Audit, Compliance and Risk Blog

Employment Law and ERISA: Medical Plan Terms - Clarity Trumps Equity

Posted by Jon Elliott on Wed, May 01, 2013 April 16, 2013 the U.S. Supreme Court delivered another reminder that agreements must be drafted clearly and specifically if they are to deliver predictable outcomes – otherwise a court’s later efforts to sort through ambiguities may produce surprises. The case is U.S. Airways v. McCutchen. It arose under a medical benefits plan subject to the federal Employee Retirement Income Security Act of 1974 (ERISA).

James McCutcheon works for U.S. Airways, and participated in the company’s health benefits plan, which is regulated by ERISA. That plan included an obligation that the plan pay McCutchen’s medical expenses incurred as a result of a third party’s actions, and entitled it to reimbursement if McCutchen later recovered money from the third party.

After McCutchen was injured by a negligent driver, the plan paid $66,886 in medical expenses. McCutcheon subsequently sued the driver, driver’s insurance company and his own automobile insurance company, seeking recovery for over $1 million in other expenses and damages. That case settled for $110,000; McCutchen’s lawyers were to receive 40% for attorney fees and McCutchen the other $66,000. U.S. Airways demanded its full reimbursement – which exceeded McCutchen’s net proceeds by $886. McCutcheon and his attorney rejected the demand, but the attorney placed $41,500 in escrow, figuring that the ERISA plan should be responsible for a proportional share of the attorney fees from the court case that secured the money in the first place.

US Airways, as fiduciary to the plan, rejected the offer and sued for full reimbursement. It relied on the express language of the plan:

“If [US Airways] pays benefits for any claim you incur as the result of negligence, willful misconduct, or other actions of a third party, … [y]ou will be required to reimburse [US Airways] for amounts paid for claims out of any monies recovered from [the] third party, including, but not limited to, your own insurance company as the result of judgment, settlement, or otherwise.”

McCutchen’s defense to this suit sought to trump the language of the agreement with equitable principles, arguing that:

  1. The plan should be eligible to recover only any over-recovery by McCutchen, and since the first suit had recovered only a small fraction of McCutchen’s total loss the plan should receive none of that recovery; OR

  2. Even if the plan was entitled to at least some of that recovery, it should be required to contribute to the attorney fees necessary to secure that recovery, rather than gain a windfall from his efforts.

The District Court rejected both arguments and ordered McCutcheon to follow the terms of the plan document and pay the full $66,886 – making U.S. Airways whole but costing McCutchen more than his net proceeds from the first case. On appeal, the Third Circuit rejected the District Court’s ruling as one giving the plan “unjust enrichment” absent a contribution to the costs to secure the money, found that equitable considerations trumped the plan’s express language, and remanded for the District Court to determine an equitable division.

U.S. Airways then appealed to the U.S. Supreme Court, which split five justices to four in a decision rejecting the Third Circuit’s reasoning but reaching a similar result. The justices based their reasoning on longstanding precedent that the express terms of a contract —or in this case a contract-like formalized health benefits plan—are to be interpreted to give effect to the terms agreed to by the parties, whether or not those terms follow generalized equitable principles. In this case, the Supreme Court majority decided that:

  • The plan document was clear that U.S. Airways was entitled to reimbursement, so reimbursement was due; but

  • The plan document was not clear about whether the plan should contribute to the costs necessary to secure the funds, so the Court applied the general “common fund” analysis available under both contract law and equitable principles (i.e., that both parties share costs necessary to create a common fund that both then share).

The message: clear language in contracts and other agreements supersedes equitable principles, but unclear language does not. Accordingly, this decision reinforces the importance of clear drafting.

Implementation Checklist

When negotiating a contract or other agreement—including a health benefits plan regulated under ERISA—does the organization ensure that provisions are drafted clearly, to reliably provide desired results?

  • Is this the case for the expected outcome?

  • Is this the case for outcomes under unexpected but possible alternative outcomes?

Where can I go for more information?

The U.S. Supreme Court posts decisions on its webpage. The U.S. Airways v. McCutcheon decision is available here

About the Author Elliott is President of Touchstone Environmental and has been a major contributor to STP’s product range for over 25 years. He was involved in developing 16 existing products,including Workplace Violence Prevention: A Practical Guide to Security on the Job,Securities Law and Directors' and Officers' Liability.

Mr. Elliott has a diverse educational background. In addition to his Juris Doctor (University of California, Boalt Hall School of Law, 1981), he holds a Master of Public Policy (Goldman School of Public Policy [GSPP], UC Berkeley, 1980), and a Bachelor of Science in Mechanical Engineering (Princeton University, 1977).

Mr. Elliott is active in professional and community organizations. In addition, he is a past chairman of the Board of Directors of the GSPP Alumni Association, and past member of the Executive Committee of the State Bar of California's Environmental Law Section (including past chair of its Legislative Committee).

You may contact Mr. Elliott directly at:

Tags: Corporate Governance, Business & Legal, Employer Best Practices, Health & Safety, Employee Rights, Insurance, Insurance Claims, ERISA