Last year, the U.S. Supreme Court issued its ruling in US Airways, Inc. v. McCutchen, holding that while equitable doctrines cannot “trump” the terms of an ERISA plan, they can be used to interpret, construe and fill gaps in language where plan terms are ambiguous. The important corollary to that rule, as noted in the McCutchen opinion, is that courts are not permitted to rewrite the terms of an ERISA plan when they are clear, plain and unambiguous.
To date, there has been no notable analysis of McCutchen in a court of appeals opinion. A handful of district court cases, however, have analyzed McCutchen and demonstrate how clear and unambiguous plan terms can successfully avoid the unintended application of equitable doctrines to plan terms.
McCutchen involved a self-funded health plan. The plan’s terms allowed it to recover health benefits paid to a participant when that participant recovered from third-party sources, such as a tortfeasor or other insurer. Specifically, the plan stated, “[y]ou will be required to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party.”
The Supreme Court held that this plan language was ambiguous because it did not specify the rules for allocating a third-party recovery between the plan and the participant and did not explicitly provide that the plan had first priority to reimbursement from third-party recoveries. In particular, the phrase “monies recovered” did not specify whether the “recovery” meant the participant’s gross recovery before reducing for attorneys’ fees or the net recovery after reducing for attorneys’ fees.
Given this ambiguity, the court held that the equitable “common fund doctrine” provided the default allocation rules. Under the “common fund doctrine,” one who recovers money for the benefit of another is entitled to retain a portion of that recovery as an attorney fee. Applying that doctrine in McCutchen, the court concluded that McCutchen was permitted to retain a portion of his net recovery (after reducing for his own attorneys’ fees) and was not required to fully reimburse the plan for the benefits paid on his behalf.
Like McCutchen, Diagnostic v. Bomani involved a self-funded health plan’s suit for reimbursement of money a plan participant recovered from a third-party. The court in Bomani, however, held that the plan could fully recover from the plan participant because the plan specified — unlike in McCutchen — that it had the right to recover 100 percent of the benefits that it paid and that the plan had the first right to reimbursement and priority over the funds regardless of whether the participant was made whole. Interestingly, the court also noted that if the plan had been insured (rather than self-funded), a state anti-subrogation statute, which prohibited insurers from recovering from an insured’s settlement with third-party tortfeasors, would have barred reimbursement.
In a similar case, Airtran Airways, Inc. v. Elem, the court again held that a self-funded health plan had the right to full reimbursement from a plan participant where the plan language stated that the plan participant was a constructive trustee over any third-party settlement, that the plan automatically had a lien over any such settlement, that the plan had a first priority claim to the settlement proceeds and that the plan was not required to participate in court costs or attorneys’ fees. The court further concluded that the plan could recover the fees held by the participant’s attorneys because they possessed funds that in “good conscience” belonged to the plan. This reasoning also existed in Cavanagh v. New Eng. Benefit Trust (“a plan participant’s attorney, by virtue of depositing his client’s recovery in his trust account, [does not have] a claim to an attorney’s fee that is sufficient to defeat an express abrogation of the common-fund doctrine in his client’s plan.”), but the court decided otherwise in Cent. States Southeast & Southwest Areas Health & Welfare Fund v. Bollinger, Inc. (plan’s right to reimbursement did not extend to money held by participant’s other insurers).
Through these cases, the U.S. Supreme Court and lower courts have demonstrated a willingness to adhere to unambiguous plan terms and a reluctance to interpret or “rewrite” plans, even when confronted with arguments based on principles of equity. On the flip side, the danger for plan sponsors and administrators is that plan terms that are not clear will be construed against them using equitable principles. To avoid that result, plan sponsors and administrator should review plan language for potential ambiguities, especially with respect to reimbursement provisions where McCutchen and subsequent cases have provided guidance on how to avoid application of the “common fund doctrine.”