Many HMO contracts have clauses which say that if you have an accident, and they pay for your medical care, and you sue the person who caused the accident, and you get money from him, the HMO can take from that judgment or settlement, whatever they paid for your care, and they can place a lien on the money you got.

They often call this "subrogation", but it's really not.
Subrogation is the right of an insurer to sue a responsible third party on your behalf. But in this case, YOU sued and won, and the insurer is really looking for "reimbursement" or "indemnification". What it's called can be important if your case comes under ERISA, as we'll discuss below.

For all types of insurers, you can usually keep them from taking the full amount of the award by checking exactly what the money you got from the defendant was for. Usually there's money for medical expenses, and some for pain and suffering, lost wages, maybe punitive damages, etc.

The HMO can get at ONLY the part that was earmarked for medical expenses. If that was $5,000, and the rest of the award came to $1 million, and the HMO had paid $50,000 for your care, it still couldn't get more than the $5,000, and it would still be fully obligated to pay your future claims without deduction for the $45,000 you didn't pay.

If you're lucky enough to live in Maryland, the HMO might not be able to collect anything from you. A court there said, in Reimer v. Columbia Med. Plan, that since their enabling statute says that an HMO is a "prepaid plan", any payment other than premiums, deductibles, and co-payments is against the law. You might see how your own state's statute is written to see if you could make the same argument. It doesn't look as though it would apply in California.
I've recently (10/2000) heard, but don't know, that the Reimer decision was "overturned" by the Maryland legislature, so check it out before relying on it.

But California has its own protections against these liens, specified in Civil Code s. 3040.
It applies to liens by HMOs, Insurance companies, IPAs, or medical groups.
Liens are limited to costs to perfect the lien, plus either

1. for non-capitated plans: the actual amount paid to providers, or
2. for capitated plans: 80% of the usual & customary charges by non-capitated providers in the area. And don't take the HMO's word for what's "usual & customary". If you check with the doctors they pay, you may find that they tell Them very different story.

1. if an attorney was involved: 1/3 of money due to the patient
2. if no attorney was involved: 1/2 of money due to the patient

• workers' compensation claim.
• Certain Medi-Cal benefits (Welf. & Inst. Code sec. 14124.70 et seq)
• Certain hospital services (Civ. Code sec. 3045.1 et seq)

ERISA

[This section is adapted from "Beware the ERISA health plan lien" by Peter H. Wayne IV and Mark R. Taylor, in Trial, December 2007 | Volume 43, Issue 12, www.justice.org/publications/trial/0712/wayne_taylor.aspx?UserName=kp343tlbDfGpyWtKzyFADzCqwchCX8AhqwXpGdChb5A=]

ERISA liens can lay claim to most or even all of the proceeds from settlement of any tort case where the plaintiff received benefits from an ERISA health plan. The attorney must counsel his client that the lien might consume a large portion (and possibly all) of any potential settlement. It is crucial that ERISA liens be dealt with properly.13

Many states’ rules of professional conduct can now be read to require an attorney to hold disputed funds (such as lien amounts) in his trust account and even to notify the ERISA lien holder of settlement.

The 2006 Supreme Court’s decision in Sereboff v. Mid Atlantic Medical Services, Inc., gave ERISA liens some very large teeth by holding that ERISA plans can enforce complete reimbursement of their liens. 3

The Sereboffs were injured in a car accident, and the ERISA plan paid about $75,000 of their medical expenses. They sued third parties for damages. Shortly thereafter, Mid Atlantic asserted a lien on any recovery they received. The Sereboffs settled the lawsuit for $750,000 but did not pay anything to Mid Atlantic.

The plan’s "acts of third parties" provision stated that if the Sereboffs received benefits for an injury or illness and later recovered damages related to a tort claim against a third party for that injury or illness, the Sereboffs would have to reimburse Mid Atlantic Services for the benefits they had received. The provision also stated that Mid Atlantic’s share of the recovery would not be reduced if the Sereboffs did not receive the full damages claimed.

Mid Atlantic sued to enforce the lien under §502(a)(3) of ERISA, claiming that it was entitled to reimbursement as a matter of equity. The trial court found in the company’s favor and the Sereboffs appealed, arguing that Mid Atlantic’s claim was actually for breach of contract, not equitable relief—the only type of relief granted under §502(a)(3). The Fourth Circuit affirmed, ruling that Mid Atlantic’s suit was one seeking equitable relief, and a unanimous Supreme Court agreed.

Many federal courts have applied this decision to the detriment of plaintiffs.4 Courts have ruled that ERISA liens can trump a catastrophically injured plaintiff’s need for lifetime care,5 consume a special-needs trust,6 and lay claim to an entire settlement—including attorney fees.7 One recent decision that looked like a win for plaintiff — holding that an ERISA lien cannot be recovered from a minor’s special-needs trust — depended more on procedural technicalities than substantive ERISA law and should not be given widespread reliance.8

If a valid lien is not adequately satisfied, the plan can sue plaintiffs or their attorneys. Plaintiffs attorney may also be liable for the amount of his attorney fees even though he was not a party to the reimbursement agreement.11 Moreover, if he counsels or assists the client in subverting a valid ERISA claim through deceit or dishonesty, he can also be liable to the plan.12

Conversely, if the attorney mistakenly pays an invalid lien, he has committed malpractice against his client. If he disburses the settlement before the lien is resolved, he risks ethical sanctions as well. State ethics opinions are imposing a duty to hold disputed funds (here, the lien amount) in the attorney’s trust account until the lien is resolved.14

Therefore, the release of settlement proceeds to the plaintiff in the face of a potential ERISA lien could give rise to two separate complaints against the attorney: an ethical complaint based on an alleged violation of a state’s rules of professional conduct,15 and another complaint seeking the remedies prescribed by 29 U.S.C. §1132(a)(3).16

Initial Steps

It is crucial to obtain a copy of the summary plan description (SPD) early. The SPD is intended to be a summary of the plan, rather than a full recitation of its terms. Thus there is sometimes a conflict between what is contained in the plan and what is contained in the SPD.

If the SPD does not contain specific subrogation language, it is important to understand what courts in the applicable jurisdiction have said about which document—the full plan document or the SPD—controls the plan’s lien rights.21

In most cases, it is reasonable to treat the SPD as though it is the controlling document; however, on more difficult liens it is wise to demand and review a copy of the entire plan as well.22 As soon as you receive notice of a potential lien, you should make a written request for the SPD and other necessary documents as discussed below.

Ascertaining enforceability

Insured and self-funded plans and their liens are treated differently under ERISA. State insurance statutes and common law will often offer equitable defenses against the lien that are not available under the purely federal law of ERISA. It is thus critical to determine whether the ERISA plan is insured and to be familiar with state subrogation law.

Self-funded ERISA plans are not subject to state law but health insurance carriers and insured ERISA plans are.26 When an insured plan asserts a lien against a personal injury settlement, it is the insurer—not the plan—that is attempting to recoup its expenses. Holliday states: "An insurance company that insures a plan remains an insurer for purposes of state laws purporting to regulate insurance after application of the deemer clause."28

The question arises of how to treat a plan that is self-funded but has also purchased excess or "stop-loss" insurance to cover large, unexpected claims. The U.S. Department of Labor (DOL) has taken the position that merely obtaining a stop-loss insurance policy will not cause a plan to lose its self-funded status for ERISA preemption purposes.30 Although the Supreme Court has not addressed the issue, the DOL’s view appears to be uniformly adopted throughout the federal circuits, meaning that the terms of ERISA and the provisions of the plan will still preempt state law despite the presence of stop-loss insurance.31

The SPD is required to disclose the funding arrangement of the plan.32 However, not all plan administrators comply with this rule. The SPD should not be relied on as the final word on this crucial matter. Check the plan’s Form 5500, which must be filed each year with the DOL and must declare the appropriate funding status. Many (but not all) of these documents may be found online at the site www.freeerisa.com by searching the Form 5500 filings by employer name. If the Form 5500 cannot be located in this way, it can always be requested from the plan administrator under 29 U.S.C. §1024(b)(4).

If the plan administrator acknowledges that an insurance company is connected to the plan but attempts to retain preemption of state law by asserting that the insurer plays merely an administrative role, request a copy of the administrative service contract between the employer and the insurer. Thoroughly investigate the funding status of the plan to determine whether the plan or the insurer bears the risk.

ERISA plans often try to enforce their lien against a plan beneficiary’s third-party recovery assets with the argument that, because federal law applies, your client must satisfy the lien in full. This argument is often merely a scare tactic.

An ERISA lien might be fully enforceable in one circuit and completely unrecoverable in another.

For example, see the discussion of the "make-whole" doctrine below.

Also, State defenses against insured ERISA plans vary widely from state to state.

For example, an insured plan in Kentucky could still enforce its lien in full. However, that same plan in Virginia would be unable to enforce its subrogation right due to that state’s anti-subrogation statute, allowing you to disregard the lien altogether.35 Thus, a state or circuit boundary can make a significant difference in the right of reimbursement.

Defining defenses

A few defenses are universal; others depend on the jurisdiction. The following are the most common defenses.

The specific-fund doctrine.

In Sereboff, the Court held that an ERISA carrier is able to enforce its plan’s third-party recovery provision under federal law as long as the plan "specifically identifie[s] a particular fund, distinct from [the plan beneficiaries’] general assets [namely, the settlement proceeds themselves] . . . and a particular share of that fund to which [the plan] was entitled [meaning up to the amount the plan paid for injury-related care]."36 This language is critical to all ERISA plans, and it will make or break an ERISA lien right from the start.

The reason for this lies in the type of lien-related relief allowed by ERISA. The statute provides that a plan may seek only "equitable relief" to enforce its terms.37 The equitability of the relief sought stands as the basis for the Court’s decision in Sereboff and the previously controlling decision of Great-West Life & Annuity Insurance Co. v. Knudson.38 In both cases, the Court attempted to decipher what Congress meant by "equitable relief."

In Great-West, the ERISA lien was held unenforceable because the third-party recovery provision of the plan at issue did not specify a particular fund from which to recover the lien. Rather, it sought legal restitution from the client’s general assets.39 The Court held that such relief was "legal" rather than "equitable," and not permissible under ERISA.

Similarly, the Sereboff Court found that one feature of equitable restitution is the imposition of a "constructive trust" or "equitable lien" on "particular funds or property in the [client’s] possession."40 However, Sereboff was distinguished from Great-West in two ways.
First, the settlement funds had been set aside pending the resolution of the case and were still in the Sereboffs’ possession and control.41
Second, the Court found that the plan language justified equitable restitution for two reasons: The plan specifically identified the settlement proceeds—apart from the Sereboffs’ general assets—as being subject to its lien; and the plan limited its right of recovery to only the amount it had paid for injury-related care, as opposed to the settlement as a whole.42

By identifying a specific fund from which it would claim reimbursement (the settlement), and limiting that reimbursement to the amount to which it was equitably entitled (the amount it had paid for injury-related care), the plan had created a "constructive trust" on that portion of the settlement. In essence, the Sereboff Court concluded that that portion of the settlement rightfully belonged to the plan, and its recovery was therefore equitable.43

If the third-party recovery provision language of the ERISA plan does not identify a specific fund to which it is entitled—namely, the settlement proceeds—or does not limit the plan’s recovery to the amount it has paid for injury-related care and is thus rightfully entitled to, then under Sereboff the lien is unenforceable.

The make-whole doctrine.

This doctrine is a common law rule that limits an insurer’s right of subrogation. The Fourth Circuit has explained it this way:

Generally, under the doctrine, an insurer is entitled to subrogation of an insured’s recovery against a third party only to the extent that the combination of the proceeds the insurer has already paid to the insured and the insured’s recovery from the third party exceed the insured’s actual damages. In other words, the insured must be made whole before the insurer can exercise his right of subrogation.44

There currently exists a circuit split as to whether the make-whole doctrine should be applied as the default rule in ERISA subrogation.

The Sixth Circuit has adopted the make-whole doctrine as the default rule, effectively barring recovery of an ERISA lien unless the plan has specifically rejected the make-whole rule in the plan contract.33
The Ninth Circuit clearly adopted the doctrine as the default rule, stating that "in the absence of a clear contract provision to the contrary, an insured must be made whole before an insurer can enforce its right to subrogation."47
Federal Circuits using the doctrine as the default rule include the Sixth, Seventh, Ninth, and Eleventh Circuits.48 Many states also apply the doctrine against insured plans.49 Federal Circuits rejecting the doctrine as the default rule include the First, Third, Fourth,34, and Eighth.46

But, even in jurisdictions supporting the make-whole doctrine, it is still generally considered only a default rule that can be abrogated by specific plan language. "If a plan sets out the extent of the subrogation right or states that the participant’s right to be made whole is superseded by the plan’s subrogation right, no silence or ambiguity exists," the Sixth Circuit has said.50 The policy language abrogating the doctrine must be conspicuous, plain, and clear so that it is understood by the beneficiary.51 Otherwise, the doctrine will apply. Once again, close inspection of the plan language is essential.

For insured plans, the make whole issue is a matter of State law.
The make-whole default rule was adopted in California in Sapiano v. Williamsburg Nat. Ins., 28 Cal.App.4th 533 (1994), and for the 9th Circuit in Barnes v. Independent Auto Dealers of Calif., 64 F3d 1389 (9th Cir. 1995).
The make-whole amount is based on expert testimony at trial.
Note, however, that this rule can be overruled by an explicit contractual term, and all Kaiser contracts include such a term. If the make-whole doctrine does not apply or has been properly abrogated by the plan, a well-crafted ERISA plan could be entitled to most or even all of the plaintiff’s settlement proceeds if the settlement amount isn’t large enough to satisfy the lien. In these cases, one must rely on negotiating skills, as the law may not offer a defense against the lien.

The "common-fund" or "common-benefit" doctrine.

This doctrine demands that the lien holder contribute to attorney fees. According to the Seventh Circuit, the underlying theory is that to "allow [the insurer] to obtain full benefit from the plaintiff’s efforts without contributing equally to the litigation expenses would be to enrich [it] unjustly at the plaintiff’s expense."52 Reductions for attorney fees are virtually routine with respect to other liens, which is why many attorneys expect the same of ERISA liens.

However, the majority of federal circuits have ruled that an ERISA plan need not contribute to attorney fees where its own plain language gives it an unqualified right to reimbursement.53

Even if the plan is ambiguous or silent on the matter of attorney fees, the question of whether the plan must contribute to the fees is still unsettled. As the Eighth Circuit has put it, silence on the issue of fees may mean two things: that the plan is always entitled to all of its claims for reimbursement regardless of the results such a rule could produce, or that the plan will pay reasonable fees and expenses providing some support and incentive to the plan’s beneficiaries to move forward with their claims, to which the plan will be partially subrogated.54

Even though a plan might not explicitly highlight its exemption from attorney fees, various circuits are finding that plan language can be clear enough to put plan participants on notice of that exemption. The Third Circuit, for example, has stated that "it would be inequitable to permit [the participants] to partake of the benefits of the plan and then, after they had received a substantial settlement, invoke common law principles to establish a legal justification for their refusal to satisfy their end of the bargain."55

Thus, even if a self-funded plan is silent on the matter, the ERISA lien may not have to be reduced for attorney fees.

Negotiating the fully enforceable lien

It is entirely possible for an ERISA plan to have a fully enforceable lien in place. Savvy plan counsel are likely to ensure that the magic subrogation words are contained in the plan documents, so you should not expect to rely on poorly drafted subrogation provisions in many cases. Also, you might find yourself in an unfavorable jurisdiction.

If the plan language is solid, and all possible defenses are either unavailable or have been abrogated by the plan’s terms, the plan can legally demand full payment of the lien. In this event, there are many negotiation tactics to be tried, and others to be avoided.

The wrong approach is to belligerently refuse to cooperate. Refusal to satisfy a valid lien can endanger the plaintiff’s future benefits and risk litigation by the lien holder. If this approach damages the plaintiff’s interests, it also raises issues of professional liability against the attorney.

An attitude of cooperative negotiation with the lien holder can go a long way. If you have verified that the plan has a right to recovery, acknowledge that right, but discuss other considerations as well: The plan administrator might consider the facts of the case, your client’s injury and loss, or whether the client has dependents.

If an ERISA lien is large enough to lay claim to most or all of the settlement, this will affect the plaintiff's incentive to pursue the case. This can also be used as leverage against the ERISA lien, because if your client doesn’t recover anything, neither does the lien holder.

Peter H. Wayne IV of Louisville, Kentucky, and Mark R. Taylor of Salt Lake City are both directors of the Garretson Law Firm and of regional offices of the Garretson Firm Lien Resolution Center. They can be reached at phw@garretsonfirm.com and at mtaylor@garretsonfirm.com. Notes

3.. 126 S. Ct. 1869 (2006).

4.. See e.g. Admin. Comm. of Wal-Mart Stores, Inc. v. Shank, 2007 WL 2457664 (8th Cir. Aug. 31, 2007); Admin. Comm. for Wal-Mart Stores, Inc. v. Salazar, 2007 WL 2409513 (D. Ariz. Aug. 20, 2007); Brown v. Assocs. Health & Welfare Plan, 2007 WL 2350323 (W.D. Ark. Aug.16, 2007).

5.. See Salazar, 2007 WL 2409513.

6.. See Shank, 2007 WL 2457664.

7.. See Brown, 2007 WL 2350323.

8.. Mills v. London Grove Township, 2007 WL 2085365 (E.D. Pa. July 19, 2007). The court was asked to approve the personal injury settlement of a minor where the net proceeds were to be placed into a special-needs trust but were also subject to an outstanding ERISA lien. The court found the lien unenforceable because the ERISA plan sought to recover the lien from the minor’s parents, while the settlement proceeds would directly pass into the trust. However, in the opinion of these authors, if the plan had simply waited until the funds were placed in the trust, and then filed an action against it, the lien would likely have been recoverable as allowed by numerous other courts. Several other procedural technicalities, rather than substantive law, also informed the Mills court’s decision. Thus, an attorney relying on this case alone as a defense to an ERISA lien takes a precarious legal position.

9.. See Chapman v. Klemick, 3 F.3d 1508, 1510-11 (11th Cir. 1993).

10.. See Great-West Life & Annuity Ins. Co. v. Smith, 180 F. Supp. 2d 1311 (M.D. Fla. 2002).

11.. See Trustees of Teamsters Local Union No. 443 v. Papero, 485 F. Supp. 2d 67, 71 (D. Conn. 2007).

12.. Greenwood Mills, Inc. v. Burris, 130 F. Supp. 2d 949, 957-61 (M.D. Tenn. 2001).

13.. ERISA is, as the Supreme Court describes it, an "enormously complex and detailed" statute. E.g. Hughes Aircraft Co. v. Jacobson, 525 U.S. 432, 447 (1999). An article of this length cannot provide all the background necessary to properly evaluate the merits of an ERISA plan’s asserted lien; it can only provide a primer to assist a plaintiff attorney in identifying the issues and possible pitfalls that may be involved. More research, and possibly even consultation with an ERISA lawyer, may be needed.

14.. See e.g. Va. Legal Ethics Op. 1747 (2000). Read narrowly, this opinion interprets Rule 1.15 of Virginia’s Rules of Professional Conduct as placing a legal obligation on an attorney to not deliver disputed settlement funds to a client when a third party has a valid statutory lien, contract, or court order that grants an interest in the funds. However, the opinion invites broader interpretation of the rule to include agreements or laws (such as ERISA) creating a legal obligation to deliver those funds to another.

15.. Controversy exists over whether an ethical violation can arise under this fact scenario, but the authors thought it important to bring it to the readers’ attention. See Webster v. Powell, 391 S.E.2d 204 (N.C. App.1990); Shapiro v. McNeill, 699 N.E.2d 407 (N.Y. 1998) (holding that a breach of a provision of the Code of Professional Responsibility is not "in and of itself" a basis for civil liability—though it may be a contributing factor); Va. Legal Ethics Op. 1747 (2000).

16.. See Greenwood Mills, Inc., 130 F. Supp. 2d at 957-61; Great-West Life & Annuity Ins. Co., 180 F. Supp. 2d at 1313.

17.. 29 U.S.C. §1003 (2000).

18.. Id.

19.. 29 U.S.C. §1022. The information that must be contained in the SPD is set forth in the statute at §1022(a)-(b), §1024.

20.. Tocker v. Philip Morris Cos., 470 F.3d 481, 488 (2d Cir. 2006).

21.. See Burke v. Kodak Ret. Income Plan, 336 F.3d 103, 113-14 (2d Cir. 2003) (SPD controlled); Aiken v. Policy Mgmt. Sys. Corp., 13 F.3d 138, 141 (4th Cir. 1993) (SPD controlled); Branch v. G Bernd Co., 955 F.2d 1574, 1579 (11th Cir. 1992) (plan controlled); Edwards v. State Farm, 851 F.2d 134, 137 (6th Cir. 1988) (SPD controlled).

22.. 29 U.S.C. §1024(b)(4). A plan beneficiary can request a copy of the SPD and other plan-related documents from the plan administrator at any time. The administrator must provide these documents within 30 days on written request or risk a $100-per-day penalty. See 29 U.S.C. §1132(c)(1).

23.. 29 U.S.C. §1144(a).

24.. 29 U.S.C. §1144(b)(2)(A).

25.. 29 U.S.C. §1144(b)(2)(B).

26.. See Metro. Life Ins. Co. v. Massachusetts, 471 U.S. 724, 746-47 (1985).

27.. 498 U.S. 52, 61 (1990).

28.. FMC Corp. v. Holliday, 498 U.S. 52 (1990)

29.. Id. at 64.

30.. Dept. of Labor Op. Ltr., No. 91-05A (Jan. 14, 1991).

31.. See e.g. Lincoln Mut. Cas. Co. v. Lectron Prods., 970 F.2d 206, 210 (6th Cir.1992); United Food Health & Welfare Trust v. Pacyga, 801 F.2d 1157, 1161-62 (9th Cir.1986).

32.. 29 U.S.C. §1022(b).

33.. Copeland Oaks v. Haupt, 209 F.3d 811, 813 (6th Cir. 2000).

34.. In re Paris, 211 F.3d 1265 (table), 2000 WL 384036 at *3 (4th Cir. 2000).

35.. Va. Code Ann. §38.2-3405 (2006).

36.. Sereboff, 126 S. Ct. at 1875.

37.. 29 U.S.C. §1132(a)(3).

38.. 534 U.S. 204 (2002).

39.. The settlement funds in Great-West had been placed in a special-needs trust before the lien was asserted and were no longer in the beneficiary’s control. Id. at 207-08.

40.. Sereboff, 126 S. Ct. at 1874 (emphasis added).

41.. Id. at 1872.

42.. Id. at 1875.

43.. The Sereboff Court invoked "the familiar rule of equity that a contract to convey a specific object even before it is acquired will make the contractor a trustee as soon as he gets a title to the thing." Id.

44.. In re Paris, 2000 WL 384036 at *1, n. 1.

45.. Id. at *3.

46.. Harris v. Harvard Pilgrim Health Care, Inc., 208 F.3d 274, 280-81 (1st Cir. 2000); Bill Gray Enters., Inc., Employee Health & Welfare Plan v. Gourley, 248 F.3d 206, 220 (3d Cir. 2001); Waller v. Hormel Foods Corp., 120 F.3d 138, 140 (8th Cir. 1997).

47.. Barnes v. Ind. Auto Dealers Benefit Plan, 64 F.3d 1389, 1395 (9th Cir. 1995).

48.. Copeland Oaks, 209 F.3d at 813; Cutting v. Jerome Foods, Inc., 993 F.2d 1293, 1297-98 (7th Cir. 1993); Cagel v. Bruner, 112 F.3d 1510, 1521 (11th Cir. 1997).

49.. See e.g. California (Plut v. Fireman’s Fund Ins. Co., 102 Cal. Rptr. 2d 36, 40 (Cal. App. 2000)); Georgia (Ga. Code §33-24-56.1 (2000)); New Jersey (O’Brien v. Two West Hanover Co., 795 A.2d 907, 914 (N.J. Super. App. Div. 2002)).

50.. Copeland Oaks, 209 F.3d at 813.

51.. See Saltarelli v. Bob Baker Group Med. Trust, 35 F.3d 382, 386 (9th Cir. 1994).

52.. Gaffney v. Riverboat Servs. of Indiana, Inc., 451 F.3d 424, 466-67 (7th Cir. 2006).

53.. Kress v. Food Employers Labor Relations Assn., 291 F.3d 563, 569 (4th Cir. 2004); Harris, 208 F.3d at 279; Walker v. Wal-Mart Stores, Inc., 159 F.3d 938, 940 (5th Cir. 1998); Ryan v. Federal Express Corp., 78 F.3d 123, 127 (3d Cir. 1996).

54.. Waller, 120 F.3d at 141. The court went on to decide that the plan’s subrogation recovery should be reduced by a reasonable amount of attorney fees.

55.. Ryan, 78 F.3d at 127-28.