WITH INCREASING FREQUENCY, subrogation claims to the proceeds of personal injury claims are the bane of personal injury practice. In an era of modest verdicts and settlements, it is increasingly difficult to divide the settlement pie satisfactorily among all the parties.

Counsel, of late, routinely receives letters from health insurers or their assignees demanding recovery of 100 percent of the amount paid for accident-related medical bills. In the past, most allowed an offset for attorney fees. Some now will not. If the insurance program in question stems from an employer, the subrogation or reimbursement claimant often disavows any notion of reducing the claim for the attorney/procurement costs of obtaining the settlement or judgment. The justification for this approach is that no such sharing is allowed by the insurance plan’s documents, and the plan’s documents are given primacy under ERISA and federal law.

"Employee welfare benefit plans" and employer-sponsored health insurance come within ERISA’s embrace.

Dimick v. Lewis, 127 N.H. 141 (1985), calls for the sharing of litigation proceeds, with the result that subrogation claims may be reduced where the recovery is small. Insurers contend that Dimick and state law are preempted by ERISA and federal law.

The inequitable result can be that, where the only insurance proceeds available are $25,000 and the medical bills paid amount to $25,000, the claimant and the attorney get nothing, while the health insurer alone is made whole – based on the uncompensated labors of counsel.

This harsh result may no longer obtain in the wake of the Knudson case decided by the U.S. Supreme Court (No. 99-1786) in January 2002.

The factual setting derived from a personal injury settlement in a product liability action – a case that had considerable challenges to establishing liability and catastrophic injuries. The claimant’s insurer had paid $411,157 in accident-related medical bills. The settlement was for $650,000 and allocated $13,828 for past medical bills and $257,745 to a special-needs trust for future care. The insurance was part of an "employee welfare benefit program" within the meaning of ERISA.

Plan officials refused to accept the limited amount allocated for past treatment and sued the beneficiary in federal court under Section 502(a)(3) of ERISA, seeking to enforce the reimbursement provision of the plan. Plan officials wanted reimbursement of the full amount it had paid, which would have amounted to about 63 percent of the settlement.

The Supreme Court affirmed the lower court’s dismissal of the claim, holding that ERISA only allows plan officials to seek injunctive or "other appropriate equitable relief." The Court concluded that, because the claim for reimbursement was deemed an action at law, ERISA did not authorize the action brought by plan officials, and it was properly dismissed. The Court rejected plan officials’ arguments that the plan essentially was seeking specific performance of its contract or an equitable restitution claim.

The result is that ERISA health insurance plans may have a right to reimbursement, but no remedy to enforce that right.

Plans and their assignee collection agencies have sought other means to effectuate reimbursement. For example, they deny payment until medical payments insurance under an auto policy is exhausted (notwithstanding Insurance Department Bulletin 00-014-AB) or until onerous forms identifying other insurers are completed. Plans often assert a "lien" on settlement proceeds in the hands of the tortfeasor’s liability carrier. Sometimes, the liability carrier will acknowledge the claimed lien and go so far as to place the name of the plan on the settlement check.

Plans, however, have no statutory lien. Instead, what they have is a subrogation or reimbursement claim. Like any claim, it must be pled and proven in court. Before there is any lien or attachment on settlement proceeds, there would need to be a court order.

In the majority opinion in Knudson, Justice Scalia concludes by suggesting that the plan may have other remedies. He ends by stating that the Court expresses no opinion whether a direct action for breach of contract brought by a plan/insurer may "have been preempted by ERISA."

The foregoing passage, says attorney Douglas Wenners of Anthem Blue Cross/ Blue Shield of New Hampshire, may leave open an avenue for insurers to seek to enforce subrogation rights. Wenners points out that while federal court has exclusive jurisdiction over ERISA-based claims, case law has rejected preemption arguments where the issue is uniquely a function of state regulation, such as insurance.

Wenners does not expect much of a change in the way subrogation claims have been handled by Anthem in New Hampshire. "We have always had a good relationship with most of the members of the New Hampshire plaintiff’s bar," he said. Wenners expects that that relationship will continue, with subrogation claims being resolved through a negotiated process. "It’s the New Hampshire way," he said. (Requests for comment from other insurance plans went unanswered.)

I submit the New Hampshire approach as outlined in Dimick is the fairest resolution. Under Dimick, the subrogation claimant shares equitably with other claimants to the settlement proceeds. Despite the language in its plan documents, the health insurer should not be given the priority claim to settlement proceeds.

By seeking such a priority, ERISA plans got themselves in this situation, where they may well be left, without statutory amendments, to no enforceable claim to settlement proceeds.

I recommend promising a compromise with the plan at the outset in exchange for prompt payment of medical bills. It remains to be seen whether all insurers will, in the spirit of enlightened self-interest, be amenable to such compromise.

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