Subrogation: What is that and how does it relate to Insurance?
Question: How do you win (or lose) a million dollars in court and never get a penny of it?
Answer: If your attorney forgets the Subrogation clause in your insurance policies.
Subrogation refers to a practice of recapturing claims dollars spent by a benefit plan by taking money back from other involved insurance companies or from court settlements.
Now you might ask “Bill what is subrogation any way?”
Assume you are hit by another driver and it goes to court. During that process you have hospital claims and other medical expenses that are paid by your employer’s group medical plan. When the jury gives you a settlement you have to pay your attorney and then you expect to keep all that pain and suffering money the jury gave you.
Right at that point your medical plan (and your auto insurance carrier) can “Subrogate” the claim and take back whatever they spent on your medical bills. As disconcerting as that might be to the person who was injured (it might mean they actually get nothing) employers also need to be paying attention to this in regard to their plan documentation.
Excerpt from an article by Proskaur ERISA Practice Center
Posted in Subrogation/Reimbursement
“The Sixth Circuit rejected a participant’s argument that the plan’s subrogation provision was not enforceable because it was only in the plan’s summary plan description, and not in the trust agreement that the participant argued was the operative plan document. The Court determined that the subrogation provision was contained within a document that served as the summary plan description as well as the plan document….”
Anybody who has ever spoken to me about employee benefits has heard me beat the drum about how important an updated SPD form is. My other soapbox is document agreement in language.
So why is that important regarding subrogation?
When you look at the case noted in the Proskaur article you will see that the decision rested on the Summary Plan Document.
That document frequently contains language about Subrogation of benefits and had it not been in the document the decision in this case might have rested on language in the insurance contracts.
Let’s consider what might have occurred if an SPD had not been available.
- The court would probably have refused to let the plan take back money they had spent on medical claims. Let’s just assume that was $250,000.
- The DOL and IRS might have become aware that an SPD was not available and assessed the ERISA fine for not having that document.
Loss of ability to recapture funds in the benefit plan $250,000
Penalty for not providing an SPD $241,000 Gorini v. AMP Inc., 117 Fed. Appex. 193 (3d Cir. 2004) ERISA fine for not having an SPD $110/day per participant
In this case the employer loses half a million dollars and still gets hit for an ERISA fine that we cannot determine at this point.
But if he has 25 employees, and they limit the calculation of the fine to only the previous 12 months it might mean an additional $1,000,000 give or take.
Compliance is not that hard and it is not really all that expensive when you consider the alternative.
If this finally convinced you to look into your SPD and other documents give us a call with your questions, 602-381-9900.