Does Made-Whole Doctrine Withstand ERISA Preemption in 4th Circuit?
I’ve been writing quite a bit lately about cases dealing with ERISA, and the dissent filed by Justice Larry Starcher in Turner ex rel. Turner v. Turner, 2008 WL 5449773 (December 15, 2008), provides an opportunity to discuss a potentially significant issue.
As you may recall, in Turner, which I wrote about last week, the Supreme Court of Appeals of West Virginia held that a subrogation action by an ERISA plan fiduciary or administrator has to be filed in federal court and cannot be adjudicated as part of an underlying personal injury action.
In his dissent, Justice Starcher, who left the Court on December 31, 2008 after he did not run for reelection, questioned whether the “made-whole” doctrine would preclude City Hospital from recovering for the medical expenses paid on behalf of its employee’s children. Justice Starcher wrote that, “[i]n West Virginia, the ‘made whole doctrine’ stops an insurance company from gobbling up a plaintiff’s entire settlement under the rubric of ‘subrogation’ if the settlement is insufficient to fully compensate the plaintiff’s past and future losses.”
He then went on to write that, “[m]ost importantly, a per curiam opinion from the Fourth Circuit Court of Appeals indicates that West Virginia’s made whole doctrine is not preempted by ERISA. See Martine v. Hertz Corp., 103 F.3d 118 (4th Cir. 1996)."
Unfortunately, the dissent in Turner does not expand on that issue.
In Martine, USB, the claims administrator for the West Virginia Public Employees Insurance Agency (PEIA), appealed the dismissal of its subrogation claim created by PEIA's payment of more than $124,000 in medical expenses incurred by Martine, who had been involved in an accident with another driver who had rented a car from Hertz.
USB moved to intervene in the action, which the district court permitted. Following a four-day trial, but before the jury announced its verdict, Martine moved to dismiss USB's complaint on the grounds that he would not be made whole because the tortfeasor had insufficient assets to satisfy a probable judgment.
The jury's verdict of $650,000 included $36,800 for past medical expenses and $5,000 for future medical bills. In granting Martine's motion, the district court relied on the Supreme Court of Appeals of West Virginia's decision in Kittle v. Icard, 405 S.E.2d 456 (W. Va. 1991) and concluded that because Martine would not be made whole by the amount he could collect, USB was not entitled to subrogation. USB appealed.
The Fourth Circuit noted initially that the West Virginia Code gave PEIA a statutory right to subrogation, and that the Supreme Court of Appeals had held that subrogation clauses in insurance contracts are valid and enforceable.
USB argued that Kittle did not apply because its right to subrogation was contractual, while the insurer in Kittle had only a statutory right, and cited a case from the Tenth Circuit Court of Appeals that rejected the made-whole doctrine when an insurance contract unambiguously provided the insurer with subrogation rights if its insured obtained a settlement or verdict.
The Fourth Circuit disagreed because "Kittle defines subrogation in such a way as to require that equity be considered whenever an insurer invokes its right." Here is the Court's explanation for why equitable principles did not entitle USB to subrogation at least in the amount awarded by the jury for medical expenses:
The district court determined that the West Virginia Supreme Court's pronouncements in Kittle and [State ex rel. Allstate Ins. Co. v.] Karl, supra, defined equity as per se denying insurers any recovery when insureds were not fully compensated by a settlement or judgment. And, noting that Martine received less than one-sixth of the amount to which he was entitled and would be further undercompensated for his injuries if USB were entitled to subrogation the district court held that even aside from any per se rule, the equities favor Martine over USB. We find no abuse of discretion or legal error in that conclusion.
This is an interesting issue. Martine does not explicitly hold that ERISA does not preempt the made-whole doctrine in West Virginia. But the opinion did address the presence of subrogation language in insurance policies, which would be akin to the subrogation language or anti-made-whole doctrine language present in a summary plan description, such as City Hospital's in Turner, and found that Kittle's definition of subrogation required equity to be considered.
I would like to know if anyone has relied on Kittle or Martine successfully to defeat a health plan's subrogation claim. The majority opinion in Turner does not cite either case -- but the opinion did not seem interested in expanding the Turners' options for challenging City Hospital's subrogation interest.
