Guest Article

Knowledge of Plan's Reimbursement Claim May Make Attorneys Liable for Honoring That Claim

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Summary: Two federal district courts recently ruled that whether or not a plan participant's attorney can be personally held liable for reimbursing a group health plan hinges on the attorney's knowledge of the plan's reimbursement right.

Two recent cases demonstrate that a plan may be able to recover the benefits it paid from the proceeds of a tort settlement or judgment from a plan participant's attorney, but only if the attorney was aware that the plan's rights were governed by ERISA.

Attorney Did Not Act in Bad Faith When She Failed to Reimburse Plan

In the first case, J & J Snack Foods Corp. v. Kafrissen, 2001 WL 1346321 (E.D. Pa., Oct. 30, 2001), James Dowd died from injuries he sustained in an auto accident. He incurred approximately $83,000 in medical expenses, which were paid by his group health plan. Carole Kafrissen, the Dowd family's attorney, filed a wrongful death lawsuit that was removed to federal court. While the matter was pending, on several occasions, representatives of Blue Cross and Blue Shield of New Jersey and the plan sponsor wrote to Kafrissen advising her that the plan would be asserting a lien for $83,000, but no one ever indicated the basis for asserting those liens. Kafrissen had no experience with ERISA and, in 17 years of practice, her clients were never required to pay an ERISA-type subrogation claim.

The case was eventually settled for $975,000, which were allocated for wrongful death and survivors, but not for medical expenses. The entire settlement was paid to the family members. Kafrissen ignored the subrogation liens because they were not valid under Pennsylvania law, and she was unaware that ERISA preempted state law until approximately a year after the settlement was disbursed, when she was advised for the first time that the lien was based on an ERISA claim.

The court concluded that Kafrissen: (1) did not act in bad faith; (2) was never told about ERISA's application to the plan before the settlement; (3) did not disobey a court order or conduct her lawsuit in bad faith; and (4) no constructive trust existed over the settlement proceeds. The court also noted, that although the plan was aware of the tort action, it never intervened in the matter until a year after the date of the settlement. As such, the court refused to hold Kafrissen and the Dowds liable for either attorney's fees or punitive damages.

Obviously, this result would have been much different for the plan had it stated the basis for its subrogation lien.

Attorney Intentionally Ignored Plan's Subrogation Provision

The second case, Great-West Life & Annuity Insurance Co. v. Smith, 2002 WL 59144 (M.D. Fla., Jan. 4, 2002), also involved a claim by an ERISA plan against a plan participant and his attorney for failing to reimburse the plan out of tort settlement proceeds according to the plan's subrogation provisions. However, in this case, the law firm apparently knew of the plan's subrogation and right of recovery provisions, and distributed the proceeds to the plan participant without reimbursing the plan for approximately $51,000 in medical expenses.

The court's ruling dealt only with three of the plan's claims against the law firm:

Equitable relief under ERISA's civil enforcement provision for the firm's failure to reimburse the plan. The court ruled that even though the law firm was not an ERISA fiduciary, that cause of action could be maintained against a non-fiduciary, so it was allowed to stand; Tortious interference with the plan's contractual right to reimbursement from the settlement proceeds; and Conversion of the portion of the proceeds to which the plan had first lien.

The court ruled that the latter two claims were preempted by ERISA.

Implications

The difference in the outcome of these two cases apparently rests on the participant's attorney's knowledge and awareness of the fact that the plan had a valid lien under ERISA. To that end, any action by an attorney that deprives the plan of its right of reimbursement creates a cause of action against the attorney.

Excerpted from the April 2002 supplement to Coordination of Benefits Handbook, ©Thompson Publishing Group, Inc., 2002. All rights reserved.

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