New York State Seal
STATE OF NEW YORK
INSURANCE DEPARTMENT
25 BEAVER STREET
NEW YORK, NEW YORK 10004

Eliot Spitzer
Governor

Eric R. Dinallo
Superintendent

The Office of General Counsel issued the following opinion on November 28, 2007 representing the position of the New York State Insurance Department.

Re: Health Insurance, Reimbursement From Tort Recovery

Questions Presented:

1. Where an insurer has issued a group long term disability policy containing a provision regulating the insurer’s right to reimbursement from the insured as a result of payments received from tort claims arising from an accident, may the insurer unilaterally modify its reimbursement rights after an accident though a subsequent “Reimbursement Agreement”?

2. Has the “Reimbursement Agreement” in question been approved by the Insurance Department?

3. What is the significance of the insured signing the “Reimbursement Agreement” based on a representation by the insurer that failure to do will affect her monthly benefits?

Conclusions:

1. No. Such a modification may not affect the respective rights and obligations of the insurer and insured, which were fixed at the time of the accident. Any change, if permitted by the policy, must be prospective and would constitute a policy form that would require the approval of the Insurance Department in accordance with N. Y. Ins. Law § 3201 (McKinney 2006 and 2007 Supplement).

2. No. The “Reimbursement Agreement” in question was not approved by the Insurance Department.

3. Under the circumstances presented here, a representation by the insurer that failure to execute the Agreement would affect the insured’s benefits could constitute an unfair claims settlement practice within the meaning of Insurance Law § 2601.

Facts:

The inquirer, an attorney, reports that his client is covered through a certificate under a group long term disability policy issued to her employer by Insurer. Under the heading of “Rights to Reimbursement,” the policy at issue here reads as follows:

Insurer reserves the right to be reimbursed if a Covered Person receives benefit payments because of an Injury that was caused or contributed by [sic] the negligence or act of a third party. Such reimbursement will be made to [Insurer] provided: (a) the Covered Person received payment for loss of time because of a third party settlement or court judgment, and (b) such settlement or judgment specified an amount or portion of payment that represents payment for such benefits, and (c) [Insurer] has paid benefits to the Covered Person under the terms of this policy for the same benefits covered by the settlement or judgment. . . . The Covered Person will execute and give to [Insurer] any instruments and papers needed to secure the rights described above. (Emphasis added.)

In June 2003, the client was involved in an automobile accident. In February 2006, she applied to and received from Insurer long term disability benefits1. By letter of March 23, 2007, Insurer forwarded a “Reimbursement Agreement” to the client. The letter stated:

If we do not receive the requested information by the above date [i.e., April 13, 2007] [Insured’s] benefits may not be continued.

The “Reimbursement Agreement” itself provides:

I [the Insured] hereby agree: (a) to repay Insurer for such benefits to the extent they are for losses for which compensation is paid to the covered person by and on behalf of the person at fault; (b) to allow [Insurer] a lien on such compensation and to hold such compensation in a trust for the Sponsor [i.e., the Employer], and; (c) to execute and give to [Insurer] any instruments needed to secure the rights under (a) and (b). (Emphasis added.)

Further, when [Insurer] has paid benefits to or on behalf of the injured covered person, [Insurer] will be subrogated to all rights of recovery that the covered has against the person at fault. . . . The covered person must execute and deliver any instruments needed and do whatever else is necessary to secure those rights to [Insurer].

There is no indication that the insurer obtained the permission of either the client or her employer prior to delivery of the “Reimbursement Agreement” to the client.

Analysis:

Background

Historically, health insurers, unlike other first-party insurers, did not assert a right of subrogation2 when a claim was caused by a third party, although the injured party’s recovery might include items duplicating amounts paid under health insurance policies. In the past fifteen years, however, health insurers have asserted their “right” to reimbursement from tortfeasors. In Teichman v. Community Hospital of Western Suffolk, 87 N.Y. 2d 514, 640 N.Y.S. 2d 472 (1996), New York’s highest court held that a health insurer was entitled to reimbursement under the principles of subrogation where it had a purported lien on medical expenses. Id. at 523, 640 N.Y.S. 2d. at 477.

The Court of Appeals has not expanded on its holding in Teichman to indicate whether a health insurer has a right to intervene in the underlying tort action. Given this uncertainty, many health insurers have included language in their policies and contracts similar to that included here by the insurer.

The plan instituted by the client’s employer constitutes an employee welfare benefit plan within the purview of the Employee Retirement Income Security Act (‘ERISA”), 29 U.S. C. A. § 1002(1) (West 2003). Many self-funded plans include recovery language in their plan documents similar to that in insurance policies and contracts. In Sereboff v. Mid Atlantic Health Services, 547 U.S. 356 (2006), the U.S. Supreme Court held that an ERISA plan may seek reimbursement, as equitable relief3, of benefits paid from a plan participant. See 29 U.S.C. § 1132(a)(3)(B).

Question 1

The first question asks whether the 2007 Reimbursement Agreement expands the insurer’s rights under the governing group insurance policy.

It has been the consistent position of the Insurance Department that a health insurer’s right to recover amounts paid as a result of an accident depends upon the policy or contract that has been issued. See Office of General Counsel Opinion dated April 3, 2003. Insurance Law § 3201, requiring approval of health insurance policies, is relevant to the inquiry. The statute provides, in pertinent part, as follows:

(a) In this article, ‘policy form’ means any policy, contract, certificate, or evidence of insurance and any application therefor, or rider or endorsement thereto, affording benefits of the kinds of insurance specified in paragraph one, two, three or twenty-four of subsection (a) of section one thousand one hundred thirteen of this chapter, . . . The term ‘policy form’ shall not include an agreement, special rider, or endorsement relating only to the manner of distribution of benefits or to the reservation of rights and benefits used at the request of the individual policyholder, contract holder or certificate holder.

(b) (1) No policy form shall be delivered or issued for delivery in this state unless it has been filed with and approved by the superintendent as conforming to the requirements of this chapter and not inconsistent with law. . . . .

The “Rights to Reimbursement” provision in the policy issued to the client’s employer is consistent with New York law and was approved by the Department. Any recovery right of Insurer is in addition to any recoupment that may be available to the insurer providing no-fault benefits in accordance with Insurance Law § 5105.

As noted, the 2007 “Reimbursement Agreement” purports to give the insurer a right of recovery that is not limited to the circumstances set forth in the policy - Namely, the right to recoup amounts paid from a judgment or settlement that are allocated to benefits paid by the insurer. It is a maxim of contract law that the provisions of a contract may not be altered or modified without the consent of all parties thereto. See Bier Pension Plan Trust v. Estate of Schneirson, 74 N.Y. 2d 312, 546 N.Y.S. 2d 824 (1989). Accordingly, the respective rights and obligations of the insurer and the client had been fixed by the time of the accident. The policy provides, with respect to “Policy Changes”:

This policy may be changed in whole or in part. Only an officer of [Insurer] can approve a change. The approval must be in writing and endorsed on or attached to this policy.

Whether Insurer could properly extend its recovery rights by contract with the “Reimbursement Agreement” is a question unto itself. But to the extent that Insurer sought to modify the reimbursement provision for the future (i.e., before any accident involving an individual insured under the policy), it could do so only by means of a Rider, which would have required the Department’s approval in accordance with Insurance Law § 3201(b)(1). The employer’s continuation of the policy thereafter would constitute assent to the change, which in turn would bind certificate holders such as the client. However, at no time did Insurer ever seek the appropriate approval from the Department. Therefore, any proposed policy change was ineffective.

Question 2

The second question asks whether the Department approved the “Reimbursement Agreement”. As noted above, the Department has issued no such approval. If Insurer intended merely to clarify the “Right to Reimbursement” portion of the policy, such a clarification would not meet the definition of policy form in Insurance Law § 3201(a). However, if Insurer intended to modify the “Right to Reimbursement” provision in the policy, especially to increase its right of reimbursement (as appears to be the case), Insurer’s use of such a rider without approval would violate Insurance Law § 3201(b)(1).

Question 3

The third question asks about the significance of the client’s failure to sign the “Reimbursement Agreement”. Since the “Reimbursement Agreement” seemingly purports to modify an existing policy in violation of Insurance Law § 3204, the “Reimbursement Agreement” is a nullity. Accordingly, Insurer may not take action against the client based on her refusal to execute the “Reimbursement Agreement.”

In fact, to do so could constitute an unfair claims settlement practice. Insurance Law § 2601(a) provides:

No insurer doing business in this state shall engage in unfair claim settlement practices. Any of the following acts by an insurer, if committed without just cause and performed with such frequency as to indicate a general business practice, shall constitute unfair claim settlement practices: (1) knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue . . . .

In order to effectuate Insurance Law § 2601(a), the Insurance Department has promulgated N.Y. Comp. Codes R. & Regs. tit. 11, Part 216 (Regulation 64). 11 NYCRR § 216.3(a) provides:

No insurer shall knowingly misrepresent to a claimant the terms, benefits or advantages of the insurance policy pertinent to the claim.

The Insurance Department will undertake an investigation to ascertain whether Insurer has a general business practice of using the “Reimbursement Agreement”, or some similar such document, to modify its contractual right to reimbursement. The Department also will look into whether Insurer routinely represents that execution of such document is a condition precedent to continuation of benefits.

For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.

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1 We have assumed that any settlement or judgment arising out of the June 2003 automobile accident resulted from an action that either met the jurisdictional requirements of the No-Fault Law, see Insurance Law § 5104(a), or a claim that was made after exhaustion of “first party benefits”, see Insurance Law § 5101.

2 “Subrogation” occurs when an insurance company pays an insured's claim of loss due to another's tort, and the insurer then  succeeds to the insured's rights (as the right to sue for damages) against the tortfeasor. See Allstate Insurance Company v. Persampire, 2007 N.Y. App. Div. Lexis 11919 (2d. Dept. November 20, 2007).

3    ERISA permits a fiduciary to bring an action to obtain “other appropriate equitable relief.”  The Supreme Court has construed that term several times, and in Serebofffound that seeking restitution constitutes such relief.