New York Anti-Subrogation Law Saved From ERISA Preemption

An ERISA plan participant was entitled to challenge an insurer’s practice of subrogating or seeking reimbursement from participants’ personal injury awards or settlements under a New York law that prohibited such actions because that state law regulated insurance and was therefore saved from preemption, the Second Circuit ruled in Wurtz v. Rawlings Co., LLC (No. 13-1695-cv).

Background. Under the state law at issue in this case, a personal injury settlement “does not include any compensation for the cost of health care services” or other losses that “are obligated to be paid or reimbursed by a benefit provider” (such as an insurer), and that benefit providers had no “right of subrogation or reimbursement against any such settling party.” When it was enacted in 2009, it eliminated the inequality between jury verdicts and settlements that tended to discourage the settlement of personal injury lawsuits.

In February 2012, Meghan Wurtz and Mindy Burnovski (Wurtz) filed a class action suit in state court, alleging violations of this statute by the Rawlings Company, LLC; Oxford Health Plans (NY), Inc.; and UnitedHealth Group, Inc. (Rawlings). According to the complaint, Wurtz had received medical benefit payments from third parties for personal injuries. Wurtz also had settled her personal injury lawsuit, recovering from the tortfeasor. Rawlings had asserted liens under Wurtz’s insurance plans to recover medical expenses that they had paid, and Wurtz paid a reimbursement sum of $1,316.87 to Rawlings.

In filing this action for her and on behalf of a possible class of plaintiffs, Wurtz sought a declaration that, based on the statute, Rawlings did not have a right to seek reimbursement or subrogation of medical benefits against her tort settlements, and also sought damages for unjust enrichment and deceptive business practices under state law. After removing the suit to federal court, Rawlings moved to dismiss this action for failure to state a claim based on ERISA preemption.

District court ruling. The lower court granted Rawlings’ motion, holding that Wurtz’s claims were superseded under two parallel and independent principles of preemption: (1) complete preemption under ERISA Sec. 502(a), and (2) express preemption under ERISA Sec. 514. The complete preemption holding permitted Wurtz’s claim to be recast as an ERISA claim, but the lower court concluded that the claims could not successfully proceed under ERISA because Wurtz had not exhausted her administrative remedies and because the terms of the plans allowed reimbursement. The court also held that Wurtz’s claims for damages were a reassertion of her declaratory judgment claim and, thus, were expressly preempted as well. Wurtz appealed.

Preemption issues. The Second Circuit first considered whether the state law at issue was completely preempted by determining whether Congress intended to replace the state law claim with a federal law claim and give the party the ability to seek adjudication of the claim in federal court. Because Rawlings asserted the Class Action Fairness Act (CAFA) as an alternative basis to justify removal to federal court, and Wurtz did not dispute these assertions, a proper basis for federal subject-matter jurisdiction existed, and the court held it would decide both Rawlings’ express preemption defense and their complete preemption argument.

Addressing next the express preemption issue, the court ruled that the lower court was incorrect in finding that the state law was not “saved” from preemption; by its terms the law was specifically directed at insurers and substantially affected risk pooling between insurers and insureds, i.e., it regulated insurance.

Regulation of insurance. As to the assertion by Rawlings that the law was nevertheless “completely” preempted, the Second Circuit explained that the U.S. Supreme Court had established a test to determine if a claim was completely preempted: if the claim is brought: (1) by an individual who at some point, could have brought his claim under ERISA; and (2) under circumstances in which there is no other independent legal duty that is implicated by a claimant’s actions. Here, the Second Circuit concluded that neither of these requirements was met because (1) the claims were based on a state law that regulated insurance and were not based on the terms of their ERISA plans, and thus, the state law did not impermissibly expand the exclusive remedies provided by ERISA; and (2) there existed an independent legal duty which arose from the state law prohibiting Rawlings from seeking subrogation or reimbursement from settling parties, which was unrelated to whatever Wurtz’s ERISA plan had provided about reimbursement.

The court held, therefore, that the state law prohibiting subrogation was saved from preemption as a law that “regulates insurance.” The district court’s judgment was vacated and the case was remanded for further proceedings on Wurtz’s claims.

Visit our News Library to read more news stories.