Barnes v. Independent Automobile Dealers Ass'n of California Health & Welfare Benefit Plan

Citations: 64 F.3d 1389; 95 Cal. Daily Op. Serv. 7111; 95 Daily Journal DAR 12137; 19 Employee Benefits Cas. (BNA) 1958; 138 A.L.R. Fed. 793; 1995 U.S. App. LEXIS 25260Docket: No. 93-16049

Court: Court of Appeals for the Ninth Circuit; September 8, 1995; Federal Appellate Court

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Susan Barnes appeals a district court ruling granting summary judgment in favor of the Independent Automobile Dealers Association of California Health, Welfare Benefit Plan, which had denied her recovery for medical expenses based on a subrogation clause in the Plan's agreement. Barnes, an employee beneficiary of the self-funded medical benefit program, incurred $23,075.40 in medical bills following a car accident in October 1990. After the accident, she filed a lawsuit against the driver, Catherine Clark, and later submitted a claim to the Plan, which withheld payment citing the subrogation clause due to the pending lawsuit. 

Barnes’s automobile insurer paid her $5,000, and she settled with Clark for $25,000 in November 1991. In August 1992, Barnes filed a state court action against the Plan for her outstanding medical bills, which was removed to federal court under ERISA. Both parties filed for summary judgment, with Barnes seeking $18,075.40, the total medical expenses minus the insurance payout. The Plan maintained that the subrogation clause justified its refusal to pay.

Upon review, the appellate court determined that the district court had erred in granting summary judgment for the Plan. It found that Barnes is entitled to recover her medical expenses and remanded the case for entry of summary judgment in her favor, noting that the Plan's document did not grant discretionary authority for benefits determination, warranting a de novo review.

ERISA is characterized as remedial legislation that should be interpreted broadly to protect participants in employee benefit plans. Subrogation refers to an insurer's right to recover losses from third parties responsible for those losses after compensating the insured. If an insurer fully pays a claim and the insured subsequently recovers from a third party, the insured must reimburse the insurer for any excess amount recovered. The central question is whether the Plan's subrogation rights, as defined in the benefit agreement, allow it to deny payment to Barnes after she settled with a third party for $25,000. ERISA preempts state subrogation laws and common law, indicating that federal law governs subrogation issues related to self-funded employee benefit plans. 

The appeal raises two critical issues: the ambiguity of the Plan's subrogation clause and whether Barnes compromised the Plan's rights. Barnes contends the clause is ambiguous, arguing it must be interpreted against the Plan, leading to her entitlement to payment for medical expenses. The subrogation clause states that the Plan may withhold payment until a third party's liability is determined and that it is subrogated to all rights of recovery after making a payment. While both parties agree on the first sentence's clarity, they dispute the second sentence's meaning. Barnes claims subrogation rights only arise after payment, while the Plan argues for subrogation rights regardless of payment status. The interpretation aligned with the Plan's language suggests that subrogation rights only arise post-payment, as the document does not address the Plan's rights if no payment is made, leading to the application of the principle that the express mention of subrogation upon payment implies exclusion of rights when payment is not made.

The doctrine of "expressio unius est exclusio alterius" implies that mentioning one item excludes others, as established in Longview Fibre Co. v. Rasmussen. In the context of ERISA and a specific subrogation clause, the court found that plan administrators misinterpreted the clause by assuming it allowed reimbursement for all benefits paid, regardless of timing related to settlements with third parties. No subrogation right arises until a claim is paid. Even if the language of the plan is ambiguous, it is construed against the drafter and in favor of the insured. In this case, because the Plan never paid Barnes, it had no subrogation rights when Barnes settled and released Clark from liability.

The Plan argued that Barnes’ release of Clark violated the subrogation clause, which states that an employee receiving payment must not act to prejudice the Plan's recovery rights. However, the court determined that because the Plan had not made any payments, there were no existing subrogation rights that could be prejudiced by Barnes’ actions. The clause does protect the Plan from future prejudice regarding subrogation rights if the Plan were to make a payment later. The court noted that the Plan document does not detail the Plan's rights when no payment has been made, leaving the court with the responsibility to establish a federal common law rule to address such gaps, in alignment with ERISA’s regulatory framework. The court emphasized that this rule should evolve incrementally, reflecting the existing legal structure.

The “make-whole” rule in insurance law dictates that an insurance company cannot enforce subrogation rights until the insured has been fully compensated for their injuries. This principle operates as an interpretive guideline, allowing beneficiaries to waive their make-whole rights only if there is a clear agreement to that effect. In alignment with ERISA's goals of protecting employee benefits, the rule prevents an insured from recovering more than their actual damages. In this case, Barnes received $25,000 for general damages and $5,000 for medical expenses, which fell short of her estimated claim value of at least $65,000, as indicated by an attorney's affidavit outlining costs related to surgery, pain, suffering, and lost wages. The district court dismissed this affidavit as insufficient evidence for trial, but the reviewing court disagreed, noting that the Plan did not dispute the $65,000 estimate. Furthermore, there was no evidence to suggest that Barnes had been made whole, and the Plan’s subrogation clause did not explicitly allow reimbursement rights prior to full compensation. Thus, the court concluded that the Plan’s rights are constrained by the make-whole rule, affirming that Barnes did not compromise the Plan's rights.

The Plan argues that its subrogation clause, which states it is subrogated "to all rights of recovery" after making a payment, negates the application of the make-whole rule. Courts have previously upheld that references to "any" or "all" rights of recovery can override this rule, particularly when an insurer has already compensated the insured or when the court defers to the plan administrator's interpretation. However, the Plan's reliance on California cases allowing subrogation from third-party lawsuit proceeds, even when the insured is not fully compensated, does not apply here. In relevant cases, insurers had made payments to the insured or participated in third-party litigation.

In contrast, the Plan did not assist Barnes in her lawsuit against Clark and only sought to claim settlement proceeds after Barnes negotiated a settlement, thereby not making any payments to her. Under these facts, since the Plan did not contribute to the costs or risks associated with the recovery from the third party, the make-whole rule is upheld, allowing Barnes to recover her medical expenses.

Barnes also requests attorney’s fees under 29 U.S.C. 1132(g)(1), which permits such an award to either party in ERISA-related actions. The decision to award fees considers factors including the opposing party’s culpability, financial ability to pay, deterrent effect, the benefit to all participants in the ERISA plan, and the legal merits of both parties' positions. Barnes's situation presents several factors favoring her claim for attorney's fees, particularly as she has succeeded in enforcing her rights under the plan.

The Plan acknowledges that it can satisfy a fee award, and Barnes’ case addresses a significant legal issue concerning subrogation clauses in ERISA plans, with Barnes’ arguments holding greater merit. Consequently, the court awards Barnes her attorney’s fees for the appeal. Although Barnes also sought fees for the district court action, the district court did not consider this request while granting summary judgment to the Plan. On remand, the district court is instructed to evaluate whether to award fees and must articulate the rationale for its decision, as per Hummell. If the district court denies fees without justification, the court of appeals cannot assess the decision for abuse of discretion.

The decision reverses the district court’s summary judgment for the Plan and orders entry of summary judgment for Barnes, along with a determination of reasonable attorney fees for the appeal. Additionally, the matter of attorney fees for the district court action is remanded for consideration of relevant factors and required reasoning. The court references Mann v. Glens Falls Ins. Co., a case that does not pertain to the order of performance in subrogation claims. The evidence indicated that Clark had minimal assets, suggesting that Barnes’ release of Clark did not harm the Plan’s ability to assert its subrogation rights. The Plan's claim that Clark was not judgment-proof lacks supporting evidence, failing to create a genuine issue of fact necessary to counter Barnes’ summary judgment motion.