Health Insurer Learns That if Law is at the Heart of the Matter, Equity Grants No Relief
February, 2002
Long thought deceased by many a lawyer, the distinction between law and equity has received new life by virtue of Congress’ enactment of the Employee Retirement Income Security Act of 1974 (ERISA). So ruled the United States Supreme Court in Great-West Life & Annuity Ins. Co. v. Knudson, 122 S. Ct. 708 (2002). The case has serious implications for health insurance and other carriers who pursue their claims for reimbursement against insureds, wrongdoers injuring or causing damage to insureds, or custodians of tort suit recoveries. On a 5-4 vote, the Court held that while ERISA’s § 502(a)(3) purports to allow actions to recover when seeking traditionally equitable relief, it grants no remedy when seeking legal relief.
Facts
Janette Knudson was rendered quadriplegic by a car accident and as a result incurred $411,157.11 in medical bills charged to her husband’s health plan. Under the health plan, Great-West paid the medicals. The plan gave Great-West the right to recover from the beneficiary any payment for benefits paid by the plan that the beneficiary is entitled to recover from a third party. After the Knudsons filed a state court tort action against the manufacturer of their car and others, the parties reached a negotiated settlement. Honoring the health plan’s reimbursement clause more in the breach than the observance, the settlement allocated the bulk of the $650,000 recovery to attorneys’ fees and a special trust for future medical care of Janette while assigning only $13,828.70 as compensation for past medical bills, the subject of Great-West’s reimbursement claim. The California state court approved the settlement terms and allocations, but Great-West, not surprisingly, felt less than whole. When Knudsons’ attorney sent it a check for $13,828.70, Great-West refused to cash it.
Instead, Great-West filed a federal court action under ERISA against the Knudsons seeking injunctive and declaratory relief, and payment out of the settlement proceeds of the entire amount it paid for Janette’s medical bills. The federal district court denied Great-West’s claim on the ground that the state court approval of the allocations of the settlement fund controlled the case. The Ninth Circuit also ruled against the insurer, but for a different reason; namely, that § 502(a)(3) of ERISA allowed only “equitable relief,” while here Great-West’s claim must fail because it sought a “legal” remedy. The Supreme Court agreed with the holding of the Ninth Circuit and affirmed.
Legal Analysis
ERISA’s § 502(a)(3) authorizes a civil action by a participant, beneficiary or fiduciary “to enjoin any act or practice which violates . . . the terms of the plan, or . . . to obtain appropriate equitable relief,” to redress such violations or enforce any provisions of the plan.
The Court rejected three arguments made in support of reimbursement, and expressly took no position on several other specific reimbursement claim scenarios not before it.
First, the Court refused to accept Great-West’s argument that by seeking “to enjoin [an] act or practice which violates” the plan’s terms (the denial of reimbursement), it sought the “equitable” relief authorized by § 502(a)(3). The Court found that since Great-West sought to impose personal contractual liability upon the Knudsons, a relief available under principles of law rather than equity, the reimbursement claim was not authorized by § 502(a)(3). Seeking an “injunction” to compel payment of money past due under a contract does not qualify as the pursuit of equitable relief, said the Court.
Second, Great-West argued that it sought restitution, a traditionally equitable relief. However, whether restitution is equitable or legal relief depends on the nature of the underlying remedies sought. For restitution to be equitable, the action must not seek to impose personal liability on the defendant, but to restore to the plaintiff particular funds or property in the defendant’s possession. Here, the insurer sought reimbursement of some funds, not particular funds, belonging to plaintiff. Thus, the restitution sought was legal, not equitable, said the Court. The funds were in the hands of the Knudsons’ attorney and the special trustee, not the Knudsons themselves. The attorney and trustee were no longer parties to the action.
Lastly, the Court found that the common law of trusts does not bring the action to the equitable side of the bench. Rather, the common law of trusts provides equitable set-off remedies to trust beneficiaries not applicable here where the claim was for return from other monies.
The majority noted that it was not deciding whether the insurer could have intervened in the state court tort action, whether ERISA pre-empted contractual remedies, or whether equitable relief could have been obtained against the attorney and the trustee. Finally, it observed that Congress authorized a “participant or beneficiary” to bring a civil action to enforce one’s rights under the terms of the plan without reference to whether the relief sought is legal or equitable in § 502(a)(1). See 29 U.S.C § 1132(a)(1).
Learning Points:
In the future, insurers should consider several options, none of which guarantees success. Also, likely outcomes may be governed by varying federal cases and local state law.
One option is intervention in the state court tort proceedings and pursuit of contract remedies. Another is to add the attorney, trustee and all other actual or potential custodians of settlement proceeds as party defendants and assert a constructive trust theory against the actual holder or holders of the funds. Third, consider a more traditional subrogation action brought in the name of the insurer, the insured or both, on both legal and equitable theories, relying in part on 29 U.S.C. § 1132(a)(1) which allows a “participant or beneficiary” (but not a fiduciary) to sue without regard to law or equity for benefits. Of course, subrogation can be based on contract, equity or both. Potential obstacles remaining include anti-subrogation laws noted by the dissent, the argument that ERISA preempts non-ERISA remedies, and the argument that they are all, at heart, actions seeking a legal remedy contrary to the Knudson case. Also, state judges approving allocations of settlement proceeds to health insurers at a little over three cents on the dollar ($13,828.70/$411,157.11) offer little help, and can make intervention, even if granted, a procedural victory with little monetary rewards. However, the alternative may be no settlement or recovery at all. Lastly, § 503(a)(1) may be limited to plan benefits, and may not extend to an insurer standing in the shoes of an insured who, like Janette Knudson, had already received plan benefits in full.
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