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New York personal injury plaintiffs with employer sponsored health plans are shielded from insurance company actions that seek reimbursement from their tort settlements, a federal appellate court has held in an important preemption case.

The U.S. Court of Appeals for the Second Circuit unanimously reversed a trial judge and held that the Employee Retirement Income Security Act of 1974 (ERISA) does not preempt a parallel state law. Consequently, employer-sponsored health plans are blocked by the state law from recovering medical benefits from settlement funds.

Wurtz v. Rawlings Co., 13-1695-cv, is rooted in a class action initiated in 2012 by personal injury plaintiffs who were covered by ERISA insured health plans.

The plaintiffs sued three companies—the Rawlings Co., Oxford Health Plans and UnitedHealth Group—contending that New York General Obligations Law §5-335 trumped ERISA reimbursement rights. Wurtz was closely watched by the personal injury bar, both in New York and nationally, because of its ramifications for healthcare lien law, as well as its potential to impact and possibly impair settlement negotiations.

The dispute centers on §5-335, which states that a personal injury settlement “does not include compensation for the cost of health care services” or other losses that “are obligated to be paid or reimbursed” by an insurer. It also states that the benefit provider has no “right of subrogation or reimbursement against” the settling plaintiff.

At issue was whether ERISA preempts the state law and permits companies to seek reimbursement against individuals in New York, despite the shield provided under state law.

ERISA, which established national standards for the administration of private pension plans and regulates employee benefits, expressly preempts any state law related to “any employee benefit plan.” But it excludes those that “regulate insurance.”

Under U.S. Supreme Court precedent, laws “regulate insurance” under the clause if they are “specifically directed” toward “entities engaged in insurance” and “substantially affect the risk pooling arrangement between the insurer and the insured” (see Kentucky Association of Health Plans v. Miller, 538 U.S. 329, 2003).

Last year, Eastern District Judge Joseph Bianco (See Profile) found that ERISA controlled and that §5-335 was not “saved” from preemption.

Bianco held that §5-335 is not specifically directed at insurance since it regulates not only insurers, but all benefit providers, such as self-funded employer plans. He also held that the state law did not substantially affect the risk pooling arrangement, because it applied only to a subset of providers who had no statutory right of reimbursement and had not intervened in the settled action.

The ruling severely restricted the scope of §5-335, apparently limiting it to individually purchased insurance policies and a handful of state-based plans. Wurtz has been cited nationwide to challenge statutes similar to New York’s, especially since the circuits were divided on a related preemption issue.

In a decision last week, the Second Circuit largely parted with the Third, Fourth and Fifth Circuits and sided with the Ninth in holding that §5-335 is not preempted by ERISA.

“Allowing plaintiffs’ state-law claims under section 5-335 to proceed will not disturb ERISA’s goal of providing national uniformity,” Circuit Judge John Walker Jr. (See Profile) wrote for the three-judge panel, which also included circuit judges Jose Cabranes (See Profile) and Barrington Parker (See Profile).

Walker found Bianco’s ruling contrary to FMC Corp. v. Holliday, 498 U.S. 52 (1990), which dealt with a Pennsylvania antisubrogation clause similar to New York’s. In that case, the Supreme Court held that Pennsylvania’s antisubrogation statute was not applicable to self-funded ERISA plans.

The Second Circuit said §5-335 is clearly aimed at the insurance industry, and therefore meets the “specifically directed” test. Additionally, the judges rejected Bianco’s analysis on the question of whether the statute “substantially affects” the risk pooling arrangement.

“[T]he test is not whether the law substantially affects the whole insurance market—the test is whether the law substantially affects how risk is shared when it applies,” Walker wrote. “For example, even though only a subset of insured suffer mental illness, the Supreme Court has held that a law requiring minimum mental health care benefits regulates insurance and is thus saved from preemption.”

Settlements Affected

Steven Harfenist of Harfenist, Kraut & Perlstein in Lake Success, one of the attorneys on appeal for the plaintiffs, said the ruling has considerable implications.

Harfenist said the defense bar had been relying on Wurtz to overcome state antisubrogation clauses all over the country as insurers assessed liens against personal injury settlements, citing their contractual right to subrogation.

“It is a significant case for New York and outside the state because they are enforcing these subrogations all across the country,” Harfenist said. “Wurtz was their crown jewel.”

Harfenist said Wurtz “radically affected the ability of personal injury lawyers to resolve cases.” He said the ruling impacted settlement discussions because plaintiffs and their attorneys had to balance the settlement offer against what could be a large health care lien.

“The lien made it difficult to reach an outcome with the defendant. It’s all economics,” Harfenist said.

Michael Rose of Hach Rose Schirripa & Cheverie who represented the two named plaintiffs in their personal injury action, said that in the wake of Wurtz, plaintiffs’ settlement monies were routinely held up while they engaged in a separate battle with a subrogation company.

“The collection companies were relying on Wurtz beyond New York State to enforce their subrogation rights of reimbursement. We would settle cases and end up going back and fighting with the subrogation companies, while we were holding clients’ money in escrow,” Rose said.

Franklin Solomon of the Solomon Law Firm in Cherry Hill, N.J. also represented the plaintiffs on appeal.

Richard Cohen of Lowey Dannenberg Cophen & Hart in White Plains, who argued for the defendants, declined comment. Anton Metlitsky of O’Melveny & Myers in Manhattan also appeared on behalf of the defendants.

The appeal was argued Oct. 30.