Oaks v. Haupt

• Court: Court of Appeals for the Sixth Circuit
• Decided: April 7, 2000
• Docket: 99-3471
• Status: Published

Opinion

RECOMMENDED FOR FULL-TEXT PUBLICATION 8 Copeland Oaks, et al. v. Haupt, et al. No. 99-3471 Pursuant to Sixth Circuit Rule 206 ELECTRONIC CITATION: 2000 FED App. 0125P (6th Cir.) File Name: 00a0125p.06 The plain language of this provision clearly establishes that the Plan may require the formal assignment of recovery rights as a precondition to payment of benefits, but it is equally clear that the Plan’s subrogation and refund right does not vest until UNITED STATES COURT OF APPEALS a covered person has accepted benefits. Hence, we find that FOR THE SIXTH CIRCUIT the plan administrator abused her discretion in concluding _________________ that the Plan has a right to demand any payment of funds subject to subrogation or refund as a condition to receiving ; benefits, including payment of the $5,000 Hartford settlement.  The Plan may require the Haupts to execute assignment COPELAND OAKS and  documents in advance of receiving benefits, but may not COPELAND OAKS EMPLOYEE  require payment of funds until the Haupts accept benefits.2 BENEFIT PLAN,  No. 99-3471 We therefore AFFIRM the district court’s conclusion that Plaintiffs-Appellants,  because the opt-out provision of the Copeland Oaks plan fails > to establish both a priority over recovered funds and a right to v.  any full or partial recovery, the make-whole rule will apply.  However, we REVERSE the district court’s finding that   JEFFREY A. HAUPT and Brooke was made whole by her total recovery, and REMAND Defendants-Appellees.  the case for a final resolution consistent with this opinion. BROOKE A. HAUPT,  1 Appeal from the United States District Court for the Northern District of Ohio at Akron. No. 98-00780—James S. Gwin, District Judge. Argued: March 15, 2000 Decided and Filed: April 7, 2000 2 We note that our sister circuits are in agreement on this question. Before: MERRITT, DAUGHTREY, and MAGILL,* Confronted with similar facts, the Eleventh Circuit concluded that Circuit Judges. although a plan’s subrogation right is not enforceable until after benefits have been paid, it was not an abuse of discretion to require signing of an agreement as a precondition to payment. Cagle at 1520. The court noted that “[o]nce benefits are paid, participants and beneficiaries have little incentive (other than the fear of a lawsuit) to sign a subrogation agreement,” and that “[c]ost concerns weigh in favor of the Fund’s policy.” Id. The Ninth Circuit, after considering the plain language of a plan in light of background principles of insurance law, also concluded * that “the Plan’s right to subrogation arises only after the Plan makes The Honorable Frank J. Magill, Circuit Judge of the United States payment to the insured.” Barnes at 1393. Court of Appeals for the Eighth Circuit, sitting by designation.

1 2 Copeland Oaks, et al. v. Haupt, et al. No. 99-3471 No. 99-3471 Copeland Oaks, et al. v. Haupt, et al. 7

_________________ including the Plan, will more than make her whole, and the Plan will be entitled to subrogation or refund of the excess COUNSEL recovery of medical expenses. Therefore, we REVERSE the district court’s decision to the contrary and REMAND this ARGUED: Earl M. Leiken, BAKER & HOSTETLER, case for a finding of Brooke’s damages, the Plan’s coverage, Cleveland, Ohio, for Appellants. David Brian Spalding, and whether Brooke will be made whole by her total recovery. SHETLER & SPALDING, Alliance, Ohio, for Appellees. ON BRIEF: Earl M. Leiken, Chris Bator, BAKER & Finally, a word is required regarding the specific relief HOSTETLER, Cleveland, Ohio, for Appellants. David Brian sought by the Plan. In its complaint, the Plan requests a Spalding, SHETLER & SPALDING, Alliance, Ohio, for declaration “that the Plan need not pay any of the medical Appellees. expenses incurred in connection with the treatment of Defendant Brooke A. Haupt’s accident-related injuries unless _________________ and until Defendants Haupt fully satisfy the requirements of the Plan’s subrogation and reimbursement provision and any OPINION other conditions.” The demand continues: “Among these _________________ requirements is paying to Plaintiffs the $5,000 already received from Hartford under the medical payments coverage MARTHA CRAIG DAUGHTREY, Circuit Judge. In this of the Policy and the delivery of all required instruments and ERISA action, the plaintiffs, Copeland Oaks and its employee papers, including but not limited to an executed release benefits plan, appeal the district court’s grant of summary satisfactory to Hartford.” The question raised by this demand judgment to the defendants, Copeland Oaks employee Jeffrey is whether the Plan, once its right of subrogation is Haupt and his daughter, Brooke. Copeland Oaks brought this acknowledged, can require signing of a subrogation suit seeking a declaratory judgment regarding the terms of its agreement or actual payment of subrogated funds as a medical benefits plan, and the Haupts filed a counterclaim precondition to its payment of benefits. This is a question of seeking payment. On cross-motions for summary judgment, plan interpretation which is committed to the administrator’s the district court held that in light of federal common law sound discretion. adopted by this circuit in a recent unpublished opinion, Marshall v. Employers Health Ins. Co., 1997 WL 809997 (6th The relevant language in the Copeland Oaks Plan provides Cir. 1997) (per curiam), Copeland Oaks was precluded from as follows: exercising its right to subrogation or refund and that the Haupts’ counterclaim was therefore moot. Only Copeland Accepting benefits under this Plan for those incurred Oaks appeals the district court opinion and order, which is medical or dental expenses automatically assigns to the reported at 41 F.Supp.2d 747 (N.D. Ohio 1999). We find that Plan any rights the Covered Person may have to recover the district court correctly identified the appropriate legal payments from any third party or insurer... As a condition standard, but that there is insufficient information in the to the Plan making payments for any medical or dental record to determine whether Copeland Oaks has a right to charges, the Covered Person must assign to the Plan his subrogation. We therefore reverse the district court’s or her rights to any recovery arising out of or related to judgment and remand for further fact-finding. any act or omission that caused or contributed to the Injury or Sickness for which such benefits are to be paid. 6 Copeland Oaks, et al. v. Haupt, et al. No. 99-3471 No. 99-3471 Copeland Oaks, et al. v. Haupt, et al. 3

The make-whole rule provides that an insurer cannot I. FACTUAL AND PROCEDURAL BACKGROUND enforce its subrogation rights unless and until the insured has been made whole by any recovery, including any payments Jeffrey Haupt, an employee of Copeland Oaks, is the father from the insurer. See, e.g., 16 Couch on Insurance 2d § 61:64 and custodial parent of Brooke Haupt, a minor. Both Jeffrey (“[N]o right of subrogation against the insured exists upon the and Brooke were enrolled in the Copeland Oaks Employee part of the insurer where the insured’s actual loss exceeds the Benefit Plan. After Brooke incurred serious and permanent amount recovered both from the insurer and the injuries in an auto accident, the Haupts filed claims with the wrongdoer”(emphasis added)). As a general rule, an insured Plan for her medical expenses and also pursued a claim should not be allowed to retain a double recovery at the against the negligent driver of the vehicle in state court. The expense of the insurer. See, e.g., 16 Couch on Insurance 2d driver’s insurance policy provided coverage for bodily injury § 61:18 (“Subrogation has the dual objective of (1) preventing up to $100,000 and for medical expenses up to $5,000. The the insured from recovering twice for the one harm, as would carrier, Hartford Insurance, offered to settle for the policy be the case if he [sic] could recover from both the insurer and limits and issued a check to Brooke’s parents in the amount from a third person who caused the harm, and (2) reimbursing of $5,000. A state probate court then ordered the company to the surety for the payment which it has made.”) The district pay the remaining $100,000, less $30,000 1in attorneys’ fees, court erred in concluding that because Brooke was not made into a trust account for Brooke’s benefit. Meanwhile, the whole by her recovery from Hartford, she was not made Plan agreed to pay the more than $300,000 in claimed whole and, hence, that the Plan was obliged to pay all of her medical expenses, but only on the condition that the Haupts covered medical costs while she retained the Hartford comply with the subrogation provision of the Plan. Both settlement. We agree that the $100,000 bodily injury Brooke and Jeffrey initially signed subrogation and refund settlement trust cannot be subject to subrogation under the agreements, but after settling the claim against the driver, Plan, as it is not payment for medical expenses. However, it Brooke disaffirmed any and all contracts with Copeland Oaks may be the case that the $5,000 settlement for medical or the Plan on the basis of her non-capacity as a minor. expenses can be subrogated, if it is determined that Brooke Jeffrey continues to demand payment for the medical will be more than made whole by her total recovery from all expenses he incurred on Brooke’s behalf. sources, including Copeland Oaks. II. ANALYSIS Unfortunately, review of this question is complicated by the fact that no court has ever made a specific factual finding Copeland Oaks is an Ohio non-profit corporation which regarding Brooke’s total damages. Furthermore, although the provides residential facilities for senior citizens. It has Plan has consistently stated that it is willing to compensate established the Copeland Oaks Employee Benefit Plan, a Brooke in full for her covered medical expenses once the health insurance plan for eligible employees and their subrogation and refund agreement is signed, it is not entirely beneficiaries. The Plan is an “employee welfare benefit plan” clear that the Plan’s payments will actually make Brooke and an “employee benefit plan” as defined in 29 U.S.C. whole, since there is nothing in the record to indicate what her § 1002(1) and (3). At all times relevant to these proceedings, coverage is under the Plan. Copeland Oaks has been the employer, plan sponsor, plan

Nevertheless, if it can be established that the Plan will compensate Brooke for an amount within $5,000 of her total 1 At the time the appellate briefs were filed, the $5,000 check had not damages, then Brooke’s total recovery from all sources, been negotiated. Hartford Insurance has apparently deferred payment of the remaining $100,000 pending resolution of this action. 4 Copeland Oaks, et al. v. Haupt, et al. No. 99-3471 No. 99-3471 Copeland Oaks, et al. v. Haupt, et al. 5

administrator and fiduciary of the Plan, as those terms are v. Independent Automobile Dealers Ass’n of California defined by ERISA. See 29 U.S.C. § 1002(5), (16), (21). The Health and Welfare Benefit Plan, 64 F.3d 1389 (9th Cir. Plan is self-insured, which is to say that all benefits are paid 1995); Cagle v. Bruner, 112 F.3d 1510 (11th Cir. 1997). As out of the general assets of Copeland Oaks. noted by the Eleventh Circuit, were we to accept Copeland Oaks’ position, “the [Plan] could avoid a default rule of Part of the subrogation clause of the Plan provides: insurance law applicable in the ERISA context merely by giving itself discretion to interpret the plan. We do not believe The Covered Person agrees to recognize the Plan’s right that ERISA gives the Fund that kind of authority, which is to subrogation and reimbursement. These rights provide denied to insurance companies not governed by ERISA.” the Plan with a priority over any funds paid by a third Cagle, 112 F.3d at 1522. Furthermore, we are mindful of the party to a Covered Person relative to the Injury or fact, recently reiterated by a panel of this circuit, that even an Sickness, including a priority over any claim for non- arbitrary and capricious standard of review can be tempered medical or dental charges, attorney fees, or other costs by considering conflicts of interest such as those implicit in and expenses. any self-funded plan, and by construing ambiguities against a plan drafter. See University Hospitals v. Emerson Electric (Emphasis in original.) Co., 202 F.3d 839, 846-7 (6th Cir. 2000). In Marshall, we adopted the so-called “make whole” rule Hence, we now hold that in order for plan language to of federal common law, which requires that an insured be conclusively disavow the default rule, it must be specific and made whole before an insurer can enforce its right to clear in establishing both a priority to the funds recovered and subrogation under ERISA, unless there is a clear contractual a right to any full or partial recovery. In the absence of such provision to the contrary. As we held in that opinion: clear and specific language rejecting the make-whole rule -- with clarity and specificity ultimately determined by the Such a rule is consistent with the equitable principal that reviewing court -- it is arbitrary and capricious for a plan [an] insurer does not have a right of subrogation until the administrator not to apply the default. We find in this case insured has been fully compensated, unless the that because the language of the Copeland Oaks Plan fails to agreement itself provides to the contrary. Also, the establish its priority right over any partial recovery, the make-whole rule is merely a default rule. If a plan sets district court correctly applied the make-whole rule. out the extent of the subrogation right or states that the participant’s right to be made whole is superseded by the However, the district court next found that Brooke Haupt plan’s subrogation right[,] no silence or ambiguity exists. had not been made whole by the settlement entered in the state court proceeding. See Copeland Oaks, 41 F.Supp.2d at Marshall, 1997 WL 809997, at *4. 754. As a result, the district court entered summary judgment Here, Copeland Oaks argues that because it is subject only for the defendants, held that the motion for judgment on the to the “arbitrary and capricious” standard of review, we counterclaim was moot, and dismissed the action. We find should defer to its conclusion that the Plan language expressly that in reaching this conclusion, the district court was opts out of the default make-whole rule. However, review of mistaken in its understanding of law, and so abused its the Marshall decision, as well as rulings of our sister circuits, discretion. leads us to conclude that this position must fail. See Cutting v. Jerome Foods, Inc., 993 F.2d 1293 (7th Cir. 1993); Barnes