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Ninth Circuit Enforces Hawaii Anti-Reimbursement Statutes Against Insured Plan

ERISA health care plans typically include reimbursement and subrogation clauses, which give plans a right to reimbursement of medical expenses paid on behalf of a beneficiary where the injury is caused by a third party.  While such provisions are common in ERISA health care plans, they sometimes conflict with state laws that prohibit plans and insurers from seeking reimbursement.  A recent decision from the Ninth Circuit illustrates the interplay between ERISA and state laws prohibiting an insurer’s right to reimbursement for medical bills paid on behalf of a participant.  See Rudel v. Haw. Mgmt. Alliance Ass’n, No. 17-17395, 2019 WL 4283633 (9th Cir. Sept. 11, 2019).  As discussed below, the decision also serves as a good reminder to plan sponsors to ensure that their plans’ reimbursement and subrogation provisions are updated to achieve the desired outcome.

In this case, Randy Rudel, a plan participant, was hit by a car while riding his motorcycle and, as a result, he sustained numerous and severe injuries.  Rudel had health insurance from the Hawaii Medical Alliance Association (HMAA) pursuant to an ERISA plan.  HMAA paid $400,779.70 in medical bills on behalf of Rudel.  Rudel also received $1.5 million in a tort settlement for “general damages” related to the injury.  The damages included medical expenses and damages for emotional distress, but did not include special damages that would “duplicate medical payments, no-fault payments, wage loss, [or] temporary disability benefits.”

HMAA subsequently sought reimbursement of the medical bills it paid based on a plan provision that gave HMAA the “right to be reimbursed for any benefits [it] provide[s], from any recovery received from . . . any third party or other source of recovery including general damages from third-party settlements.”  Rudel refused to reimburse the plan and sued in state court based on two Hawaii statutes that prohibited reimbursement for general damages from third-party settlements.

HMAA removed the case to federal court in Hawaii, arguing that ERISA preempted the Hawaii anti-reimbursement statutes.  Subject to certain exceptions, ERISA § 514 provides that ERISA supersedes all state laws insofar as they “relate to” any employee benefit plan.  An exception applies for state laws that regulate insurance, banking, or securities—commonly referred to as the “savings clause.”  Rudel sought to move the case back to state court, arguing that his claim was not preempted because the Hawaii statutes were protected by the savings clause.

The Ninth Circuit held that the Hawaii statutes were saved from ERISA preemption and that HMAA had no right to reimbursement based on the statutes.  In so holding, the Court first determined that Rudel’s state law claims were completely preempted for purposes of jurisdiction under ERISA § 502(a) because his claim was one to clarify his rights to benefits under the plan.  This meant that the case could stay in federal court rather than being remanded to state court.  Next, the Court ruled that the Hawaii statutes were saved from preemption because they were directed toward entities engaged in insurance and substantially affected the risk pooling arrangement between the insurer and the insured.  In other words, the Hawaii statutes regulate the extent to which insurers may limit coverage and recover certain types of reimbursement and thus impact the eventual net value of any payment made to a plan member and create more risk for insurers.

Proskauer’s Perspective:  While the Ninth Circuit’s decision reminds us that fully-insured plans have to comply with state insurance laws, including anti-reimbursement statutes, it should not be forgotten that state insurance laws apply only to fully-insured plans.  ERISA’s broad preemption provision continues to apply for self-insured plans.  On the topic of plan reimbursement and subrogation provisions, plan sponsors should consider periodically reviewing their plans’ reimbursement and subrogation provisions to ensure that they reflect the sponsor’s intention in terms of the types of payments subject to recoupment, the type of legal interest created, and the type of funds subject to reimbursement.  Because such provisions affect injured beneficiaries’ recoveries, they are hotly contested.  Accordingly, plan sponsors will want to ensure that their plan provisions are up to date.

© 2020 Proskauer Rose LLP. National Law Review, Volume IX, Number 274



About this Author

Russell L Hirschhorn ERISA Litigation, employee benefits attorney, Proskauer
Senior Counsel

Russell Hirschhorn is a Senior Counsel in the Labor & Employment Law Department, where he focuses on complex ERISA litigation and advises employers, fiduciaries and trustees on ERISA benefit and fiduciary issues. 

Russell represents employers, plan sponsors, plans, trustees, directed trustees and fiduciaries in all phases of litigation, arbitration and mediation involving employee benefits, including class action and individual claims relating to ERISA’s fiduciary duty and prohibited transaction provisions, denials of claims for benefits, severance plans, ERISA Section 510,...

Kyle Hansen Employment lawyer Proskauer

Kyle Hansen is an associate in the Labor & Employment Law Department and a member of the ERISA Litigation Group.

Kyle graduated summa cum laude from the University of Mississippi School of Law, earning his J.D. and two honors diplomas in the areas of Space & Aviation Law and Business Law. During law school, he won the North American Championship at the 2017 International Manfred Lachs Space Law Moot Court Competition, also winning “best brief.” He went on to represent North America at the world competition and was runner-up. Kyle also served as the senior editor for the Journal of Space Lawand as an associate editor for the University of Mississippi Law Journal. He gained experience working for the Mississippi Attorney General’s Office on a variety of pension fund issues.

Prior to law school, Kyle graduated cum laude from Claremont McKenna College with degrees in Philosophy and Legal Studies.