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Subrogation: 'Don't Ask, Don't Tell'

In Maryland, people injured by a negligent driver or by another negligent party are entitled to recover the cost of their medical treatment from the negligent party. This is the case even when the injured party has health insurance. However, those health plans that have paid for the injured party's treatment often seek reimbursement from any recovery that the injured party obtains.

The health plan's right to reimbursement is called subrogation, and state law governs, and sometimes limits, the subrogation rights of health insurers. Maryland, for example, reduces the insurer's subrogation claim by a percentage (not to exceed 33 1/3%), which reduction recognizes that injured parties usually have to pay attorneys' fees to obtain a recovery.

When the entity paying the injured party's medical bills is not a health insurance company but a self-insured employer, however, the reimbursement is subject to the Employment Retirement Income Security Act of 1974 (ERISA). That federal legislation pre-empts, or nullifies, state anti-subrogation statutes, including Maryland's reduction for attorneys' fees. Therefore, self-insured employee welfare benefit plans (ERISA self-insured plans) are often entitled to full reimbursement for paid medical expenses.

As a result, until recently it was common practice for personal injury attorneys to notify ERISA self-insured plans of settlements, and hold an amount sufficient to satisfy the ERISA self-insured plan's reimbursement claim in the law firm's trust account. In 2002, however, the wisdom of that strategy was called into question by the United States Supreme Court decision in Great-West Life & Annuity Insurance Company v. Knudson.

A. Great-West

Janette Knudson was severely injured in an automobile accident. An ERISA self-insured health plan covered more than $400,000 of her medical expenses. Most of those medical expenses were paid by Great-West Life & Annuity Insurance Company pursuant to a "stop loss" insurance agreement with the plan. Ms. Knudson later settled her personal injury claim for $650,000. After deducting attorneys' fees, repaying a Medicaid lien, and depositing Ms. Knudson's net settlement into a special needs trust for her benefit, but which trust she did not control, counsel for Ms. Knudson set aside only $13,828.70 to satisfy Great-West's reimbursement claim.

Great-West sued Ms. Knudson and her attorneys. The U.S. Supreme Court surprisingly held that Great-West was not entitled to any money in excess of the $13,828.70. The Court explained that for Great-West to recover money under ERISA, the money owed must be traceable to particular funds or property, and must be in the injured party's or attorney's possession. The Court held that when settlement funds have been disbursed and co-mingled with other funds, or have been dissipated so that they are no longer identifiable, no remedy remains under ERISA.

B. Post Great-West Strategies

As a consequence, some have recommended that counsel for beneficiaries no longer notify self-insured ERISA plans of personal injury settlements. They argue that holding a portion of a recovery in a law firm's trust account only serves to preserve identifiable funds against which an ERISA self-insured plan will have a claim. Instead, disbursement of recoveries to the injured party without notifying the plan may operate to defeat the reimbursement claim.

To prevent that from occurring, ERISA self-insured plans must monitor personal injury claims more closely. To the extent they are aware of a personal injury suit, they can seek to intervene in that suit. They may also attempt to convince the liability carrier to notify the plan of any resolution of the claim. The plan may even request that the carrier issue a joint settlement check to the plan and the beneficiary.

Another strategy is for ERISA self-insured plans to require beneficiaries, and often their attorneys, to sign subrogation agreements in which they promise to repay the plan from any recovery. If the attorney or beneficiary refuses to sign the subrogation agreement, then the plan refuses to pay the beneficiary's medical bills. In fact, at least one Maryland court has upheld an ERISA self-insured plan's refusal to pay benefits under such circumstances.

Great-West is consistent with the Supreme Court's other recent ERISA decisions, in which the Court has interpreted ERISA literally. However, the Great-West decision also unfortunately encourages plaintiffs' lawyers to adopt a "don't ask, don't tell" policy when dealing with self-insured ERISA plans.


December 22, 2004




Rosen, Barry F.


Personal Injury