The make-whole rule provides that an insurer cannot enforce its subrogation rights unless and until the insured [i. e., Farie] has been made whole by any recovery, including any payments from the insurer.” Copeland Oaks v. Haupt, 209 F.3d 811, 814 (6th Cir. 2000). The make-whole rule is the default rule in the Sixth Circuit. Id. at 813. . . . The rule may be overcome, however, if the language of the ERISA plan expressly disavows it . . .
Farie v. Jeld-Wen, Inc., 2008 U.S. Dist. LEXIS 88893 (N.D. Ohio) (Oct. 31, 2008).
Oliver Wendell Holmes said the life of the law has not been logic but rather experience. I do not subscribe to Holmes’ jurisprudential views on larger issues, but that pithy comment really does describe much of what we learn about ERISA law.
In this recent case, the Sixth Circuit views on necessary plan language are set forth, and the rules applied by the district court should be scrupulously followed by plan administrators and third party administrators in the Sixth Circuit.
The case presents the typical health plan reimbursement dispute wherein the plan participant, injured in a car accident, obtains a personal injury settlement and then refuses to reimburse the health plan for related expenditures. The plaintiff sought a declaratory judgment against the plan on the issue which was then joined in earnest when the plan counterclaimed for its reimbursement.
The procedural posture was a motion to dismiss by the plan.
The plaintiff/plan participant had wheeled out the usual artillery in this arena, the make whole doctrine and the common fund doctrine. Both fail to have sufficient range when the plan has set up the proper perimeter through appropriate plan language. And so it was here.
No Make Whole Rule
“The make-whole rule provides that an insurer cannot enforce its subrogation rights unless and until the insured . . . has been made whole by any recovery, including any payments from the insurer”, stated the judge, noting that “the make-whole rule is the default rule in the Sixth Circuit.”
To avoid the rule, the plan language must meet specific requirements. The court held that the plan language met the applicable standards, noting that ”the rule may be overcome . . . if the language of the ERISA plan expressly disavows it.”
No Common Fund Doctrine
In addition, the judge rejected claims that the plan must reduce its reimbursement for attorneys’ fees. The court observed that “like the make-whole rule, the Sixth Circuit recognizes that the language of an ERISA plan may disclaim the common fund doctrine.”
Note: The simplicity of drafting appropriate plan language to meet challenges such as occurred in this case is increasingly reflected in the common adoption of disavowal language in specimen plan documents. Nonetheless, the venue of plan administration must also be considered.
For example, while the Eleventh Circuit imposes a similar “default rule” favoring the make whole doctrine, prudence dictates that the precise means of rejecting the rule should be considered in view of prior Eleventh Circuit caselaw rather than reliance on a boilerplate provision. Better to have language couched in terms of prior case law than a generic plan provision – in short, experience over logic when it comes to ERISA.