Once the plan document is clear that medical expenses are not covered to the extent they arise as a result of an injury or wrongful act of a third party or are covered by other insurance, an effective plan should also contain a provision for subrogation and reimbursement. The plan should contain a right to proceed directly as against a third party or in true subrogation terms to "step into the shoes of the plan participant". This provision will have the result of allowing the plan to either (a) proceed directly to recover its funds, or (b) allow the plan to be entitled to repayment of medical expenses when received by its participant. It is difficult to make a complete subrogation/reimbursement agreement clear and concise. When in doubt opt for a clearer but less concise provision.
A complete provision needs to address the following scenarios:
A) The responsibility of the plan to make payment. It should be clear in the exclusion section of the benefit agreements that the plan is not obligated to make payments for health claims caused by the negligent or wrongful acts of another party. This provision should be included with all of the plan's other exclusions but should reference the coordination of Benefits section which will allow the plan to advance benefits if it so desires. This determination of payment will almost always occur prior to a determination of responsibility of any other third party and will allow the plan to achieve its goals of providing coverage to participants without having committed to payment of a claim which may otherwise be barred from presentation in a court of law by the collateral source rule.
B) The ability of the plan to secure repayment of its claims from the responsible party should also be well detailed. The plan document must describe the responsibility of the plan participant (and any other persons covered under the plan) to acknowledge the right of the plan to be subrogated to any right of any covered participant as against any potentially responsible third party.
C) The plan document must also provide that the plan has the right to be reimbursed from any funds received by the participant.
D) The obligation of covered persons under the plan to protect the interests of the plan must be clear. The plan provisions should specifically state that the covered participants must notify the plan of any potential third party actions and may not waive, compromise or otherwise settle or discontinue the subrogation rights of the plan. As a practical matter, since subrogation is a derivative claim of the participant, the participant has in most instances the ability to defeat the plan's direct right of subrogation against the responsible third party tortfeasor. To the extent that the third party has been released, the plans only remedy is to pursue its beneficiary (unless the third party had been placed on notice in which case the plan's claim is not extinguished).
Attorney Fees
Many state courts have held that if the plan does not participate in the recovery of funds to which the plan later asserts a right of subrogation or contractual reimbursement, the Plan is limited by the "common fund doctrine" to being required to reduce its claim by the same proportion of attorney fees and costs of suit as the participant paid the plaintiff's counsel. If the plan does not wish to have its recovery reduced it must assert its own claim against the alleged tortfeasor and bear its own costs.
Most highly effective subrogation programs review on a case by case basis the retention of plaintiff's counsel to protect the plan's interest. In general the participant's counsel is in a better position to effectively pursue the plan's interests and can do so at a lower cost than if the plan were to pursue its rights directly. However, each case must be reviewed independently. For many large dollar cases (particularly those over $50,000 with clear liability) it is generally in the plan's best interest to protect its own interest rather than rely upon Plaintiff's counsel. In these cases the plan's net recovery can be significantly increased by pursuing its own independent claim. Another consideration is that in most cases where there are significant injuries there often is insufficient third party coverage available to satisfy the future needs of the injured participant and the subrogation claims of the plan. In these cases there is a potential conflict between the participant's counsel and the plan's interest. The plan trustees have a fiduciary duty to the plan which generally prohibits the arbitrary release of plan claims to assets because of humanitarian concerns. Plaintiff's counsel also has a duty to maximize his clients recovery which generally will mean an attempt to reduce or compromise the subrogation claim. Clearly defining the plan's obligation as to attorney fees will give the plan better options when the plan elects to pursue its own interests.
Reimbursement Agreements
It should also be noted that many plans require the participant to sign a reimbursement agreement which provides that the plan is to be reimbursed, up to the amount of any benefits paid, from any payments, awards or settlements which may be paid to the participant by any third party.
While a reimbursement agreement is helpful to remind the participant of his/her duty under the plan, if the plan has clear language, a reimbursement agreement should not be needed. Plans often get themselves into difficulty with reimbursement agreements even if the plan references such an agreement. If a plan does not contain a right of reimbursement and only references that the participant will sign a reimbursement agreement, a court may construe the plan as having waived or not protected its right of reimbursement if an agreement is not signed. Many plans contain third party subrogation language but are not as clear on the plan's right to be reimbursed from any participant recovery. In those cases the participant may settle the third party claim extinguishing the plan's subrogation right while not being required to reimburse the plan. Reimbursement agreements may also be questioned if the participant refuses to agree to the terms of the agreement stating that they are not properly part of the plan document.
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