Stay Out Of My Shoes! Commercial Litigants Should Consider Subrogation Provisions As Part Of Litigation Planning

Most insurance policies provide for “subrogation.” Subrogation is triggered whenever an insurance company pays out an amount to a policyholder for harm caused to the policyholder by a third party. If the insurer can prove that the third party was at fault, the insurance company can typically file a “subrogation” lawsuit against the third party to recover the money it paid out to the policyholder. To use a simple example, if a third party sets fire to a business’s office, and the business’s insurance company pays the business the amount of its fire loss, then the insurance company can typically sue the arsonist in a “subrogation” action to recover the amount that it paid to the business.
“Subrogation” is defined by everyone’s favorite legal dictionary as “the substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim.” Black’s Law Dictionary 1467 (8th ed.2004).

Sometimes, however, an insurer doesn’t want to take the time and incur the expense of having to prove third-party fault, especially when the policyholder has received a relatively modest sum under the policy. What’s a reimbursement-seeking yet litigation-averse insurer to do? Well, the policyholder, despite having been paid by the insurance company, can still sue the third party for any additional losses not covered by the policy. An insurer might choose to write a subrogation provision into its policies that permits the insurer to recover all or part of its payout from whatever other money the policyholder might obtain by directly suing the third-party wrongdoer, or as compensation under some other policy that may be triggered by the incident.
From a customer relations view, however, a policyholder that has taken the time to haul a third party into court (or haggle out a settlement) is unlikely to be overly excited about sharing the fruits of their labor. The policyholder might feel that, equitably, his or her insurer doesn’t deserve to sit back, do nothing, and later take a cut of – or even all of – money it didn’t lift a finger to help secure. This is particularly true where, after the policyholder has paid attorneys’ fees, the insurer wants even more money that’s left over from the recovery. Well, too bad. At least in the context of ERISA (that’s the Employee Retirement Income Security Act, the federal law that covers pretty much every work-related benefits plan in the country), the U.S. Supreme Court said this summer that, if an ERISA plan has such a subrogation clause, that language controls and equitable principles just don’t enter into it.
In U.S. Airways, Inc. v. McCutchen, 133 S.Ct. 1537 (2013), the top court unanimously rejected the claims of a U.S. Airways employee that received $66,866 from his company’s health plan for medical expenses resulting from a car accident. That plan allowed U.S. Airways to reimburse itself from any related recovery from a third party. Not content with just having his medical bills paid for, McCutchen lawyered up (on a 40-percent contingency basis) and sought more than a million bucks from the driver at fault.
As is often the case, however, terrible drivers have terrible insurance, and McCutchen only squeezed a measly $10,000 out of her. After his own insurance company paid out under his policy, McCutchen received a total of $110,000, $44,000 of which went to his attorneys. But before he could pocket the remaining $66,000, U.S. Airways stepped in, contending that, under the plan’s subrogation clause, U.S. Airways was owed full reimbursement of its $66,866 payout from the $110,000 recovery, regardless of his payment of attorneys’ fees. In other words, by independently going after the driver at fault, McCutchen would end up $866 in the hole.
Not surprisingly, McCutchen balked at this potential outcome, so U.S. Airways drove straight into the U.S. District Court for the Western District of Pennsylvania under § 502(a)(3) of ERISA, which allows a health-plan administrator (in a self-funded plan, that’s usually the employer) to obtain “equitable relief” to enforce the terms of the plan. McCutchen protested that U.S. Airways’ request for “equitable relief” under § 502 must incorporate equitable doctrines and principles – particularly those doctrines and principles, such as the so-called “double recovery rule,” that would prevent U.S. Airways from taking money that wasn’t recovered for medical expenses. Even if U.S. Airways did get to dip into his recovery, McCuthchen complained, the equitable “common fund” rule should require U.S. Airways to at least chip in for the attorneys’ fees.
But the District Court wasn’t buying it, and granted summary judgment on the “clear and unambiguous” language of the plan that provided for reimbursement, regardless of what damages the money was ostensibly recovered for or whether the policyholder incurred legal fees in obtaining it. On appeal, the Third Circuit reversed, finding it a bit unfair that U.S. Airways could claim the fruits of McCutchen’s legal efforts, and actually force him to take a loss on the whole deal. It therefore instructed the District Court to calculate some lesser amount of “equitable relief” that would be appropriate given the size of McCutchen’s recovery and the company’s lack of participation in the action against the third party. This time U.S. Airways disagreed, relying on the plain language of its plan contract, and the U.S. Supreme Court agreed to consider the issue.
Justice Kagan agreed that the equity wasn’t a good reason to ignore the express terms of an ERISA plan. Because McCutchen’s plan plainly stated that the employer could reimburse itself from the entire amount obtained from third parties, the “double recovery” rule wasn’t relevant in determining what U.S. Airways was entitled to – it could seek reimbursement from any recovered sums, whether for medical expenses or otherwise. However, Kagan didn’t totally dish McCutchen a bad break.
Where the plan is silent on certain issues, the majority held (or, more specifically, Justice Kennedy’s moderate swing-vote held), well-established contract defaults, such as the common-fund rule, were incorporated into its terms. McCutchen’s plan didn’t say anything about attorneys’ fees, so the Court assumed the plan operated under the common-fund rule. In other words, McCutchen wasn’t forced to “pay for the privilege of serving as U.S. Airways’ collection agent” and he could reduce the company’s reimbursement by its fair share of his fees. (The Court’s conservative bloc dissented here, holding that this question wasn’t fairly presented in the case.)
The take-away lesson: The precise language of subrogation provisions matter. Plan sponsors, particularly those of self-funded health plans, should review plan documents carefully, making sure they specifically address any issue that might otherwise be controlled by an equitable default rule. Not quite sure that you’re sufficiently protected? Please feel free to contact Bill Sinclair, head of STSW’s commercial litigation group, at 410-385-9116 or bsinclair@silvermanthompson.com, and Chris Mincher, an associate in STSW’s business litigation group.