In order to prevent a double-recovery of benefits when claimants qualify to receive both Social Security and disability insurance payments, most group insurers include provisions in their policies that reduce the insurance payment by the amount of Social Security benefits received by the claimant. In addition, since Social Security adjudications often follow the disability insurance approval by months or even years, group policies typically include provisions allowing for recoupment of overpayments that result from the subsequent award of Social Security disability.

However, as Bilyeu v. Morgan Stanley Long Term Disability Plan, 2012 U.S.App.LEXIS 12554 (9th Cir., June 20, 2012) held, due to a quirk in the Employee Retirement Income Security Act (ERISA) law, insurers’ ability to enforce their reimbursement rights may be compromised. If the claim arises under ERISA, insurers are limited to seeking “appropriate equitable relief” in accordance with 29 U.S.C. Section 1132(a)(3).

And even where such claims are permissible, in another decision issued by the 9th U.S. Circuit Court of Appeals on the same day as Bilyeu, CGI Technologies and Solutions, Inc. v. Rose, 2012 U.S.App.LEXIS 12556 (9th Cir., June 20, 2012), such claims are subject to equitable defenses. In Bilyeu, the plaintiff, Leah Bilyeu, suffered a double-whammy when she brought suit against Unum Life Insurance Co. challenging the termination of her disability payments. Not only was her case dismissed on procedural grounds; she also lost on a counterclaim asserted by Unum seeking recoupment of an overpayment resulting from Bilyeu’s receipt of Social Security payments. The court of appeals reversed the district court on both issues, although this article will focus only on the overpayment claim.

The 9th Circuit found that Unum’s suit seeking reimbursement of an overpayment attributable to the Social Security award sought legal, not equitable, relief. Although the policy provided that Unum could seek reimbursement of overpaid benefits, and Bilyeu executed an agreement promising to promptly reimburse Unum any overpayment claimed on account of a Social Security award, the court found Unum’s right to recover the overpayment was limited by ERISA. The court focused on whether Unum possessed an enforceable equitable lien by agreement consistent with Sereboff v. Mid Atl. Med. Servs., Inc., 547 U.S. 356 (2006), which permitted a health insurer to obtain reimbursement of medical expenses it had paid to treat injuries suffered in a car accident that were later recovered by the plaintiff in a personal-injury lawsuit. The court explained that Sereboff established at least three criteria that needed to be met in order to secure an equitable lien by agreement in an ERISA action:

First, there must be a promise by the beneficiary to reimburse the fiduciary for benefits paid under the plan in the event of a recovery from a third party. Second, the reimbursement agreement must “specifically identif[y] a particular fund, distinct from the [beneficiary’s] general assets,” from which the fiduciary will be reimbursed. Id. at 364. Third, the funds specifically identified by the fiduciary must be “within the possession and control of the [beneficiary].” Id. at 363.

The court found the first requirement was established – Bilyeu did not dispute her promise to reimburse Unum if she received an overpayment of benefits. As to the second criterion, Unum maintained that once the Social Security payment was issued, the “fund” over which it sought reimbursement came into existence and a lien could be imposed upon that fund. However, the 9th Circuit disagreed, finding that the difference between the tort recovery in Sereboff and the Social Security payment is that “the overpaid disability benefits are not a particular fund, but a specific amount of money encompassed within a particular fund – the long-term disability benefits Unum paid to Bilyeu.”

The court further noted that even if the insurer had identified the Social Security disability benefits as the “fund,” the Social Security Act’s restriction on creditors’ rights to obtain assignments of or attachments upon Social Security benefits contained in 42 U.S.C. Section 407 precludes that approach. But even if Unum could satisfy the second Sereboff requirement, the court found the claim would still fail because Unum could not establish the overpaid disability benefits remained within Bilyeu’s “possession and control.” Sereboff, 547 U.S. at 363. In Sereboff, the third-party tort recovery was preserved in an investment account. Here, however, the disability benefits Unum had paid to Bilyeu had been spent and the only funds available to repay Unum would be Bilyeu’s general assets. The court referenced Epolito v. Prudential Ins. Co. of Am., 737 F. Supp. 2d 1364, 1382 (M.D. Fla. 2010), which recognized the benefits paid by Unum, including the amounts deemed to constitute the overpayment, had been spent by the plaintiff for ordinary living expenses long before the Social Security award.

The 9th Circuit acknowledged that several other courts of appeals had ruled differently – Funk v. CIGNA Grp. Ins. 648 F.3d 182, 194 n.14 (3d Cir. 2011); Cusson v. Liberty Life Assurance Co. of Boston. 592 F.3d 215, 231 (1st Cir. 2010); Longaberger Co. v. Kolt. 586 F.3d 459, 466 (6th Cir. 2009); Gutta v. Standard Select Trust Ins. Plans. 530 F.3d 614, 621 (7th Cir. 2008); and Gilchrest v. Unum Life Ins. Co. of Am., 255 F. App’x 38, 44-45 (6th Cir. 2007) (unpublished). However, the court disagreed with those rulings, which it deemed inconsistent with Sereboff.

Although it may seem odd that the insurer’s rights to recover an overpayment were impaired by this ruling, other courts have established that the insurance company retains the right of setoff. According to Northcutt v. Gen. Motors Hourly-Rate Employees Pension Plan, 467 F.3d 1031 (7th Cir. 2006), if the insurer is later found to have improperly terminated disability payments, it can reduce the amount owed to the insured by setting off the overpayment. However, because ERISA is a law of equity, courts may apply equitable principles to trump policy terms. As the 9th Circuit explained in CGI Technologies, a court “need not honor the express terms of the plan where traditional notions of equitable relief so require.” (citing CIGNA Corp. v. Amara. 131 S. Ct. 1866, 1879 (2011)).

Note: I represented the plaintiff in the Gutta case cited in this article.

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