Waller v. Hormel Foods Corp.

• Decision Date: 26 March 1996
• Docket Number: No. 3-95CV-116.,3-95CV-116.
• Citation: 950 F.Supp. 941
• Parties: Thomas and Judith WALLER, Plaintiffs, v. HORMEL FOODS CORPORATION and Hormel Foods Corporation Medical Plan, Defendants.
• Court: U.S. District Court — District of Minnesota

950 F.Supp. 941

Thomas and Judith WALLER, Plaintiffs, v. HORMEL FOODS CORPORATION and Hormel Foods Corporation Medical Plan, Defendants.

No. 3-95CV-116.

United States District Court, D. Minnesota, Third Division.

March 26, 1996.

Thomas James Conlin, Robins Kaplan Miller & Ciresi, Mpls., MN, for Thomas Waller and Judith Waller.

Larry Ardell Hanson, Moore Costello & Hart, St. Paul, MN, Leonard Walter Glewwe, Moore Costello & Hart, Mpls., MN, for Hormel Foods Corp.

ORDER

DAVIS, District Judge.

INTRODUCTION

This matter came before the court on June 28, 1995, and is brought pursuant to the Declaratory Judgments Act, 28 U.S.C. § 2201, et seq.¹ Plaintiffs and Defendants bring cross-motions for summary judgment respecting a subrogation provision of an ERISA plan. For the reasons hereafter stated, Plaintiffs' motion is Denied and the motion of Defendants is Granted.

FACTS

This case presents the question of whether a subrogation clause of an ERISA plan will be given effect where plan beneficiaries allege that prospective settlement with the tortfeasor will not fully compensate them for injuries covered by the plan. The facts, as set forth below, are largely undisputed.

Plaintiff Tom Waller is employed by Defendant Hormel Foods, which provides Tom and his wife Judy with medical coverage. Technically, of course, it was not "insurance" because Hormel relied upon a self-funded employee welfare benefit plan ("The Plan") established pursuant to the Employee Retirement Income Security Act, 29 U.S.C. § 1001, et seq.

In May 1993, the Wallers were involved in a serious car accident caused by the negligence of another motorist. The Wallers were both injured, but Judy sustained a severe hip fracture which has necessitated, as of June 1995, over $140,000 in medical expenses. Tom's physical injuries appear to have been less severe, for he has incurred approximately $6,000 in medical costs. Plaintiffs allege, and Defendants do not dispute, that Judy's injuries in particular have profoundly altered the Wallers' relationship, requiring Tom to spend much of his time caring for his wife. Judy's future earning capacity is uncertain.

These Wallers' medical costs have been borne by the Plan, consistent with its obligation to provide medical coverage. The Wallers also have auto insurance coverage available to compensate them, which precipitates the present dispute. Both the Wallers and the negligent motorist² were insured by American Family Insurance Group. The motorist's liability policy, and the Wallers' underinsurance policy each provide $100,000 of coverage per person. As a result, the Wallers each have a total of $200,000 of auto insurance coverage to compensate them.

Judy Waller and American Family have reached a settlement-in-principle, whereby she will receive the full $200,000 available to her in exchange for a release. This agreement, however, is expressly contingent upon Hormel signing the release, since the Plan has asserted a subrogation interest in the settlement proceeds. This interest arises from the following provision contained in the Summary Plan Description which was given to Hormel employees:

In the event of any payment by the Company for health care expenses, the Company shall be subrogated to all rights of recovery which you or your dependent, receiving such payment, may have against any person or organization. You or your dependent must execute and deliver instruments and papers and do whatever else is necessary to secure such rights. In addition, you or your dependent must do nothing after the loss to prejudice such rights.

Exh. G, attached to the Affidavit of Alfred A. Griffin.

Plaintiffs bring this action seeking a declaration that: (1) the Plan may not enforce the subrogation agreement unless and until the Wallers have been fully compensated for their injuries (i.e., that the Wallers, rather than the Plan have a first priority interest in the settlement proceeds); (2) should the Wallers succeed, they are entitled to attorney's fees incurred in this action; and (3) should the Plan be entitled to assert its interest, it is required to reimburse the Wallers for attorney's fees incurred in securing the insurance settlement. The Plan replies that the clear language of subrogation clause entitles it to the proceeds without regard for the adequacy of Wallers total recovery. It seeks a declaration to this effect. The Plan also disputes the basis for any fee award.

DISCUSSION

I. Summary Judgment Standard

Summary judgment is appropriate if there is no genuine issue of material fact and the moving party is entitled to summary judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Unigroup, Inc v. O'Rourke Storage & Transfer Co., 980 F.2d 1217, 1219-20 (8th Cir.1992).

II. Subrogation

Subrogation clauses are a common feature of ERISA plans. While they vary widely in precise operation and effect, they share the goal of limiting the total expenditure of plan assets. Subrogation accomplishes this by permitting the plan to "stand in the shoes" of the beneficiary with respect to tort or other recoveries to which the beneficiary is entitled on account of the injuries for which the plan has paid benefits. This prevents the beneficiary from recovering twice — once from the plan, and once from the tortfeasor. With subrogation, the "collateral source rule" is of consequence only for the tortfeasor. Subrogation is frequently confused with reimbursement, owing perhaps to the frequency with which both provisions are included in ERISA plans. The key distinction is that subrogation in effect assigns (or requires assignment of) the tort claim to the subrogee (the plan). Reimbursement simply requires the successful owner of the tort claim (the beneficiary) to repay the plan's advances. Despite this, it is common for plaintiffs to assert claims against tortfeasors which are ostensibly subrogated elsewhere, and fight over allocation afterwards.

A number of state jurisdictions have adopted a rule of interpretation which limits the effect of subrogation clauses in contracts of insurance, regulation of which has been largely devolved to the states by operation of the McCarran-Ferguson Act, 15 U.S.C. § 1011, et seq. In these states, subrogation or reimbursement is permitted only where the insured has been "made whole", that is, has received a recovery sufficient to fully compensate him. See, e.g., Westendorf by Westendorf v. Stasson, 330 N.W.2d 699, 703 (Minn.1983) (rejecting claim that subrogation clause itself created first priority interest); Rimes v. State Farm Mut. Ins. Co., 106 Wis.2d 263, 316 N.W.2d 348, 353-354 (1982) (full recovery required before subrogation given effect); Shelter Mut. Ins. Co. v. Bough, 310 Ark. 21, 834 S.W.2d 637 (1992) (same). The authorities are not in agreement as to whether this is indeed the majority rule. "The rule hardly exists, as a practical matter" in the many states permitting anti-subrogation rules to be overridden by boilerplate subrogation clauses. Cutting v. Jerome Foods, Inc., 993 F.2d 1293, 1297 (7th Cir. 1993). Whatever its reach, this interpretive rule surely is guided by the compassion and sympathy evoked where, as here, a grievously injured or disfigured claimant seeks redress. Nevertheless, it is deeply flawed.

Employing the make-whole rule to subvert subrogation clauses may in many instances eliminate the incentive of an insured to aggressively pursue a "full" tort recovery. A tort victim/insured who recovers in full must deduct the amounts paid in benefits, whereas the one who recovers just under this amount keeps both the tort settlement and the benefits paid. This appears to be so even if together, these sums "fully" compensate the claimant. See Provident Life and Acc. Ins. Co. v. Williams, 858 F.Supp. 907, 913 (W.D.Ark.1994) (ordering that trial be held on issue of whether the settlement fully compensated beneficiary). One solution to this problem is the pro-rata division of tort proceeds. The claimant reimburses the insurer in an amount reflecting the ratio between "full" recovery and the actual tort recovery. See Scales v. Skagit County Medical Bureau, 6 Wash.App. 68, 491 P.2d 1338 (1971). Thus, if the claimant recovers half the value of his injuries, the insurer recovers one-half of the medical benefits it has paid.

There is a certain rough fairness to this, which contracting parties are obviously free to pursue. However, it merely exposes another flaw in the make-whole rule — the determination of damages. An obvious predicate for invoking the rule is a finding that the claimant has not been made whole. Given the all-or-nothing nature of the rule, this is likely to remain a contested issue between the parties, even where the claimant achieves a substantial recovery. See, Williams, 858 F.Supp. at 909 ($6,500,000 tort recovery, $650,000 in benefit payments). The further litigation which will necessarily ensue effectively frustrates the primary goal of settlement, namely, avoiding litigation. At least two federal courts have sanctioned subsequent proceedings solely to determine the value of an already settled claim. Williams; Sanders v. Scheideler, 816 F.Supp. 1338 (W.D.Wis.1993).³ These proceedings are, of course, full trials on damages.

III. ERISA Subrogation and Federal Common Law

It is no longer disputed whether state anti-subrogation rules are preempted by 29 U.S.C. § 1144, to the extent they may be applied to ERISA plans. The Supreme Court decisively settled the issue in FMC v. Holliday, 498 U.S. 52, 64-65, 111 S.Ct. 403, 410-411, 112 L.Ed.2d 356 (1990), where it invalidated a provision of Pennsylvania's Motor Vehicle Financial Responsibility Law which prohibited the exercise of subrogation rights. However, the foregoing discussion of anti-subrogation rules is helpful in light of the Supreme Court's teaching that Congress expected federal courts develop a body of common law applicable to ERISA...