Just last week, the Supreme Court ruled that an employer sponsored health plan could not recover money from an injured employee because it waited too long to try to recover those funds. The case deals with “subrogation rights,” which is an insurer’s right to recover expenses if the insured individual recovers damages from litigation related to the injury.
In Montanile v. Board of Trustees of The National Elevator Industry Health Benefit Plan, the participant, Robert Montanile, was injured by a drunk driver. As a result of his injuries, Montanileis health plan paid out over $120,000 in medical claims. Montanile ultimately recovered $500,000 in a settlement against the driver. The health plan pursued its “subrogation rights” and sought recovery of its paid claims from Montanile’s settlement proceeds.
What are an employer’s subrogation rights?
Every health plan usually contains a subrogation clause. They are designed to reimburse the insurer for medical expenses it has paid. If an employer sponsors a self-insured plan, the reimbursements will flow to the employer.
Subrogation rights are triggered if a health plan participant recovers damages for an injury or illness, from outside the plan. If the health plan has paid out claims for that same injury, it can seek reimbursement from the participant.
What caused the employer to lose its subrogation rights in the recent Supreme Court case?
Unfortunately for the health plan, it made two fatal missteps. First, the health plan tried to negotiate a settlement with Montanile, but when those negotiations broke down, it waited six month to sue him. Then, after the plan was notified that it could object to the settlement proceeds being transferred directly to Montanile, it failed to take action. During the plan’s six month delay, Montanile claimed he spent all of his settlement monies. His expenditures were all on “nontraceable items” such as services and food.
Had Montanile’s settlement award remained in a segregated account, the Supreme Court would have fully supported the plan’s right to pursue it. But instead, it was delivered to Montanile directly and then dissipated. The plan’s only recourse was to pursue its subrogation rights against Montanile himself, seeking to recover its medical expenses from his general assets.
The Supreme Court has now denied health plans this remedy. In the Montanile ruling, the Court explains that an ERISA plan may pursue its subrogation rights against segregated settlement proceeds, or even traceable goods that may have been purchased from those proceeds: ERISA gives benefit plans “equitable” remedies, which include the right to seize things. But the Court would not allow the plan to seek recovery from Montanile’s general assets, because that would amount to a legal remedy against Montanile himself, a remedy that is not authorized under ERISA.
How can employers preserve their subrogation rights?
The lesson of the Montanile case is that employers and ERISA plan insurers should never allow any delay in pursuing their subrogation rights. They should promptly and formally object to any transfer of targeted funds out of a segregated account. Then they should bring legal action to establish liens against those segregated settlement proceeds. They should absolutely take action to prevent the proceeds’ transfer to the plan participant. If ERISA plan participants are given possession of their monetary recoveries — and the time to spend them on “nontraceable” goods — then the employer’s and plan’s subrogation rights may well be lost.
Preserving subrogation rights will directly benefit any employer sponsoring a self-insured medical plan. It may also aid in staving off premium increases for those sponsoring insured plans.
How the ruling affects other welfare and retirement plans.
The court’s 8 to 1 opinion seems to extend its holding to all ERISA plans, including disability and 401(k) plans. But whether its rule should apply to all ERISA plans will likely be a question for future litigation.