In May, the United States Supreme Court issued a much anticipated opinion in the case of Sereboff v. Mid Atlantic Medical Services, Inc., a follow-up to the Court’s 2002 landmark decision in Great-West Life & Annuity Ins. Co. v. Knudson. The unanimous decision in Sereboff, written by Chief Justice John Roberts, further defined the scope of ERISA health and welfare funds’ right to reimbursement from plan beneficiaries of health care costs paid by plans under so-called “Acts of Third Parties” clauses. Such clauses are common to health and welfare plans and provide generally that if a beneficiary is injured because of the acts of a third party, and then recovers monetary damages from the third party, the beneficiary agrees to reimburse the plan from those proceeds. A typical example is a car accident. If a beneficiary refuses to reimburse the plan, the plan may file suit under ERISA to enforce the terms of the plan. The question presented in several cases interpreting ERISA in this regard is the scope of relief available to the plan.

Marlene Sereboff was injured in a car accident in California. She was a beneficiary under her employer’s ERISA qualified health plan, which paid approximately $75,000.00 in medical expenses. After Sereboff filed a lawsuit against a number of third parties, Mid Atlantic served her with several notices of its lien any recovery she might have. Sereboff eventually settled the tort case for $750,000.00 and her attorney distributed the settlement proceeds to her. Mid Atlantic then filed suit under § 502(a)(3)(B) of ERISA, 29 U.S.C. § 1132(a)(3)(B), which allows a plan fiduciary to seek “other appropriate equitable relief”. Sereboff agreed set aside $75,000.00 of the settlement in an investment account pending the determination of Mid Atlantic’s lawsuit.

Section 502(a)(3) provides that a plan fiduciary may bring a lawsuit “(A) to enjoin any act or practice which violates any provision of this subchapter or the terms of the plan, or (B) to obtain other appropriate equitable relief (i) to redress such violations or (ii) to enforce any provision of this subchapter or the terms of the plan.” (emphasis added). To reach its decision in Sereboff as to whether the Plaintiff sought appropriate equitable restitution, the Court looked to its earlier decision in Knudson and a number of traditional equity cases (equity is very broadly defined as cases involving consideration of fairness, as opposed to strict adherence to legal principles. Equitable restitution is a remedy by which the plaintiff seeks the return of specific property under the control of the defendant which is rightfully his). In Knudson, the proceeds of the defendant’s lawsuit were placed in a Special Needs Trust under California law. The Court determined that the funds in the Special Needs Trust were not within the defendant’s control. For this reason, the Court held that the relief Great-West sought was not equitable restitution, but was typical of a legal claim for monetary damages.

The distinguishing fact in Sereboff was that the funds in question were voluntarily placed by the defendant into her investment account. Thus, the Court in Sereboff was asked to determine whether the funds in the investment account were thereby within the beneficiary’s control and therefore reachable by the plan. The Court framed the question it would answer this way: “[w]hether the relief Mid Atlantic requested from the District Court was ‘equitable’ under ERISA § 502(a)(3)(B).” Ultimately answering in the affirmative, the Court engaged in a two-step analysis.

First, the Court distinguished Knudson, finding that the relief Mid Atlantic sought (i.e. the result) was equitable because Mid Atlantic sought identifiable funds within Sereboff’s possession or control. Noting that the characterization of the relief as being equitable was only the first part of the equation, the Court next turned to the question of whether “the basis for (Mid Atlantic’s) claim is equitable.” (emphasis added). Sereboff argued that since the property in dispute, her recovery from a third party, was not originally in the plan’s possession, the plan could not satisfy the general equity requirement that the plaintiff be able to trace the property from his own possession to that of the defendant. The Court, however, rejected this argument, finding that the agreement to set aside the money in the investment account was tantamount to an equitable lien by agreement. Citing an old case involving two attorneys’ claim against another attorney for a portion of a fee the attorney had agreed to pay them if he received a fee in a case, the Court found that it was not necessary for the property to be in existence at the time of the agreement (i.e. when Sereboff signed paperwork with the plan for her care) for a claim to be equitable. Since Sereboff had agreed to place the money in the investment account, the Court determined that tracing was not required and found that the claim Mid Atlantic asserted was equitable.

Thus, in order for a health and welfare plan to comply with ERISA and come within the principles of equity, the Plan must seek recovery of specifically identifiable property within the possession or control of the defendant. Equity typically requires that the property sought be traceable from the plaintiff to the defendant. If, however, the parties agree to set aside the property in an account within the defendant’s control, the plan will not be required to trace the assets directly from its possession to the defendant, and will be allowed to pursue its claim within the provision of § 502(a)(3)(B).
 

Injuries from Lead Paint Exposure Barred Under Insurance Policy's  “Pollution Exclusion” Provision

The Court of Appeals for the Western District of Missouri affirmed a lower court’s judgment excluding injuries resulting from the “ingestion, absorption or inhalation” of lead paint chips. Heringer v. American Family Mut. Ins. Co., et al., No. WD62995 (Mo.App.W.D. 2004). Linda Heringer, an independent contractor, sustained lead poisoning due to her exposure to lead paint chips while renovating an old house with a heat gun. This work caused her to inhale the toxic paint chips which eventually caused lead poisoning leading to permanent and severe injuries.

Ms. Heringer then sued the owners of the house that she was renovating. The owners were insured by a homeowners policy written by American Family Mutual Insurance Company. American Family denied coverage pursuant to the policy’s “pollution exclusion” provision. Ms. Heringer settled with the owners of the home for $1 million before filing a garnishment action against American Family to collect on the award. It was at this point the Howard County Circuit Court found no coverage existed based upon the “pollution exclusion” provision of the policy, which expressly included the word “lead.”

The Court of Appeals for the Western District of Missouri found that the “pollution exclusion” provision bars personal injury claims resulting from the “inhalation, ingestion or absorption” of lead paint chips based upon the express language found in the provision, affirming the judgment of the lower court.