On May 24, 1995 Governor Carlson signed into law House File No. 96, to appear at Minnesota Statutes Sections 62A.095 and 62A.096. The bill codifies Minnesota s subrogation law with regard to health insurers and other health plans. It represents a statutory return to the rule of Westendorf v. Stasson:1 Subrogation will not be allowed where the insured s total recovery is less than the insured s actual loss. 2 The rule of Westendorf was a common law rule, however, and was applicable only in the event that a healthcare contract did not contain more stringent terms.3 Increasingly over the past ten years health insurers and health maintenance organizations (HMOs) have re-drafted their subrogation clauses, inserting language which permits the health plan first priority recovery from funds recovered from a responsible third party. Minnesota appellate courts have enforced such first priority clauses despite the fact that health insurance policies and health plans are contracts of adhesion, and that the result is grossly unfair to an undercompensated accident victim.4
The new statutory provisions codify the Westendorf rule, an insert it directly into all health plans.5 As of January 1, 1996 all Minnesotans who have private health coverage are protected from overreaching subrogation clauses typically found in health insurance and HMO contracts. A health plan s subrogation, reimbursement, or similar clause is triggered only after the covered person has received a full recovery from another source.6
A relatively small percentage of Minnesotans, however, have private health coverage. The majority receive their health coverage through an employer. The vast majority of those employers health plans qualify as employee welfare benefit plans and are therefore governed by the provisions of the Employee Retirement Income Security Act (ERISA). The Minnesota appellate courts have held in the past that all employer provided health plans that qualify as ERISA plans are governed by federal law due to the pre-exemption of state law by ERISA.7 At first blush then, the new insurance subrogation law would appear to be a very narrow victory, applicable only to those few persons who have truly private health coverage. Health coverage providers will almost certainly make this argument. Lawyers representing the injured accident victims should be careful not to succumb without further investigation.
ERISA comprehensively regulates employee pension and welfare plans. Its provisions pre-empt related areas of state law in an attempt by Congress to protect the rights of the working American. Ironically, pre-emption frequently works a hardship on the very working Americans it was designed to protect. In the case of subrogation clauses contained in employee welfare benefit plans, there is no question that Minnesota state law as codified at Sections 62A.095 and 62A.096 will better protect the individual rights of the injured persons than will the federal law of ERISA. The lawyer representing the accident victim must engage in the necessary pre-emption analysis keeping this fact firmly in mind. Examination of the federal case law completely supports the conclusion that at least with respect to insured ERISA plans, the new Minnesota Statutes Section 62A.095 will not be pre-empted by federal law, and will effectively protect the undercompensated accident victim overreaching subrogation clauses under the analysis set forth below.
ERISA pre-emption analysis is a three step process set out in three interrelated statutory provisions. Title 29 U.S.C. 1144(a), the general pre-emption clause, declares that ERISA pre-empts [a]ny and all state laws insofar as they may now or hereafter relate to any employee benefit plan covered by ERISA. The United States Supreme Court has affirmed that the pre-emptive scope of ERISA is extremely broad.8 The first step in the pre-emption analysis turns on the question of whether the Minnesota law of subrogation relates to employee benefit plans within the meaning of the general pre-emption clause. Such a relationship exists when the state law in question has a connection with or reference to an employee benefit plan. 9 The phrase is not limited to those state laws which deal specifically with ERISA plans or with subject matter covered by ERISA plans.10 Thus any provisions of state law which conflicts with a proper provision of an ERISA plan is pre-empted.11 State subrogation laws, both common law and statutory, have consistently been held to fall within the broad scope of ERISA s general pre-emption clause.12 Minnesota is no exception.
Pre-emption analysis in the insurance context does not, however, end with the general pre-emption clause. Title 29 U.S.C. 1144(b)(2)(A), known as the savings clause, returns to the states power to enforce those state laws that regulate insurance, except as provided in [the deemer clause]. It is with respect to the savings clause that Minnesota s insurance subrogation statute impacts and changes current law.
In 1990 the United States Supreme Court in FMC Corp. v. Holliday13 held that a Pennsylvania statute which prohibited a program, group contract, or other arrangement for payments of benefits to subrogation or reimbursement by an automobile claimant s tort recovery fell within the savings clause.14 In the words of the Holliday court, there is no dispute that the Pennsylvania law falls within ERISA s insurance clause because Section 1720 directly controls the terms of insurance contract by invalidating any subrogation provisions that they contain. 15 This returns the matter of subrogation to state law. Unless the statute is excluded from the reach of the saving clause by virtue of the deemer clause, therefore, it is not pre-empted. 16 The Pennsylvania statute did not merely have an impact on the insurance industry, but was directly aimed at it.17
The Minnesota appellate courts could easily have found Holliday to be controlling with respect to the Minnesota common law of subrogation but chose not to. Instead, in Blue Cross/Blue Shield v. Flam,18 the Minnesota Court of Appeals adopted the rationale of the 1989 Eighth Circuit decision Baxter v. Lynn,19 which, prior to Holliday, had found that the law of subrogation, while generally applicable to insurance contracts, is not specifically directed toward the insurance industry. 20 While acknowledging in a brief citation that Holliday existed, the Minnesota Court of Appeals instead chose to distinguish Baxter from Holliday by virtue of the fact that Minnesota s common law on subrogation is applicable to many factual circumstances unrelated to the insurance industry, and therefore falls outside the scope of the savings clause. 21 Accordingly, the Flam court held that ERISA pre-empted Minnesota s common law of subrogation, and that the subrogation language in the contract was controlling.
The newly enacted Section 62A.095 totally eliminates the Flam court s distinction between Baxter and Holliday. The Minnesota law of subrogation is not longer a creature of the common law. Courts will now be dealing with a statute specifically directed toward the insurance industry in the same manner that the Pennsylvania subrogation statute was directed toward the insurance industry in Holliday. Thus, effective January 1, 1996, Minnesota s codified healthcare subrogation law falls squarely within ERISA s insurance savings clause, and is no longer pre-empted except as provided by the deemer clause. Baxter and Flam are no longer controlling.
The final portion of the ERISA pre-emption analysis is codified at 29 U.S.C. 1144(b)(2)(B). Under the deemer clause, an employee benefit plan governed by ERISA shall not be deemed an insurance company, an insurer, or engaged in the business of insurance for purposes of state laws purporting to regulate insurance companies or insurance contracts. The Holliday court interpreted the deemer clause to exempt self-funded ERISA plans from state laws that regulate insurance within the meaning of the savings clause. 22 On the other hand, insured employee benefit plans are subject to indirect state insurance regulation. An insurance company that insures a plan remains an insurer for purposes of state laws purporting to regulate insurance. The insurance company is not relieved from state insurance regulations. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the plan s insurer. 23 The application of the deemer clause to employee welfare benefit plans containing subrogation clauses in conflict with Minnesota Statutes Section 62A.095. Those plans which are insured, however, will not be pre-empted, and will be governed by the terms of Section 62A.095.
Section 62A.095 represents a legislative victory to Minnesota accident victims. It protects their right to receive full compensation prior to reimbursing their health plans for medical benefits paid on their behalf. Using the proper analysis, this victory extends beyond the increasingly rare private health insurance policy, and should also regulate those ERISA health plans that are insured rather than self-funded. As of January 1, 1996 all attorneys representing injured accident victims should take care to probe further into the details of their clients employer-provided healthcare plans to determine the source of their funding. For those plans which are insured plans, the looming spector of the term ERISA has lost many of its teeth.
1. 330 N.W.2d 699 (1983).
2. Id. at 703
3. See, Hershey v. Physicians Health Plan, 498 N.W.2d 519, 520 (Minn. App. 1993).
5. The new Minnesota Statutes Section 62A.095 will apply to all health plans offered, sold or issued to a resident or to cover a resident of Minnesota. The Westendorf rule is codified in Subdivision 2, which states: No health plan described in Subdivision 1 shall contain a subrogation, reimbursement, or similar clause that provides subrogation, reimbursement, or similar rights to the health carrier issuing the health plan, unless: (1) the clause provides that it applies only after the covered person has received a full recovery from another source…
6. Minn. Stat. 62A.095, subd. 2.
7 Blue Cross/Blue Shield v. Flam, 509 N.W.2d 393 (Minn. App. 1993) review denied (February 24, 1994).
8. See, e.g., Metropolitan Life Ins. Co. v. Massachusetts, 471 U.S. 724, 739 (1985).
9. Id. at 47
10. Shaw v. Delta Airlines, Inc., 463 U.S. 85, 97 (1983).
11. Baxter v. Lynn 886 F.2d 182, 185 (8th Cir. 1989).
12. FMC Corp. v. Holliday, 498 U.S. 52 (1990); Baxter v. Lynn, 886 F.2d 182 (8th Cir. 1989); Hunt v. Sherman, 345 N.W.2d 750 (Minn. 1984).
13. 498 U.S. 52 (1990).
14. Id. at 59.
15. Id. at 61.
18. 509 N.W.2d 393 (Minn. App. 1993), review den. (February 24, 1994).
19. 886 F.2d 182 (8th Cir. 1989).
20. Baxter , 886 F.2d at 1986.
21. Flam, 509 N.W.2d at 397.
22. 498 U.S. at 61.