Fair? Not In ERISA

Wouldn’t you think it fair for all parties who benefit from a recovery pay their fair share of the costs of that recovery? In most areas of the law this holds true. Not in ERISA.

In U.S. Airways v. McCutchen, 133 S. Ct. 1537 (2013), the ERISA plan called for the employer self-insurer to be reimbursed for any benefits paid from any recovery the insured received from a third party tortfeasor. Unfortunately in this case, the third party tortfeasor injured a lot of people and didn’t have nearly enough insurance to pay all claims.

So, Mr. McCutchen found himself in the position of receiving a total of $110,000 from the tortfeasor and his own insurance company. After he had paid his lawyer a 40% contingency fee for the recovery ($44,000) Mr. McCutchen was left with $66,000. But his employer had laid out $66,866 and wanted it all, (including the $866 which would have to come from McCutchen’s pocket) without paying any of the cost of collection.

Since the plan clearly called for reimbursement of benefits, but did not expressly dictate how the fees and costs for recovering reimbursement monies were to be paid, the Supreme Court through Justice Kagan, speaking for a 5-4 majority, gave Mr. McCutchen a break by holding that in the absence of a clear plan dictate as to how the parties should bear the costs of third party recoveries, the “common fund” rule should apply.

The “common fund” rule is applied in most third party recovery matters involving insurance companies and beneficiaries. The rule generally apportions the costs of these recoveries between insurers and beneficiaries, so that each one pays a fair share.

In McCutchen, the Court clearly opened the door for plan administrators to disregard the “common fund” doctrine by specifying in their plans that they are to receive every penny of a third party recovery, without any offsets for legal fees or costs, until paid in full for benefits laid out. You can be sure that plan administrators are reviewing their plans with their attorneys at this very moment to accomplish this.

But, in making this ruling the Court showed its naiveté in the never-ending battle between ERISA plan administrators and claimants. Justice Kagan said she doubted that U.S. Airways would want to take the $686 out of McCutchen’s pocket. Having battled ERISA insurance companies and employers for more than 30 years, we don’t think it would have bothered an insurance company in the least.

 Most ERISA plans give the insurance company subrogation rights against a third party tortfeasor. This gives insurers the clear right to bring suit against a third party in the name of the insured. But, do they?

They don’t because if they did they might have to pay a share of the lawyer and court costs. By staying out of the legal loop, the insured bears the burden of the third party litigation including the obligation of paying the lawyer while the insurance company stands by ready to grab repayment of all benefits paid out from the first monies recovered.

So, if you have a third party claim involved in an ERISA case, know that you’ll be going it alone until recovery, when your insurer will jump in front of you with its hand out.