"The Make Whole Doctrine" and an ERISA Fiduciary's Right to Subrogation
James E. Beal1
Federal courts of appeal are currently split concerning application of the “make whole doctrine” to the subrogation rights of an ERISA fiduciary. Some circuits have adopted this doctrine as a matter of federal common law, while some have refused to do so.
I. Introduction
In Sereboff v. Mid Atlantic Medical Services, Inc.,2 the Supreme Court considered “the circumstances in which a fiduciary under the Employee Retirement Security Act of 1974 (ERISA) may sue a beneficiary for reimbursement of medical expenses paid by the ERISA plan, when the beneficiary has recovered for its injuries from a third party.”3 The issue centered on the meaning of “equitable relief” as used in § 503(a)(3) of ERISA.4 The Court held that a fiduciary is authorized to seek reimbursement from a beneficiary when “recovery [is sought] through a constructive trust or equitable lien on a specifically identified fund,” as opposed to seeking recovery from the beneficiary’s assets generally.5 The Court held that the plan’s provision requiring a beneficiary to reimburse the plan for medical expenses paid by it, should the beneficiary subsequently collect from a third party for those same costs, constituted an equitable lien for which “equitable relief” under § 502(a)(3) was available.6
This decision settled a circuit split which had existed regarding an ERISA fiduciary’s subrogation right under § 502(a)(3).7 For further commentary on the Sereboff decision, and the previously-existing circuit split, see Andrew M. Campbell, Construction and Application of Employee Retirement Income Security Act of 1974 (29 U.S.C.A. § 1001 et seq.) By United States Supreme Court, 150 A.L.R. Fed. 441.
However, this case did not completely settle all issues related to an ERISA fiduciary’s subrogation rights. There still exists a split among federal courts of appeal as to whether the “make whole doctrine” should apply to cases involving a subrogation clause in an ERISA plan. This article examines some cases that have ruled on this issue, and pays particular attention to the current rule in the 8th Circuit, which does not adopt the make whole doctrine. Attorneys representing clients who are beneficiaries of an employee benefit plan governed by ERISA need to pay careful attention to the language of the plan’s subgrogation clause, and be sure their clients are fully informed of the potential consequences should they only receive partial recovery for their injuries from a third party.
II. The Make Whole Doctrine
The make whole doctrine is an equitable insurance law principle which holds:
That in the absence of contrary statutory law or valid contractual obligations to the contrary, the general rule under the doctrine of equitable subrogation is that where an insured is entitled to receive recovery for the same loss from more than one source, e.g., the insurer and the tortfeasor, it is only after the insured has been fully compensated for all of the loss that the insurer acquires a right to subrogation, or is entitled to enforce its subrogation rights. The rule applies as well to instances in which the insured has recovered from the third party and the insurer attempts to exercise its subrogation right by way of reimbursement against the insured’s recovery.8
Some federal courts of appeal have held that this doctrine applies to an ERISA fiduciary’s subrogation right under § 502(a)(3); others have held that it does not.9
In a 6th Circuit case, Copeland Oaks v. Haupt,10 the Haupts (father and daughter) suffered serious injuries in an auto accident.11 The Haupts sued the other driver, but also filed a claim with the father’s employee benefit plan for payment of their medical expenses. The plan (sponsored by the father’s employer, Copeland Oaks) agreed to pay more than $300,000 in medical expenses subject to the plan’s subrogation clause, which gave the plan “priority over any funds paid by a third party to a Covered Person relative to the Injury.”12 The Haupts collected $105,000 in a settlement with the other driver and his insurance company. The plan then sought reimbursement in that amount. The Haupts argued that because they had not been made whole, the plan could not collect anything from them. The court had to decide, then, whether the plan’s subrogation clause was specific enough to prevent application of the make whole doctrine, which the court had adopted as the default rule in a previous decision.13
“Copeland Oaks argue[d] that because it [was] subject only to the ‘arbitrary and capricious’ standard of review [the court] should defer to its conclusion that the Plan language expressly opts out of the default make-whole rule.”14 The court ruled, however, that were it “to accept Copeland Oaks’ position, ‘the [P]lan could avoid a default rule of insurance law applicable in the ERISA context merely by giving itself discretion to interpret the plan. We do not believe ERISA gives the Fund that kind of authority, which is denied to insurance companies not governed by ERISA.’”15 The court found:
[T]hat in order for plan language to conclusively disavow the default rule, it must be specific and clear in establishing both a priority to the funds recovered and a right to any full or partial recovery. In the absence of such clear and specific language rejecting the make-whole rule – with clarity and specificity ultimately determined by the reviewing court – it is arbitrary and capricious for a plan administrator not to apply the default.16
The court held that the subrogation clause in the Copeland Oaks plan failed to “establish its priority right over any partial recovery,” and therefore the default rule applied.17
Contrary to the 6th Circuit’s decision in Copeland Oaks, the 8th Circuit ruled in Waller v. Hormel Foods Corp. that the make whole doctrine should not be applied to employee benefit plans governed by ERISA.18 The subrogation clause in the plan at issue provided that the plan “shall be subrogated to all rights of recovery which you or your dependant . . . may have against any person or organization,” but the plan did not define subrogation .19 The Wallers argued that the court should construe the word “subrogated” to include the make-whole doctrine that is commonly applied to subrogation clauses in insurance policies governed by state law. But the court ruled that “there is good reason not to read ERISA plans like insurance policies” governed by state law:
The very heart of the bargain when the insured purchases insurance is that if there is a loss he or she will be made whole. The cases that originally applied subrogation to insurance contracts never envisioned the use of subrogation as a device to fully reimburse the insurer at the expense of leaving the insured less than fully compensated for his loss. Employer-funded medical benefit plans should not be viewed in this fashion.20
The court paid particular attention to the fact that the subrogation clause at issue was published in a summary plan description (SPD) which, under ERISA, is a heavily regulated document.
The purpose of a SPD is that it should “be written in a manner calculated to be understood by the average plan participant” while also “sufficiently accurate and comprehensive to reasonably apprise such participants and beneficiaries of their rights and obligations under the plan.”21 “The Wallers argue[d] that the absence of express ‘first priority’ language” in the subrogation clause required the court to apply the make whole doctrine to the plan, but the court held that a subrogation clause published in a SPD must be construed in light of the essential nature and purpose of that document:
[F]ar from the kind of silence that would be tantamount to ambiguity, the only silence here is the understandable absence of separate, specifically articulated rules for situations of partial recovery and total recovery with variations depending on the nature of the source of recovery. This signifies nothing more than that, regardless of source, the rule is the same for total and partial recoveries.22
Thus, in Waller the 8th Circuit refused to adopt the make whole doctrine as a matter of federal common law. Instead, the court held that subrogation clauses contained in employee benefit plans governed by ERISA should not be read the same as subrogation clauses in insurance policies governed by state law.23
III. Conclusion
There exist, then, two positions concerning application of the make whole doctrine to cases interpreting subrogation clauses in employee benefit plans governed by ERISA. The 6th, 11th, and 9th Circuits have adopted the make whole doctrine as the default rule in the absence of a specific contract provision to the contrary. The 8th and 4th Circuits have chosen not to adopt this doctrine as a matter of federal common law. Depending on the amount of damages, the stakes can be very high. Where, like in the Waller case, a beneficiary only recovers around half his medical expenses in a settlement, whether that beneficiary has to then hand over those settlement proceeds to the plan can make quite a difference.
Attorneys who practice in the 8th Circuit, and represent clients who are beneficiaries of benefit plans governed by ERISA, need to read carefully the subrogation clauses of those plans and be sure that their clients are fully informed of the potential consequences should they only be able to obtain partial recovery. Many attorneys will be familiar with the make whole doctrine as it applies to insurance policies governed by state law. They need to be aware that in courts in the 8th Circuit, arguing for application of this doctrine will likely fail where the plan at issue is governed by ERISA.24
Footnotes
1 The author is an associate at Brown & James in St. Louis, where he concentrates in insurance law, products liability and the defense of transportation and premises liability claims. He is licensed to practice in Missouri and Illinois.
2 126 S.Ct. 1869 (2006).
3 Id. at 1872.
4 29 U.S.C. § 1132(a)(3).
5 Sereboff, 126 S.Ct. at 1874.
6 Id. at 1875.
7 For further commentary on the Sereboff decision, and the previously-existing circuit split, see Andrew M. Campbell, Construction and Application of Employee Retirement Income Security Act of 1974 (29 U.S.C.A. § 1001 et seq.) By United States Supreme Court, 150 A.L.R. Fed. 441 § 29 (2006).
8 16 Lee R. Russ, Thomas F. Segalla & Steven Pitt, Couch on Insurance § 223:134 (3d ed. 2000).
9 The reader should note that even in jurisdictions which apply this doctrine, it is applied only as a default rule. Where there is a clear contractual provision to the contrary, the court will not enforce the make whole doctrine. See, e.g., Moore v. Capitalcare, Inc., 461 F.3d 1 (D.C. Cir. 2006).
10 209 F.3d 811 (6th Cir. 2000).
11 Id. at 812.
12 Id. at 813 (original emphasis).
13 Id. “In Marshall we adopted the so-called ‘make whole’ rule of federal common law, which requires that an insured be made whole before an insurer can enforce its right to subrogation under ERISA, unless there is a clear contractual provision to the contrary.” Id.
14 Id.
15 Id. (emphasis added).
16 Id. (original emphasis).
17 Id. at 814 (original emphasis). Other circuits that have adopted the make whole doctrine are the 11th Circuit, see Cagle v. Bruner, 112 F.3d 1510 (11th Cir. 1997); and the 9th Circuit, see Barnes v. Independent Auto. Dealers, 64 F.3d 1389 (9th Cir. 1995).
18 120 F.3d 138, 139 (8th Cir. 1997).
19 Id. (internal citations omitted).
20 Id. at 140.
21 Id. (citing 29 U.S.C. § 1022(a)(1)).
22 Id.
23 Other circuits that have refused to adopt the make whole doctrine as a matter of federal common law include the 4th Circuit, see In re Paris, 211 F.3d 1265 (Table) (4th Cir. 2000) (depublished); and the 5th Circuit, see Sunbeam-Oster Co., Inc. Group Benefits Plan v. Whitehurst, 102 F.3d 1368, 1378 (5th Cir. 1996) (stating, in dicta, “we have serious doubts whether we would ever approve or adopt the Make Whole rule as this circuit’s default rule for the priority of recovery in reimbursement or subrogation between an ERISA plan and its participant or beneficiary under circumstances such as the ones we consider today.” See also, New Orleans Assets, L.L.C. v. Woodward, 363 F.3d 372, 375, n.4 (5th Cir. 2004)).