Subrogration

A health plan can generally recover medical expenses it has paid on behalf of a plan beneficiary who is injured in an accident and subsequently receives monetary damages from third parties. A subrogation and/or reimbursement provision (also known as an “Acts of Third Parties” provision) establishes a plan’s right to recoup benefits paid from the damages received.

The Plan must provide for subrogation and reimbursement and must explain in the SPD the Plan’s right to pursue subrogation and/or reimbursement from all covered persons in the event of third-party liability.

Definitions

Subrogation

Subrogation is the substitution of one person (or entity) for another with respect to a legal claim. Subrogation permits an ERISA plan (or its insurer) to assume the place of a plan participant or beneficiary for purposes of recovering a loss which is paid to the participant or beneficiary under the plan, from third parties that are legally responsible to the participant or beneficiary. In a subrogation action, the plan itself will sue the third party to recover benefits that the plan has paid.

Reimbursement

Reimbursement is the requirement that a plan participant who recovers damages from a third party for personal injury must use that recovery to pay the plan back for any medical expenses resulting from the injury that the plan has paid. In practice, plans are more likely to pursue reimbursement than subrogation. Sometimes participants (or their attorneys) will resist a plan’s demand for reimbursement and the plan will need to sue the participant in order to assert its rights.

Subrogation Language

The United States Supreme Court has imposed significant restrictions on the kinds of remedies available to plans under these circumstances and the processes that plans must follow to avail themselves of those remedies. Therefore, the subrogation/reimbursement language contained in the plan document, as well as the operational procedures for asserting subrogation and reimbursement claims, are very important to an employer’s success in obtaining a recovery.

The SPD should address the following:

• The Plan’s right to recover regardless of whether the covered person is made whole;
• The obligation of the covered individual to notify and cooperate with the Plan in connection with any recovery;
• Responsibility for attorneys’ fees and costs born separately by the Plan and the covered individual; and
• Imposition of a constructive trust or lien on any settlement proceeds or jury awards, not just those set aside for medical expenses.

Be Prepared!

The Plan and/or Employer should be in a position to act quickly once a potential subrogation and/or reimbursement action arises. Due to the legal complexity of this issue, plans should use extreme caution and generally rely on expert legal counsel when drafting subrogation provisions.