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The U.S. Supreme Court has ruled 5-4 against letting benefits companies sue plan members in federal court for most forms of cash damages.

The lead plaintiff in the case, Great-West Life & Annuity Insurance Company, wanted to tap settlement funds approved by a California state court to get back some of the money it spent on medical care for Janette Knudson, an insured who was injured in a 1992 car crash.

But the Supreme Court found that Great-West and the other plaintiffs should have tried harder to make their case while the state court negotiations were under way, and that the Employee Retirement Income Security Act of 1974 limits the ability of benefits companies to sue plan members for cash in federal court.

ERISA Section 502(a)(3) permits a benefit plan “participant, beneficiary, or fiduciary” to bring a federal civil suit for injunctions or “other appropriate equitable relief.”

Under the traditional rules governing equitable relief, restitution rights are so narrow that they apply mainly to tainted assets, Chief Justice Antonin Scalia writes in an opinion for the majority.

A health insurer or other benefits company might be able to sue a member for restitution if “money or property identified as belonging in good conscience to the plaintiff could clearly be traced to particular funds or property in the defendants possession,” Scalia writes.

But, if a member has no access to the plaintiffs money, has spent the plaintiffs money, or is simply involved in an ordinary contractual dispute, the plaintiff should seek a better-known form of relief, “restitution at law,” Scalia argues.

Scalia emphasizes the distinction that evolved in the English courts. There, judges handling matters involving the possibility of large cash awards had to stick closely to precedents and statutes. Judges handling matters of equity, or basic humanity and fairness, had more flexibility to come up with fair solutions, but little ability to award large sums of cash.

Scalia draws heavily in his opinion on Mertens vs. Hewitt Associates L.L.C., a 1993 Supreme Court ruling that also emphasizes the restrictions ERISA places on suits by and against plan fiduciaries and nonfiduciary plan advisors.

Chief Justice William Rehnquist and Justices Sandra Day OConnor, Arthur Kennedy and Clarence Thomas voted with Scalia and joined in his opinion.

Justice Ruth Bader Ginsburg wrote a dissenting opinion pointing out that the Federal Rules of Civil Procedure eliminated the distinction between equitable and legal relief in the federal courts more than 60 years ago.

Justices John Paul Stevens, David Souter and Stephen Breyer joined in the Ginsburg dissent. Stevens also wrote a second dissent to emphasize his support for Ginsburg.

James Jorden, a Washington lawyer who helped represent Great-West, says he is happy with the logic the court used to reach its decision.

“Its a narrow opinion that leaves most of the remedies still available to the plan,” Jorden says

Jeffrey Pop, a lawyer for Knudson, agrees the ruling is a relatively narrow one that should leave health insurers many legal tools they can use to seek third-party recoveries.

The ruling “didnt say they dont have any rights,” Pop says.

“The real effect of the ruling is to fine-tune the litigation strategies of health plans,” says William Schiffbauer, a lawyer who followed the case for the Health Insurance Association of America.

But Mary Ellen Signorille, a lawyer with the AARP Litigation Foundation, Washington, which filed a brief commenting on the case, says she believes the ruling could make it harder for benefits companies to sue actuarial firms, investment advisors and other plan advisors for cash damages.

“The plans are now in the same position that the participants are in,” Signorille says.

Great-West, an affiliate of Power Financial Corp., Winnipeg, got involved with the case because it set up a stop-loss reinsurance arrangement for a self-insured employee health plan in California.

Great-West and the plan say they spent $411,157 on medical care for Knudson, a plan member, as a result of the 1992 car crash.

Knudson eventually won state court approval for a $650,000 settlement involving several defendants and creditors. Great-West and the self-insured plan played only a small role in the state-court negotiations, and the settlement agreement allows only $13,838 for medical expenses.

Great-West said plan documents gave it a right to put a first lien on any third-party payments to Knudson. The company tried to collect the full $411,157 from the settlement funds.

A federal district court in California threw out Great-Wests case, ruling the language of the plan recovery provision limited it to taking the portion of the settlement set aside for medical expenses.

The 9th Circuit Court of Appeals also sided with Knudson, arguing Great-West had no right under ERISA Section 502(a)(3) to sue her for cash.

The Supreme Court upheld the 9th Circuit ruling and followed its interpretation of Section 502(a)(3).

Because ERISA preempts many state benefit plan claims, benefits companies unable to sue for cash in federal court may not be able to get any relief in state court, either, but that handicap is no reason to adjust the meaning of ERISA, Scalia writes.


Reproduced from National Underwriter Life & Health/Financial Services Edition, January 28, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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