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Davis v. Nepco Employees Mut. Ben. Ass’n, 51 F.3d 752 (C.A.7 (Wis.), 1995)
Page 752
Benefit Association (“Nepco”), a self-funded
ERISA plan covering her through her
husband’s employer, paid Mrs. Davis’ medical
bills following the explosion. Mrs. Davis and
her husband, David Davis, brought a
Wisconsin state tort suit in which Nepco
intervened. In October, 1990, the Davises and
Nepco each separately settled with the alleged
tortfeasors, who paid Mrs. Davis $3,932,000,
Mr. Davis $300,000, and Nepco 90% of the
approximately $429,000 in medical bills paid
to that time. The Davises and Nepco each
executed a full release of the
51 F.3d 752
19 Employee Benefits Cas. 1107, Pens.
Plan Guide P 23909V
Kathleen DAVIS and David Davis,
Plaintiffs-Appellants,
v.
NEPCO EMPLOYEES MUTUAL
BENEFIT ASSOCIATION, DefendantAppellee.
No. 94-1975.
United States Court of Appeals,
Seventh Circuit.
Argued Oct. 5, 1994.
Decided April 10, 1995.
Page 754
alleged tortfeasors, including a release of
liability for future medical expenses. Neither
the Davises nor Nepco released the other
from liability for future medical expenses.
The Davises’ payments were not apportioned
in any way. After the settlement, Mrs. Davis
incurred $29,000 in further unexpected
medical expenses arising out of the accident.
Nepco refused to pay the bill, claiming that
the Davises’ settlement covered future
medical expenses. The Davises paid, then
brought this ERISA suit for enforcement of
Nepco’s obligation. Both parties moved for
summary judgment, and the district court
ruled in favor of Nepco. Mr. and Mrs. Davis
appealed.
Page 753
Jerome A. Maeder (argued), Vincent A.
Maeder (argued), William D. Mansell,
Wausau, WI, for plaintiffs-appellants.
Lee J. Geronime, Paul D. Windsor
(argued), John C. Lapinski, David W. Runke,
Michael, Best & Friedrich, Milwaukee, WI, for
defendant-appellee.
Before POSNER, Chief Judge, ENGEL,
and EASTERBROOK, Circuit Judges.
*
ENGEL, Circuit Judge.
This case presents only one question:
which party bears liability for future medical
expenses when both a tort victim and her
medical insurer, an ERISA plan, settle
separately with the tortfeasor without
explicitly allocating any portion of the
settlements for future medical expenses.
Because we find that the ERISA plan failed to
protect its own interests regarding future
medical expenses when it settled the case, we
reverse the district court’s grant of summary
judgment for the plan.
The instant case could have been avoided
had the parties to the original tort suit clearly
allocated their settlements. Without question,
both released the original tortfeasors from
any future liability for medical expenses. The
documents evidencing each settlement are
silent as to which portion of a given
settlement, if any, was intended to
compensate the tort claimants for Mrs. Davis’
future medical expenses related to her
injuries in the explosion, even though each
agreement exonerated the tortfeasor of any
further liability for prospective expenses.
An explosion injured Kathleen Davis in
1989, disfiguring her and covering her body
with severe burns. Nepco Employees Mutual
There is little law controlling the
application of Nepco’s plan in the Davises’
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Davis v. Nepco Employees Mut. Ben. Ass’n, 51 F.3d 752 (C.A.7 (Wis.), 1995)
situation. Wisconsin law prevents any insurer
from claiming a right of subrogation against
settlement proceeds in personal injury cases
unless the injured insured has been “made
whole,” see Garrity v. Rural Mut. Ins. Co., 253
N.W.2d 512, 77 Wis.2d 537 (1977), and
Wisconsin
courts have on occasion
entertained post-settlement trials to find the
insured’s damages in order to determine
whether the insured had been made whole in
the settlement. See Rimes v. State Farm Mut.
Auto. Ins. Co., 316 N.W.2d 348, 355-56, 106
Wis.2d 263 (1982). However, Nepco is not an
ordinary health insurer but an ERISA plan,
and the Supreme Court has held that the
federal scheme in ERISA preempts state
regulation of subrogation rights belonging to
self-funded ERISA plans. FMC Corp. v.
Holliday, 498 U.S. 52, 111 S.Ct. 403, 112
L.Ed.2d 356 (1990); see 29 U.S.C. Secs.
1144(a), 1144(b)(2)(A), 1144(b)(2)(B). Since
ERISA itself does not address such situations,
we must decide this case with reference to
Nepco’s plan alone. Nepco has not argued
that it has discretion to interpret its plan, so
we review the terms of the plan de novo.
Firestone Tire & Rubber Co. v. Bruch, 489
U.S. 101, 115, 109 S.Ct. 948, 956-57, 103
L.Ed.2d 80 (1989). In addition to the Nepco
plan, we must examine two releases of the
original tortfeasor, one by the Davises and
one by Nepco, to determine whether they
affected the contractual relationship between
the Davises and Nepco.
other indemnification or provision which
might excuse Nepco from liability for Mrs.
Davis’ medical costs henceforth.
Nepco argues that the release signed by
the Davises represents evidence that future
medical expenses were covered in the
Davises’ settlement. Although the Davises’
release unequivocally relieves the tortfeasor
from liability for any further medical
expenses, whenever they might occur, the
release signed by Nepco states the same, also
waiving any right of recovery against the
tortfeasor for future medical expenses. Nepco
did in its release reserve its right of
indemnification against the Davises, and it
claims
now
that
this
reservation
demonstrates that the Davises’ settlement,
not Nepco’s, included payment for future
medical expenses. We fail to see, and Nepco
has failed to explain, how a provision in
Nepco’s contract releasing the tortfeasor can
bind the Davises, who were not a party to it.
While that reservation might be evidence of
what Nepco thought at the time, it does not
bolster Nepco’s argument that the Davises’
release
Page 755
offers evidence of what the Davises or the
tortfeasor intended. The fact that the Davises
relinquished any claim for future medical
expenses against the tortfeasor simply does
not prove that they were compensated for
future medical expenses; it is equally possible
that in return for full compensation of Mrs.
Davis’ pain and suffering, loss of income,
disfigurement, and other damages, the
Davises gave up their claim against the
tortfeasor for compensation of future medical
costs. As the Wisconsin Supreme Court
recognized,
The ERISA plan obligates Nepco to pay
employees’ medical bills, but it also creates a
right to indemnification: “If the employee is
reimbursed for medical expenses incurred as
the result of an injury by either the person
causing such injury or that person’s
insurance, such payments that duplicate
benefits paid by [Nepco] will be refunded to
[Nepco] by the employee.” Nepco Articles of
Association 17. This provision effectively
assigns to Nepco the Davises’ interest in
damages for medical expenses arising out of
the injury, whether for past or future charges.
No policy limit has been argued, nor any
particularly in a personal-injury case, where
both the questions of liability and of damages
prior to trial are to some degree in doubt[, a]
pre-trial release in settlement is in fact
usually appropriate when such doubts exist. A
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Davis v. Nepco Employees Mut. Ben. Ass’n, 51 F.3d 752 (C.A.7 (Wis.), 1995)
release is merely the giving up of a right or
claim, and it may or may not be for full
consideration and may or may not make the
grantor of the release whole. Thus, it is
apparent that the legal import urged by [the
defendant] to be given to the settlement in
this case is inappropriate.
tortfeasor directly. While the Nepco plan does
not grant Nepco any enforceable right so to
negotiate, we believe it does not prohibit it in
the absence of objections by the beneficiaries.
The Davises did not object. Similarly, the plan
does not grant Nepco any right to demand (or
negotiate directly for) prepayment of future
medical expenses, but neither does it seem to
prohibit prepayment by a willing beneficiary
or, with her agreement, by a tortfeasor. A
beneficiary likely to exhaust the fund for
future medical expenses, like Mrs. Davis, has
no reason to demand that Nepco pay each
future bill as it comes due and then receive
reimbursement to the limit of the fund, rather
than simply collecting the damages intended
to cover future medical costs. Thus we find
that Nepco could negotiate directly with the
tortfeasor to settle its claim regarding Mrs.
Davis’ past and future medical expenses.
Rimes, 316 N.W.2d at 354. We find that
neither release indicates which party
received, as part of its settlement payment,
compensation for future medical expenses.
Certainly they do not state what portion of
any settlement can be attributed to future
medical expenses.
We do, however, consider it significant
that the two parties settled independently.
The Nepco plan does not subrogate the
Davises’ interest in the entire tort suit to
Nepco, as it could have. See FMC Corp. v.
Holliday, 498 U.S. 52, 111 S.Ct. 403, 112
L.Ed.2d 356 (1990). Nor does the plan’s
indemnification provision make any claim of
priority against any damages recovered. 1
Instead, the plan provides that if the Davises
recover damages which duplicate payments
made by Nepco rather than by the Davises,
then they must turn over that portion to
Nepco. Lacking any contractual right to
intervene, Nepco could have stayed aloof
from the Davises’ tort suit, then recovered
from them any damages awarded to the
Davises for medical expenses, without ever
dealing directly with the tortfeasor. If the
Davises’ settlement had purported to allocate
the payment without Nepco’s consent,
Nepco’s right to recover only the amount
allocated to medical expenses would present a
more difficult case not present in this suit.
Nepco had neither a duty nor an
enforceable right to intervene in the personal
injury suit and settlement, but having
acknowledged the divergence of its and the
Davises’ interests by intervening, we believe
that Nepco imposed upon itself the duty to
protect its own interests adequately. It had
Page 756
the leverage to do so; the tortfeasor
acknowledged Nepco’s claims against it by
settling with Nepco despite the Davises’
release of the tortfeasor. Being liable for Mrs.
Davis’ future medical expenses, Nepco had
every interest in determining those costs’
probable then-present value and recovering
it. Since the tortfeasor was presumably
indifferent to the allocation of the sum it was
willing to pay, Nepco could and should have
bargained either to receive compensation
then for future expenses, or to insist as a
condition to its own settlement that the
tortfeasor clarify in its settlement agreement
with the Davises (of which Nepco had notice)
that they had received a sum certain as such
compensation. It did not do so. Despite
effectively owning the Davises’ claim against
No doubt anticipating such difficulties,
Nepco acted to protect its own interest rather
than wait to collect from the Davises. After
all, the Davises had no real incentive to
bargain for a settlement including the full
value of Mrs. Davis’ medical expenses; any
such damages recovered would be handed
over to Nepco. So Nepco bargained with the
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Davis v. Nepco Employees Mut. Ben. Ass’n, 51 F.3d 752 (C.A.7 (Wis.), 1995)
the tortfeasor for all medical expenses, Nepco
claims now that it actually received
compensation only for the claim for past
expenses against the tortfeasor before it
unambiguously released the tortfeasor from
all liability for future medical expenses.
————–* Honorable Albert J. Engel, of the United
States Court of Appeals for the Sixth Circuit,
sitting by designation.
1 Although one post-accident document
purports to “deem” all damages recovered by
the Davises to be compensation for medical
expenses to the extent payments are made by
Nepco, Nepco has not argued before this
court that this document has any effect.
Nepco may question its validity, since it looks
like a discriminatory attempt to alter Nepco’s
rights with respect to one beneficiary without
amending the plan itself in accordance with
ERISA. See 29 U.S.C. Secs. 1140, 1141.
It is possible, of course, that Nepco was
aware of the ambiguity regarding future
medical expenses, but felt unable to clarify
the situation without risking the settlement it
had won for its past expenses. Nepco may
have decided to take the settlement offered
and deal with the gap later. By failing to deal
explicitly with the question of future medical
expenses, however, Nepco provoked the
lawsuit it had intended to avoid. Despite some
sympathy for Nepco, we consider this
ambiguity fatal to Nepco’s claim. We find the
following undisputed facts decisive: Nepco is
required by contract to pay Mrs. Davis’
medical expenses; Nepco has the right to any
payments made by a culpable third party to
cover medical expenses; and Nepco exercised
this right in settling with the tortfeasor,
receiving a lump-sum payment in return for a
release of all liability for past and future
medical expenses. Nepco cannot identify any
payments intended to compensate the
Davises for future medical expenses. Since
Nepco essentially owned the victim’s right to
recover for future medical expenses, it is most
logical to assume in the absence of a contrary
provision in the Nepco-tortfeasor contract
that Nepco has already recovered for this
element of injury. We decline now to find-solely on the basis of the amounts each
settling plaintiff received–that the Davises,
rather than Nepco, were compensated in an
unknown amount for future medical
expenses. Rather, we hold Nepco to its
bargain. If it undervalued its claim against the
tortfeasor, its mistake does not excuse it from
liability for the Davises’ medical needs.
Therefore we REVERSE the judgment of the
district court and REMAND with directions
that the court enter summary judgment for
Kathleen and David Davis.
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