Sponsors and administrators of self-insured health and welfare
plans, as well as insurance companies that offer insured health and
welfare products, take out your scrivener devices! In US
Airways v. McCutchen,1 the U.S. Supreme Court again
addressed the right of a welfare plan to reimbursement of funds
that a participant recovers from a third party. In the process,
sponsors and insurers received a split decision. On the one hand,
the Court held that equitable principles - notably the unjust
enrichment doctrine - cannot override the terms of a benefit plan.
Thus, where a plan administrator seeks to enforce an
"equitable lien by agreement," a participant cannot
defend against application of the plan's lien requirement by
resort to equitable defenses.
On the other hand, the Court held that where a plan document is
silent on a question - in this case, the allocation of
attorney's fees that the participant expends in obtaining the
third-party recovery - equitable principles (notably, the
common-fund doctrine) may be looked to in filling the gap. Only if
the plan is drafted so as to expressly address the question may it
resolve it at odds with equitable principles.
Thus, the impact of McCutchen is to once again put a
premium on comprehensive plan drafting. If a sponsor or insurer
wants to limit its financial risk, it better clearly indicate those
limits in the plan document. If it fails to do so, by silence or
use of ambiguous language, it runs the risk that equitable
principles (which may not favor its interests) will be applied to
"provide[] the best indication of the parties'
intent."2
Analysis
In 2007, James McCutchen and his wife suffered serious injuries
in an automobile accident. At that time, Mr. McCutchen was an
employee of US Airways and a participant in its self-insured group
health plan, which paid $66,866 for his accident-related medical
expenses. The plan included subrogation and reimbursement
provisions that required participants to reimburse the plan
"out of any monies recovered from [the] third party, including
... as the result of judgment, settlement, or otherwise." The
plan documents did not expressly address whether the plan or the
participant would be responsible for paying any attorney's fees
incurred in obtaining such recovery.
Mr. McCutchen's overall recovery (from a settlement with the
driver who caused the accident and underinsured motorist benefits
available under his own automobile insurance policy) was limited to
$110,000. Of that sum, $44,000 was then paid to his lawyer, leaving
a $66,000 recovery, slightly less than the amount the US
Airways' health plan had covered in medical bills. US Airways
then demanded reimbursement of its total expense of $66,866, and
when Mr. McCutchen refused, US Airways, as fiduciary and plan
administrator, filed suit to enforce the plan's subrogation and
reimbursement provisions. The district court granted judgment to US
Airways, but the Third Circuit reversed. It held that the principle
of unjust enrichment overrode the plan's reimbursement clause,
because otherwise it would leave US Airways with a windfall. The
Supreme Court then granted certiorari to resolve the
matter.
The Court had little problem reversing the Third Circuit and
rejecting the notion that equitable principles could be raised as a
defense to application of the terms of a benefit plan. Relying on
its earlier decision in Sereboff v. Mid-Atlantic Medical
Services,3 the unanimous Court held that benefit
plan contracts have primacy over equitable doctrines. More
specifically, and as Justice Kagan explained, lien provisions that
"arise[] from and serve[] to carry out a contract's
provisions" may not be superseded by equitable doctrines. For
the Court, "[t]he agreement itself becomes the measure of the
parties' equities; so if a contract abrogates the common-fund
doctrine, the [sponsor or insurer] is not unjustly enriched" -
it merely is "claiming the benefit of its
bargain."4 Arguments of unjust enrichment were thus
beside the point when the plan administrator was simply demanding
what was called for under the plan terms.
Unfortunately, however, for the sponsor and insurer community,
this was not the end of the decision. Justice Scalia's dissent
was correct in noting that the certiorari petition had assumed the
plan's terms were unambiguous - indeed, the plan required a
lien "on any monies recovered from [the] third
party" (emphasis added). Accordingly, US Airways' lien
right was thus not subject to an allocation of attorney's fees.
This assumption also was made by the Solicitor General, because the
United States argued in its amicus brief that the common-fund rule
could be applied to override the plan's apparent requirement
that no credit be given to Mr. McCutchen for the attorney's
fees he expended in obtaining his
recovery.5
Nonetheless, writing for a majority of five Justices, Justice
Kagan assumed that because the plan's lien language did not
expressly address the issue of allocation of attorney's fees,
there consequently was an ambiguity in the plan, or as she put it,
a "contractual gap." Rather than remand the case and
instruct the lower court to determine the parties' intent
respecting this "contractual gap," the majority went on
to hold that where the plan is silent on an issue, courts may use
otherwise applicable equitable doctrines to construe the plan.
Specifically, the Court concluded that because the plan document
was silent on the allocation of attorney's fees, the
common-fund doctrine was the appropriate interpretive rule. Under
that doctrine, a litigant who recovers a common fund for the
benefit of persons other than himself (i.e., the plan) is entitled
to reasonable attorney's fee from the fund as a whole, and thus
from the plan's lien recovery.
The majority said that ordinary principles of contract
interpretation warranted this application of equitable principles.
In undertaking the proper interpretation of a plan, "a court
properly takes account of legal background rules - the doctrines
that typically or traditionally have governed a given situation
when no agreement states otherwise." The majority reasoned
that ignoring these rules was likely to frustrate the parties'
intent and produce perverse consequences. With regard to the
common-fund doctrine in particular, the majority concluded that
"[a] party would not typically expect or intend a plan saying
nothing about attorney's fees to abrogate so strong and uniform
a background rule." Essentially, the Court assumed that plan
sponsors intended to share the attorney's fee expenditure in
connection with any third-party recovery.
The majority's blithe assumption that plan sponsors would
necessarily intend to share attorney's contingent fee
arrangements that tort lawyers negotiate with plan participants
simply does not jibe with reality for many plan sponsors. The truth
is that the application of "typical" or
"traditional" legal doctrines like the
"common-fund" rule often will have results that are not
consistent with the plan sponsor's intent.
Yet the Court did essentially create two limits to this broad rule
allowing application of equitable principles to fill ambiguities or
gaps in plan language: first, the equitable doctrine could apply
only if it "provides the best indication of the parties'
intent" - although as noted above, it may well be a stretch to
assume that application of the common-fund doctrine in these
circumstances comported with the sponsor's intent. Second, and
more crucially, the Court noted that if the plan sponsor (i.e.,
U.S. Airways) had wished to depart from application of equitable
doctrines, it was free to draft its plan to say so.6 In
other words, if a plan sponsor does have an intent inconsistent
with certain commonplace equitable doctrines, it can avoid
application of those doctrines by expressly drafting around the
issue in the plan itself.
Planning Consideration.This case once again emphasizes the important of having clear, concise, and comprehensive plan terms. In light of US Airways v. McCutchen, sponsors of health and welfare plans should revisit the subrogation and reimbursement provisions in their plan documents and SPDs to ensure that the common-fund doctrine (as well as "make-whole," apportionment, and other equitable doctrines) is adequately addressed.In addition, in light of the Court's potentially broad-reaching statements about "background legal rules," sponsors of self-insured health and welfare plans also should review their plan documents and SPDs to ensure that there are no "gaps" in expressing the sponsor's intent, especially in areas where that intent might be at odds with "typical" or "traditional" common law principles. |
Footnotes
1. 569 U.S. ___ (2013) (slip op.), 2013 BL 101433.
2. 569 U.S. ___ (slip op., at 14), 2013 BL 101433 at *9. Justice Kagan wrote the opinion for the Court. The holding that equitable principles cannot override the equitable lien terms of a benefit plan was unanimous. The holding that there was a gap in the plan respecting allocation of attorney's fees, and that the equitable common-fund doctrine should apply to interpret the plan, was a five-justice opinion. Justice Scalia, joined by the conservative wing of the Chief Justice and Justices Kennedy, Thomas, and Alito, dissented, arguing that the question presented presumed that the plan's terms were unambiguous and there was no "contractual gap" that equitable doctrines were necessary to fill.
3. 547 U.S. 356 (2006).
4. 569 U.S. ___ (slip op., at 11), 2013 BL 101433 at *7. The relevant language in this case came from the summary plan description ("SPD"). The Court reiterated its position in CIGNA Corp. v. Amara that an SPD is a communication about the plan and does not itself constitute the terms of the plan. CIGNA Corp. v. Amara, 563 U.S. , 131 S. Ct. 1866 (2011). Nevertheless, because all the parties in this case had treated the language in the SPD as though it came from the plan document throughout the lower court proceedings, the Supreme Court did so as well.
5. Brief for the United States as Amicus Curiae Supporting Neither Party, US Airways, Inc. v. McCutchen, 569 U.S. ___ (2013) (No. 11-1285).
6. 569 U.S. ___ (slip op., at 16), 2013 BL 101433 at *10 ("Only if US Airways' plan expressly addressed the costs of recovery would it alter the common-fund doctrine.").
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