan fiduciary's decision to seek subrogation under a deferential abuse of discretion standard. (20)

   Because Congress enacted ERISA to protect workers, it is ironic that courts allow the enforcement of subrogation/reimbursement provisions without considering the effects enforcement will have on the plan beneficiary. (21) In these situations, the beneficiary likely believes his insurance premiums were all he owed his insurer, and will be blindsided when he discovers that the settlement he fought for in court, which he invested thousands of dollars to pursue, will go entirely to his insurance company. (22) ERISA's regulatory and protective purposes should be foremost in the reasoning of federal courts. (23)

   The United States Supreme Court recently confirmed that the dual roles insurance companies often occupy as ERISA fiduciaries and profit-seeking entities create a conflict of interest, which courts should consider. (24) In Hofer, Dakota Care's dual obligations as a fiduciary and a for-profit entity created precisely the same kind of conflict of interest. (25) ERISA requires that a plan administrator act "solely in the interest of plan beneficiaries." (26) When a powerful insurance company, like DakotaCare, attempts to recover huge sums of money from catastrophically injured beneficiaries, the company flouts its fiduciary obligation. (27) This scenario is hardly what Congress intended to endorse by enacting ERISA; indeed, it is the opposite. (28)

   This casenote will address the appropriate standard of review for ERISA decisions and examine the district court's analysis in the Hofer decision. (29) Relevant background information regarding subrogation and ERISA is provided, (30) as is an overview of important United States Supreme Court and Eighth Circuit Court of Appeals ERISA jurisprudence. (31) This casenote concludes that the abuse of discretion standard does not sufficiently safeguard plan beneficiaries in light of modern developments in ERISA plans and the protective purpose of the ERISA statutory scheme. (32) A review of the ERISA statute and its legislative history demonstrates that the decision to pursue subrogation against a beneficiary who has not been made whole is violative of the fiduciary duty imposed by ERISA upon plan administrators. (33) Moreover, this note advocates for the adoption of a de novo standard of review, predicated upon principles of contract interpretation. (34)

   2. FACTS AND PROCEDURE

      On September 11, 2004, Janet Hofer sustained serious injuries in a motorcycle accident. (35) She was a passenger on the motorcycle driven by her husband, Terry Hofer, when the accident occurred on Vanocker Canyon Road in rural Meade County. (36) Terry Hofer's negligence caused the accident. (37) Janet Hofer's injuries required serious medical attention and resulted in more than $400,000 in medical expenses. (38)

      Both Janet and Terry Hofer had health insurance coverage under his policy with DakotaCare. (39) Mrs. Hofer received approximately $414,000 from the DakotaCare policy, the limit of all medical benefits she was eligible to receive under the ERISA plan. (40) The DakotaCare plan stated all benefits were personal to the member and were not freely assignable. (41) According to the general provisions of the plan, DakotaCare could determine eligibility for benefits and construe the terms of the contract at its discretion. (42)

      Terry Hofer also retained motorcycle liability coverage through Dairyland Insurance Company. 43 The motorcycle liability policy contained a provision stating that coverage applied only to bodily injuries or property damages inflicted by "you" to the extent required by the financial responsibility laws of South Dakota. (44) Janet Hofer ultimately obtained a $250,000 settlement, which was equal to the insurance policy limits. (45) She subsequently signed a release conceding that the $250,000 settlement was equal to the policy limits, releasing Dairyland from further liability arising out of that accident. (46) In the release, Hofer reserved the right to pursue a judgment against Terry Hofer and agreed to be exclusively responsible for satisfying DakotaCare's subrogation claim and "any other subrogation claims or medical liens arising out of any payments made because of the treatment or expenses incurred ... as a result of this accident." (47)

      The Hofers placed the $250,000 payment from Dairyland into two traceable and identifiable funds. (48) Janet Hofer notified DakotaCare of the location of the funds; DakotaCare then asserted it had a legal interest in the $250,000, based upon the subrogation and reimbursement provisions in the plan. (49)

      DakotaCare then brought an action under 29 U.S.C. [section] 1132(a)(3), (50) one of ERISA's civil enforcement provisions, which allows a fiduciary to obtain equitable relief to enforce provisions of an ERISA plan, in the District of South Dakota. (51) DakotaCare sought the imposition of a constructive trust, or in the alternative, an equitable lien on all traceable and identifiable funds paid by Dairyland Insurance Company to Janet Hofer. (52) Hofer argued that DakotaCare was not eligible for subrogation or reimbursement under the terms of the plan and asserted a counterclaim for bad faith against DakotaCare. (53) She also sought attorneys' fees. (54) Both parties declared that no material facts were in dispute and that each party was therefore entitled to summary judgment in their favor. (55)

      Hofer argued that she had no right of action against Dairyland Insurance Company due to South Dakota's prohibition of direct action against an insurer by an injured party. (56) The only right of action Janet Hofer had was against her husband, Terry Hofer, who was also the insured under the DakotaCare policy. (57) In support of her assertion, Hofer noted that the motorcycle liability policy was issued to Terry Hofer and that the right to recovery against an insurer is based upon privity between the insured and insurer. (58) Janet Hofer further argued that Terry Hofer was not a third party within the meaning of DakotaCare's subrogation provision. (59) In support of this contention, Hofer noted that contracts affecting ERISA rights are subject to interpretation under the rules of the federal common law, which requires that contract terms be accorded their "plain and natural" or ordinary meaning. (60) Under the term's ordinary meaning, Terry Hofer as plan member and insured would not qualify as a "third party." (61)

      DakotaCare responded that its status as an ERISA fiduciary allowed it to interpret and construe the language of the contract. (62) DakotaCare further argued its construction of the reimbursement provision was reasonable, and that the appropriate standard of review was abuse of discretion under King v. Hartford Life and Accident Insurance Co. (63) DakotaCare asserted a right to subrogation and reimbursement based upon two distinct arguments. (64) First, DakotaCare noted that Janet Hofer recovered from Dairyland, an insurer who was a third party under the terms of the contract. (65) DakotaCare's second claim was that Terry Hofer, their insured, was a third party for purposes of reimbursement under the contract. (66) DakotaCare based this conclusion upon plan language stating that benefits were "personal to a member" and upon the fact that the April 8, 2005 release signed by Janet Hofer relieved Dairyland...