H&W: Subrogation Rights

The United States Supreme Court recently decided the case of Montanile v. Board of Trustees.  This case will be of interest to employers with self-insured plans.  Those plans likely contain provisions that permit the plan to recover any benefits it has paid out for treatment of injury caused by a third party, if the injured person recovers damages from the third party.  These are generally called subrogation and reimbursement provisions.

The Supreme Court, in prior cases, had limited the ways that a plan could enforce its subrogation and reimbursement rights in circumstances where the plan participant refused to permit the plan to recover its benefits.   In particular, the Court held that recovery could only be made from an identifiable fund in the possession of the injured party.  As a result of those cases, many plans modified those provisions to include an obligation on the part of plan participants to notify plans of lawsuits and settlements and an agreement by the participant to hold any recovery for the benefit of the plan.

In Montanile, the plan was aware of the settlement and demanded reimbursement, but Montanile’s attorney refused the demand and advised the plan that unless it objected, he would be transferring the settlement funds to Montanile.  The plan did nothing at that point, but six months later sued Montanile to recover benefits paid.  Montanile defended the case arguing that he had spent the money and that under prior Supreme Court case law, there was no identifiable fund from which to recover.  The plan argued that it should be able to recover from Montanile’s general assets based on his agreement to hold the recovery for the plan’s benefit despite the fact that he had dissipated the fund.

The Court held that the plan could not recover.  It stated that even though the agreement had created an equitable lien on the fund, that lien is destroyed when the fund is gone.

The short, sharp lesson from the Montanile case is that plan administrators need to move quickly to secure their subrogation rights while the recovery fund is still intact.

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