About the Case

MAMSI administered a group health plan in which Marlene Sereboff was a beneficiary. The plan contains a reimbursement provision requiring a beneficiary who is injured as a result of the act or omission of a third party, and who receives benefits under the plan for those injuries, to reimburse the plan for these benefits from "all recoveries from a third party (whether by lawsuit, settlement, or otherwise)." When Ms. Sereboff was hurt in a car accident, the plan paid for approximately $70,000 in medical expenses. Ms. Sereboff sued various third parties involved in the accident. As soon as Ms. Sereboff filed that action, MAMSI sent a letter to her attorney asserting a lien on any anticipated proceeds from the suit for the medical expenses incurred.

Ms. Sereboff eventually settled this lawsuit for $750,000. She refused to reimburse the plan for medical expenses, and MAMSI filed a lawsuit in federal court under ERISA seeking to recover its outlays. Because Ms. Sereboff's attorney had distributed the settlement proceeds to her, MAMSI sought and received an order that required Ms. Sereboff to keep $70,000 from the settlement proceeds in an "investment account" until the merits of the reimbursement action was decided.

The High Court's Decision

The issue in this case was whether ERISA's enforcement provisions allow the plan to recover from Ms. Sereboff the money it paid to treat her injuries. In these types of situations, ERISA allows plans to seek "equitable" relief, but not "legal" relief. The arguments centered on whether MAMSI's claim for reimbursement could be considered equitable relief. Concluding that the reimbursement action in the Sereboff case was equitable relief appropriate under ERISA, the Court focused on whether the funds that were being sought by MAMSI were "specifically identifiable" funds that were in the possession and control of Ms. Sereboff. The Court held that if these characteristics were met, then an action to obtain these funds is one feature of "equitable restitution" or equitable relief. As a result of the lien and set-aside of the $70,000, the funds were, in fact, identifiable and in the possession of Ms. Sereboff. The Court held that, therefore, an action to obtain these funds was considered equitable relief.

The Court distinguished this case from its decision four years ago in Great West v. Knudson.² The Great West case involved a similar scenario: a car accident and a reimbursement action by Great West against a beneficiary who refused to reimburse the plan. In the Great West case, however, the funds that Great West sought were not in the beneficiaries' possession, but instead had been placed in a special needs trust under California law. The beneficiary did not have possession of the funds, and so, the Court concluded, the attempt by Great West to recover the money from her was an attempt to impose personal liability, a legal remedy not available under ERISA.

Implications for Sponsors of Group Health Plans Subject to ERISA

After the Great West decision, some federal appellate courts ruled that even a reimbursement action to seek specific identifiable funds in the possession of a beneficiary was legal, not equitable relief.³ Other federal courts interpreted Great West to prevent a reimbursement action against a beneficiary only when the proceeds from the third party action were not identifiable and in his or her possession. The decision in the Sereboff case resolves the uncertainty.

The actions of plan attorneys in making sure the funds that the plan seeks are identifiable and in the beneficiaries' possession were the focus of both cases. The specifics of the plan language did not necessarily play a pivotal role in these decisions. However, the Court did note that the plan language in Great West stated that where a beneficiary fails to reimburse the plan, then "he will be personally liable" to the plan for the reimbursement. It is this personal liability, out of whatever assets the person owns, that the Court has now defined as legal relief not available under ERISA. It does not appear that the plan language in Sereboff contained this personal liability language.⁴

Sponsors of group health plans subject to ERISA should consider the following:

• Plans may wish to state in their reimbursement/subrogation language the ability of the plan to bring an action to obtain a constructive trust or equitable lien. The language could require the beneficiary to consent up front to the plan's right to an equitable lien or constructive trust or the plan's right to a specific portion of the proceeds of a settlement. This may assist plans should litigation be necessary, although without this language plans probably still have the ability to seek the creation of a constructive trust. Legal counsel should be consulted for the preparation of this type of language.
• Reimbursement or subrogation language should also require a beneficiary to notify a plan when he or she initiates a third party action. This will give the plan the opportunity to take any actions needed to intervene in the case or to bring its own action under ERISA.

Subrogation language could also contain other features enabling a plan to recover from a beneficiary without litigation, such as a right to set off future benefits under the plan until the overlapping payments from the third party are recovered.

Segal Company consultants can be retained to work with sponsors of group health plans and their attorneys to draft subrogation language and related policies for plan participants.

1	To see the U.S. Supreme Court's decision in the Sereboff case, click here. (To return to the Capital Checkup text, click here.)
2	To see the U.S. Supreme Court's decision in the Great West case, click here. (To return to the Capital Checkup text, click here.)
3	The following federal circuits have ruled that reimbursement is not equitable relief: the Sixth Circuit (covering Kentucky, Michigan, Ohio and Tennessee) and the Ninth Circuit (covering Arizona, California, Oregon and Washington state). This information is important because the law changes in these circuits. (To return to the Capital Checkup text, click here.)
4	The reimbursement language is not quoted in its entirety in the decision. (To return to the Capital Checkup text, click here.)