ERISA plans and related disability or health policies contain language granting the right to reimbursement of overpayments made to the claimant. Overpayments usually occur when the claimant receives lump sum Social Security benefits, or the claimant receives a tort settlement.

Can the claimant oppose repaying the overpayment by asserting equitable defenses? Maybe.

Here’s the case of Jalali v. Unum Life Insurance Company of America, 2018 WL 4468207 (S.D. Ohio September 18, 2018).

FACTS: Jalali was severely injured in a 2007 car accident. She sought and received ERISA-governed disability benefits from Unum. Before Jalali settled her tort claim with the adverse car driver, Unum twice sent Jalali a form asking her to certify that she would notify Unum of any tort settlement. Jalali never returned the form, and then settled her tort claim for $631,530 after attorney fees and costs. Jalali then paid off $260,000 in mortgages and $110,000 in student loans.

Unum discontinued benefits, determining she was no longer disabled. Jalali sued Unum, and during that suit Unum did not seek reimbursement of the tort settlement proceeds and the Court ordered Unum to pay disability benefits ($2400 per month). After the Court ordered Unum to resume $2400 per month disability payments, Unum sought repayment from the tort settlement by reducing disability benefits to zero for 102 consecutive months, until it recouped the overpayment. Jalali sought equitable relief, claiming the offset was inequitable.

ISSUE: Whether equitable arguments may defeat efforts to enforce provisions of the policy allowing for reimbursement from tort settlement proceeds.

DISTRICT COURT HELD:

1. ERISA Section 1132(a)(3) allows for a civil action “to obtain appropriate equitable relief…” Op. at 6.
2. “[T]he test for whether a remedy constitutes ‘appropriate equitable relief’ under [ERISA]…is whether such relief was ‘typically available in equity….’” Op. at 7.
3. “[T]he power to reform contracts…is a traditional power of an equity court … To seek reformation it is not necessary to suggest specific contract language. Op. at 7.
4. No Unclean Hands. Unum properly informed Jalali it was “possible” that it could seek reimbursement. This was an accurate representation and did not constitute misrepresentation. Op. at 9.
5. No Waiver. Unum did not “intentionally relinquish” its known rights, even though Unum never asserted reimbursement as an affirmative defense. Emails between counsel showed that both parties understood that Unum planned to assert its interest in the settlement proceeds. Op. at 10.
6. No Laches. Jalali argued that Unum was not diligent in pursuing reimbursement because Unum did not seek to do so when Unum learned of the settlement in 2012. “There is no strict time limit within which Unum must seek enforcement, and there is no evidence that the delay caused Ms. Jalali’s legal position to change”. Op. at 11.
7. The Make Whole Rule — Remand for Further Proceedings. “‘[A]n insured should not be allowed to retain a double recovery at the expense of the insurer.’” The Sixth Circuit follows the make whole rule, which means that the “insurer does not have a right to subrogation until the insured has been fully compensated….’” Op. at 12.
   • Unum has not attempted to establish an equitable lien over the settlement funds. Op. at 13.
   • “Because …the settlement funds have been dissipated, [Unum cannot now establish an equitable lien].” Op. at 13.
   •  The record indicated that Jalali’s future wage loss exceeded the amount of the settlement…[b]ut this evidence is not conclusive”. The court remands for fact-finding on application of the “make whole” rule. Op. at 14.