Insurer Reimbursement Rights in ERISA LTD Plans

Tony CanataDisability InsuranceLeave a Comment

In “ERISA Offsets Other Benefits” we explained how a claimant suing for disability benefits can end up losing and then owing money back to the insurer.  In that example, the plaintiff sues seeking payment of her disability benefits and loses, and the ERISA disability payer countersues to collect money from the plaintiff’s retroactive social security disability check that is owed to offset payments made to her under the plan. In that instance, the money won in countersuit is owed under the terms of the plan but probably would not have been collected if not for the lawsuit. But reimbursement rights in ERISA LTD plans can lead to an even more insidious clawing back of money by an administrator or insurer: there is a scenario under which you can become disabled, gain a settlement from the third party that caused your disability, and actually end up having to pay more than you netted to the payer of your ERISA disability benefits. Really.

Here is how it can happen: You sustain catastrophic injuries in an auto accident and become disabled. You file for and are awarded ERISA disability benefits. You retain a lawyer to handle the auto accident case against the person who caused the accident. For ease of numbers, let us say that you collect $300,000 in a settlement. Your lawyer’s fee is 1/3, or $100,000. Under the terms of your ERISA disability plan, the payer of your disability benefits (usually an insurance company) has a right to take your entire settlement as a set off against what they have paid you in benefits. But you don’t have the entire settlement, because your lawyer took $100,000 of it in legal fees. No matter. No less an authority than the Supreme Court of the United States has ruled that you would have to pay back all $300,000, thus netting you a $100,000 loss on your auto accident “recovery.” This was the ruling in U.S. Airways v. McCutchen, 133 S.Ct. 1537 (2013). If you read the case, you will see that Justice Kagan parsed the language of the particular plan to determine that in that case the plaintiff did not end up owing the money back. But the ruling makes clear that where a disability plan calls for a full reimbursement of third party settlement funds, a court cannot deduct the plaintiff’s legal fees on equitable principles.

If this does not seem fair to an American worker who has worked hard and paid for disability benefits and has become disabled through no fault of her own, I can assure that it is perfectly fair. It has to be, because ERISA was designed because Congress found that “in the interests of employees and their beneficiaries, for the protection of the revenue of the United States, and to provide for the free flow of commerce, that minimum standards be provided assuring the equitable character of such plans and their financial soundness.” It is right in the law, at 29 U.S.C. 1001(a). It must just be that preventing an American worker from that kind of injustice is not necessary to assure the equitable character of ERISA plans.

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