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Should health insurer pay attorney’s fees?

Subrogation claims against an injured client aggravate their lawyers no end.

One reason is that health insurers at times are reimbursed from a personal injury settlement the bills they have paid for the plaintiff’s medical care, without compensating the attorney who secured the recovery.

The Rochester law firm of O’Brien & Wolf is challenging that practice in lawsuits — apparent test cases — now in state and federal court. They (and their client) are the defendants in a case of first impression in the state and in the 8th Circuit: Weston Wilson and David Manderson, as trustees of the South Central Minnesota Electrical Workers’ Family Health Plan.

The plan sued the firm last month seeking a declaratory judgment that it doesn’t have to pay attorney’s fees. The insurer is a self-funded plan formed under the Employee Retirement Income Security Act, known as ERISA, and it claims that its statute rules, entitling it to 100 percent reimbursement. The subrogation and reimbursement provisions are written to apply firmly to the third-party recovery and impose a constructive trust thereupon.

“Specifically, Plaintiffs seek a declaration that O’Brien &Wolf, LLP (‘O’Brien & Wolf’) is not entitled to rely on the Minnesota common fund doctrine or any other equitable principles in support of its claim for attorney’s fees … where the Plan expressly disclaims the common fund rule and other equitable principles,” the complaint states.

But O’Brien & Wolff had already filed an attorney’s lien action in Olmsted County. Accordingly, the plaintiff moved the federal court for emergency relief — an emergency preliminary injunction and expedited discovery. The plan seeks to stay the state court action and tie up all the settlement funds. The purpose of the expedited discovery motion is to follow the (settlement) money so the plaintiffs can protect their equitable lien. If the plan has to pay anything, it will look for reimbursement to Travis R. Schurhammer, whose injuries are at the heart of the matter. That motion is under advisement by U.S. District Court Judge Susan Richard Nelson.

A week after the emergency motion was filed, the defendants moved to dismiss. That motion is scheduled for hearing on Oct. 6 and a settlement conference is scheduled for July 28.

Attorneys for the parties could not be reached for comment. All information in this story is taken from court filings.

Plan won’t offer discount

Schurhammer was injured in a snowmobile accident on Feb. 15, 2014. He was insured by the plaintiffs and his policy required him to agree to subrogation and reimbursement.

The plan paid $152,738.95 in medical and disability benefits. Schurhammer subsequently settled his claims for $800,000.00.

The plan refused a proposal by the law firm to reduce its claim by 60 percent. The defendants then offered to pay the reimbursement as the plan claimed but requested the plan to pay a one-third contingency fee. It refused, so in February this year the defendants sent the plan a draft for $152,738.95, the full value of the plan’s subrogation and reimbursement claim, along with a Notice of Attorney Lien. The state court action was filed in May.

Defendants ‘found the key’

In June, the defendants filed a motion to dismiss the federal case. They noted that health insurers have justified “rebuffing’ attorney fee claims since the U.S. Supreme Court decided Sereboff v. Mid Atlantic Medical Services Inc. in 2006. Mid Atlantic said that the language in the health plan controls and is not trumped by equitable doctrines. The high court followed that case in 2013 in U.S. Airways Inc. v. McCutchen, where the Supreme Court noted that third-party recoveries are not free and without cost sharing the insurer “take[s] the fruits while contributing nothing to the labor.”

The defendants assert that an Illinois law firm “found the key that unlocks the health insurer’s vaults” and successfully recovered fees from an ERISA plan in Schremp, Kelly, Napp & Darr, Ltd. v. The Carpenters’ Health and Welfare Trust Fund, a 2015 case.

The key to that case, according to the defendants, was that the plan beneficiary reimbursed the plan 100 percent of its claim before suing in state court. That rendered ERISA irrelevant, the defendants say.

Furthermore, O’Brien & Wolf is not a party to the plan, they continue, relying on Darr, where the court reasoned that the plan’s contractual provisions cannot govern the attorney. The Darr court also said the plan otherwise would be allowed to prey like a parasite on the efforts of its host.

The defendants then assert that plaintiff’s complaint fails to state a claim upon which relief may be granted. The plaintiff has no quarrel with Schurhammer, who has complied with it. The lawsuit is not about ERISA and does not raise a federal question, and the matter belongs in state court, defendants argue.

Plaintiffs invoke ERISA

The plan has two claims against Schurhammer — that he must pay all attorney fees incurred in obtaining the $800,000 settlement, and if the plan is forced to pay attorney’s fees to O’Brien and Wolf, Schurhammer must indemnify it.  If the case is decided under federal law, as the plaintiffs say it should be, its refusal to pay attorney fees is supported.

The plaintiff of course contends that the matter is about ERISA and the court has jurisdiction because it is well-settled law that the firm need not be a party to the plan to be named a defendant. It also notes that the Darr court found that the District Court did have jurisdiction over claims for equitable relief under ERISA.

The plaintiff says that the problem with the defendants’ “tactic” — to have the plan participant reimburse the plan and then sue in state court — is that the law firm does not have a true claim against the plan because either the law firm has been paid or the plan participant has not met its obligations.

It then disparages what it calls collusion between Schurhammer and the law firm.   The plaintiff points out in its complaint that the firm reduced its fee to one-third of a net recovery after subrogation claims are paid, intending to recover fees from the plaintiffs. A standard contingent fee of a third of the entire recovery would have paid the firm the fees it now is trying to collect.

In its complaint, the plaintiff pointed out that billing records from the defendant showed that $28,797.50 in hourly work was expended and that O’Brien had received $211,991.95 from its client and now asked for another $26,781.68 — 93 percent of the hourly time spent.

Getting a little more aggressive, the plaintiff refutes the argument that the plan was paid in full. “Although O’Brien & Wolf sent the Plan a check for the full $152,738.95 in benefits it had paid on Schurhammer’s behalf, he and his counsel were off violating other [unspecified] Plan terms behind the scenes,” plaintiff says. The plaintiff became susceptible to the very attorney fee claims that O’Brien & Wolf brought because the firm took a net contingent fee, it says.

“That’s the whole problem because [Schurhammer] was required to pay all fees he incurred, and the portion he reimbursed to the Plan is included in his gross recovery that he was supposed to pay fees on to O’Brien &Wolf. O’Brien & Wolf also admits that they would have no claim against the Plan if Schurhammer had paid fees on the portion reimbursed to the Plan, further supporting the Plan’s claim that he prejudiced the Plan’s subrogation and reimbursement rights in violation of the Plan terms,” the plaintiff asserted.

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