Motor Vehicle Liability
Motor Vehicle Liability
Effect of Outstanding ERISA liens on Minor Settlements.
Pursuant to regulations promulgated by the Commissioner of Insurance, North Carolina prohibits subrogation of benefits in life, accident, or health insurance policies. However, ERISA preempts the above regulation as it applies to employee welfare plans established, maintained, and operated as self-funded ERISA plans. In the context of a settlement of a minor’s injuries arising out of a motor vehicle accident, this entitles an ERISA plan to sue the minor in federal court for reimbursement from any settlement proceeds.
The General Rule: Prohibition of Subrogation
A regulation issued by the North Carolina Commissioner of Insurance captioned “Subrogation Prohibited” states as follows: “Life or accident and health insurance forms shall not contain a provision allowing subrogation of benefits.” N.C. Admin. Code tit. 11, r. 12.0319 (Sept. 1978). Subject to federal preemption, this is the general rule in North Carolina.
The Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. ? 1001 et seq., preempts state law in the area of self-funded employee welfare benefit plans. Specifically, three provisions of ERISA deal directly with preemption: the “preemption clause,” the “saving clause,” and the “deemer clause.”
The preemption clause states as follows:
Except as provided in subsection (b) of this section [the saving clause], the provisions of this subchapter and subchapter III of this chapter shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.
29 U.S.C. ? 1144(a). The saving clause states as follows:
Except as provided in subparagraph (B) [the deemer clause], nothing in this subchapter shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.
29 U.S.C. ? 1144(b)(2)(A). The deemer clause states as follows:
Neither an employee benefit plan… nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.
29 U.S.C. ? 1144(b)(2)(B).
The Supreme Court of the United States explained the interaction of the above three clauses as follows:
The pre-emption clause is conspicuous for its breadth. It establishes as an area of exclusive federal concern the subject of every state law that “relates to” an employee benefit plan governed by ERISA. The saving clause returns to the States the power to enforce those state laws that “regulate insurance,” except as provided in the deemer clause. Under the deemer clause, an employee benefit plan governed by ERISA shall not be “deemed” an insurance company, an insurer, or engaged in the business of insurance for purposes of state laws “purporting to regulate” insurance companies or insurance contracts.
FMC Corp. v. Holliday, 498 U.S. 52, 58, 111 S. Ct. 403, 407 (1990).
Applying the reasoning set forth hereinabove, the Holliday Court held that “self-funded ERISA plans are exempt from state regulation insofar as that regulation ‘relates to’ the plans.” Id. at 61, 111 S. Ct. at 409.
What is Not Preempted by ERISA
In defining the area of state law that is preempted by ERISA, the Court also articulated what was not preempted by ERISA, and thus subject to state regulations prohibiting subrogation. The Holliday Court held as follows:
Employee benefit plans that are insured are subject to indirect state insurance regulation. An insurance company that insures a plan remains an insurer for purposes of state laws “purporting to regulate insurance” after application of the deemer clause. The insurance company is therefore not relieved from state insurance regulation. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the plan’s insurer.
Id. In sum, “plans that purchase insurance – so-called ‘insured plans’ – are directly affected by state laws that regulate the insurance industry.” Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 732, 105 S. Ct. 2380, 2385 (1985). Conversely, plans that are self-insured are exempt from state insurance regulations.
EFFECT OF ERISA ON MINOR SETTLEMENTS
The case of Rhodes, Inc. vs. Morrow, et al., 937 F. Supp. 1202 (1996), illustrates the effect of an outstanding ERISA lien on a minor settlement. In Rhodes, an employee of Rhodes and the employee’s children were involved in an automobile accident. The ERISA plan operated by Rhodes paid out several thousand dollars for the medical expenses of the children. Before any payments were made, however, the employee signed a Right of Reimbursement Agreement. Subsequently, the minors settled their claims. The Rhodes ERISA plan then filed suit in Federal Court against the minors, the employee, the insurance carriers, and the plaintiff’s attorney.
The Rhodes court held that the minors were obligated to reimburse the ERISA plan. Id. at 1214. Furthermore, the court upheld the plain language of the Right of Reimbursement that entitled the ERISA plan to recover from all settlement proceeds, even though some were for pain and suffering (as distinguished from medical expenses). Id. at 1213.
Although a reimbursement agreement was signed in Rhodes, the court noted that “the Fourth Circuit has affirmed the right of ERISA plans to recover even in the absence of signed reimbursement agreements.” Id. at 1212 (citing McInnis v. Provident Life & Accident Ins. Co., 21 F.3d 586 (4th Cir. 1994); Hampton Industries, Inc. v. Sparrow, 981 F.2d 726 (4th Cir. 1992)). Thus, the above should apply regardless of whether or not a reimbursement agreement was signed.
If an outstanding lien falling under the auspices of an ERISA plan is applicable to a minor settlement, then the general North Carolina rule barring subrogation is preempted. As such, the Court must take heed of an ERISA plan’s right to subrogation.
¹”The terms ’employee welfare benefit plan’ and ‘welfare plan’ mean any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer… to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries , through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits….” 29 U.S.C. ? 1002(1)(A)
²The Right of Reimbursement stated, in pertinent part, that the employee agreed to reimburse the ERISA plan “out of any recovery by settlement, judgment, or otherwise, from any person organization [sic] responsible [for the subject injury], or from such person’s or organization’s insurance.” Rhodes at 1206.