YERKOVICH v. AAA

Citation Codes

Equivalent Citations

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Docket Number

No. 112891.

Attorney(S)

Fraser McHugh, P.C. (by Stuart A. Fraser and Carrie L. Fuca) [10 S. Main, Suite 302, P.O. Box 2304, Mt. Clemens, MI 48046-2304] [(810) 463-0100], for plaintiff-appellee. Lanctot, McCutcheon, Schoolmaster, Taylor Hom (by Charles Trickey, III) [85 N. Main Street, Suite 200, Mt. Clemens, MI 48043-5616] [(810) 465-8203], and John A. Lydick, of counsel, [577 E. Larned, Suite 210, Detroit, MI 48226] [(313) 961-1525] for defendant-appellant. Sachs, Waldman, O'Hare, Helveston, Bogas McIntosh, P.C. (by I. Mark Steckloff and Reginald M. Turner, Jr.) [1000 Farmer Street, Detroit, MI 48226] [(313) 965-3464], for defendant-appellee. Amici Curiae: Miller, Shpiece Andrews, P.C. (by Wayne J. Miller and Michael R. Shpiece) [26211 Central Park Blvd., Suite 500, Southfield, MI 48076] [(248) 945-1040], for Professors Miller and Shpiece.

Judges

Michael F. Cavanagh
Mary Beth Kelly

Acts

Labor — General Provisions — Employee Retirement Income Security Program — Protection Of Employee Benefit Rights — Congressional Findings And Declaration Of Policy

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Smart Summary

Factual and Procedural Background

Plaintiff Mary Jean Yerkovich, individually and as next friend of her minor daughter Lisa Yerkovich, filed suit against defendant AAA (also known as ACIA) and the Michigan United Food and Commercial Workers Unions and Food Employers Health and Welfare Fund (the Fund). The minor daughter was injured in an automobile accident caused by a negligent driver. At the time, plaintiff was a participant in the Fund, a self-funded ERISA employee welfare benefit plan, and also held a no-fault insurance policy issued by AAA.

Plaintiff sought payment of medical expenses from both defendants. The Fund initially denied coverage, asserting plaintiff had not executed a subrogation agreement as required by the plan. Plaintiff eventually signed a subrogation agreement, and the Fund paid $6,832 in medical benefits. AAA denied coverage based on a coordination of benefits clause that made the Fund primarily responsible for medical expenses. Plaintiff also settled a negligence claim against the tortfeasor for $20,000 in noneconomic damages.

Both plaintiff and the Fund filed motions for summary disposition seeking reimbursement of the medical expenses from plaintiff’s third-party recovery. The trial court granted summary disposition in favor of plaintiff and ordered AAA to reimburse plaintiff for any sums paid to the Fund. The Court of Appeals affirmed that decision. The case was appealed to the Michigan Supreme Court.

Legal Issues Presented

Whether the subrogation agreement between the Fund and plaintiff entitled the Fund to reimbursement from plaintiff for medical expenses paid.
If so, whether AAA, as plaintiff’s no-fault insurer, must refund plaintiff for that reimbursement.

Arguments of the Parties

Fund's Arguments

The Fund contended that under the plan’s subrogation clause and the signed subrogation agreement, it was entitled to reimbursement from plaintiff for medical expenses out of plaintiff’s third-party tort recovery.
The Fund argued that subrogation and reimbursement rights were triggered whenever a plan participant recovered monies for the same injury or accident from a third party.
The Fund urged application of an "arbitrary and capricious" standard of review to its interpretation of the plan agreement, citing Firestone Tire Rubber Co v. Bruch.

Plaintiff's Arguments

Plaintiff argued that the plan agreement’s subrogation clause only allowed the Fund to recover from the tortfeasor or the tortfeasor’s insurer, not from plaintiff herself.
Plaintiff maintained that she did not impair or negate the Fund’s subrogation rights, so the Fund’s right to reimbursement was not triggered.
Plaintiff asserted the second agreement imposing reimbursement obligations was void for lack of consideration under the preexisting duty rule.
Both plaintiff and the Fund agreed that if reimbursement were required, plaintiff would effectively pay her own medical expenses, contrary to the no-fault act’s provisions.

AAA's Arguments

AAA argued that the subrogation agreement did not support a right to reimbursement and limited reimbursement to situations where plaintiff recovered medical expenses from a third-party suit.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Shermer v. Merrill, 33 Mich. 284 (1876)	Definition of subrogation: subrogee acquires no greater rights than subrogor.	Used to interpret the plan’s subrogation clause consistent with traditional subrogation rights, limiting recovery to the tortfeasor or their insurer.
Firestone Tire Rubber Co v. Bruch, 489 U.S. 101 (1989)	Standard of review ("arbitrary and capricious") for ERISA plan administrator's interpretation of plan terms.	The majority considered but rejected applying this standard to read reimbursement rights into the plan that did not exist.
Detroit Trust Co v. Struggles, 289 Mich. 595 (1939)	Requirement of legal consideration for contract modifications.	Supported the court’s holding that the second agreement was void for lack of consideration under the preexisting duty rule.
Puett v. Walker, 332 Mich. 117 (1952)	Preexisting duty rule: performing an existing legal obligation is not valid consideration for a new promise.	Applied to hold that plaintiff’s signing of the second agreement, which imposed additional obligations without new consideration, was unenforceable.
Borg-Warner Acceptance Corp v. Dep't of State, 433 Mich. 16 (1989)	Preexisting duty rule bars contract modifications lacking new consideration.	Reinforced the court’s application of the preexisting duty rule to invalidate the second agreement.
Sibley v. DAIIE, 431 Mich. 164 (1988)	Federal ERISA law preempts state laws relating to insurance.	Referenced in dissent to support deference to the Fund’s interpretation under ERISA preemption principles.
ACIA v. Frederick Herrud, Inc, 443 Mich. 358 (1993)	Interpretation of coordination of benefits under no-fault insurance act.	Discussed in dissent regarding the no-fault insurer’s responsibility as secondary payer when health insurer is primary.
Transamerica v. IBA Health, 190 Mich. App. 190 (1991)	No-fault insurer’s secondary responsibility for medical expenses not covered by primary insurer.	Used in dissent to explain AAA’s obligation to cover medical expenses not paid by the Fund.
Reed v. Citizens Ins Co, 198 Mich. App. 443 (1993)	No-fault act construed liberally in favor of injured persons.	Invoked in dissent to emphasize the act’s purpose of expeditious compensation.
Miller v. State Farm, 410 Mich. 538 (1981)	No-fault act’s purpose to minimize delays and disputes in compensation.	Referenced in dissent to argue against delay caused by the majority’s interpretation.
Tousignant v. Allstate Ins Co, 444 Mich. 301 (1993)	Determination of coverage responsibilities under coordinated benefits provisions.	Used in dissent to explain interaction between health insurer and no-fault insurer responsibilities.

Court's Reasoning and Analysis

The Court focused primarily on the interpretation of the Fund’s plan agreement, particularly the subrogation clause. It analyzed the language defining "subrogation" as the Fund’s right to recover medical expenses from the person who caused the injury or their insurer, consistent with traditional subrogation principles. The Court noted that the Fund sought reimbursement from plaintiff herself, not the tortfeasor or the tortfeasor’s insurer, which was inconsistent with the plan’s subrogation clause.

The Court distinguished between "subrogation" rights, which allowed recovery from the third party causing the injury, and "repayment" rights, which the Fund reserved only for lost wage benefits recovered by plaintiff from any source. The plan did not provide for reimbursement from plaintiff for medical expenses recovered through plaintiff’s own recovery.

The Court further held that the second agreement, which expanded plaintiff’s duties to reimburse the Fund out of any third-party recovery, was void for lack of consideration under the preexisting duty rule. Since the Fund was already contractually obligated to pay plaintiff’s medical expenses conditioned on protection of its subrogation rights—which plaintiff did not impair—the second agreement imposed additional obligations without new consideration and was unenforceable.

The Court rejected the Fund’s argument that an "arbitrary and capricious" standard of review should compel deference to the Fund’s interpretation, emphasizing that courts cannot read into a contract rights that do not exist. The Fund had the opportunity to include reimbursement provisions but did not do so.

Accordingly, the Court reversed the Court of Appeals' affirmance of the trial court’s grant of summary disposition and ordered the Fund to reimburse plaintiff any sums paid by plaintiff to the Fund.

Holding and Implications

The Court held that the Fund’s subrogation clause did not entitle it to reimbursement from plaintiff for medical expenses paid, and that the second agreement imposing reimbursement obligations on plaintiff was void for lack of consideration under the preexisting duty rule. Because the Fund was not entitled to reimbursement, the Court did not reach the issue of AAA’s obligation to reimburse plaintiff.

The Court reversed the Court of Appeals and ordered the Fund to repay plaintiff any sums paid in reimbursement.

The direct effect of this decision is that the Fund cannot demand reimbursement from the plaintiff for medical expenses paid unless the plaintiff impairs the Fund’s right of subrogation against the tortfeasor. No new precedent altering ERISA or no-fault insurance law was established beyond the contract interpretation and application of the preexisting duty rule in this context.

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MARY JEAN YERKOVICH, Indi v. dually, and as Next Friend of LISA YERKOVICH, a Minor, Plaintiffs-Appellees,

CAVANAGH, J.

The issues presented are: (1) whether the subrogation agreement between defendant fund and plaintiff Yerkovich entitled the fund to reimbursement from plaintiff for medical expenses and, if so, (2) whether plaintiff's no-fault insurer, defendant AAA, must refund plaintiff for that reimbursement. We hold that the subrogation clause did not confer upon the fund the right to be reimbursed out of plaintiff's third-party recovery from tortfeasors. Because we hold that the fund was not entitled to reimbursement, we do not reach the second question.

FACTS

Plaintiff's minor daughter was injured in an automobile accident when the driver of the vehicle in which she was riding negligently collided with another vehicle. At the time of the accident, plaintiff was a participant in the Michigan United Food and Commercial Workers Unions and Food Employers Health and Welfare Fund. The fund is a self-funded employee welfare benefit plan created and administered pursuant to the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1001 et seq. Plaintiff also had a no-fault policy issued by defendant AAA.

Plaintiff filed this action on behalf of her daughter against both defendants, seeking payment of medical expenses. The fund had initially denied coverage, claiming plaintiff had failed to execute a subrogation agreement. The fund claimed this was required by the plan's subrogation clause. Plaintiff eventually signed the "Subrogation Agreement and Assignment" form, and the fund paid $6,832 in medical expense benefits. The AAA also denied coverage, claiming that plaintiff's policy contained a coordination of benefits clause that made the fund primarily responsible for medical expenses from the accident. Plaintiff also filed a negligence claim seeking noneconomic damages against the driver of the vehicle in which her daughter was riding. That case was settled for $20,000.

Plaintiff and the fund each filed motions for summary disposition in the trial court, essentially advancing the same position. The fund argued that, pursuant to the plan, plaintiff was required to reimburse the fund the $6,832 it had paid for medical expenses out of her third-party tort recovery. Plaintiff and the fund agreed that if such reimbursement were required, it would result in plaintiff paying her own medical expenses, contrary to the provisions of the no-fault act. Plaintiff and the fund argued that the AAA should be responsible for paying for the medical expenses. The AAA argued that the language of the subrogation agreement between plaintiff and the fund did not support a right to reimbursement and limited reimbursement to situations where plaintiff recovered medical expenses from a third-party suit. The trial court granted the motions for summary disposition and ordered the AAA to repay plaintiff any sums she paid to reimburse the fund. The Court of Appeals affirmed. 231 Mich. App. 54; 585 N.W.2d 318 (1998).

THE SUBROGATION AGREEMENT

At issue in this case is the interpretation of the plan agreement between the fund and plaintiff. Specifically, we must answer whether the fund was entitled to a refund from plaintiff for medical expenses. The fund provided plaintiff with a plan booklet that laid out the rights, benefits, and duties of the parties. Under the "General Provisions" section, the plan provided a subsection entitled "Third Party Subrogation." The fund argues that, under this section, plaintiff was required to sign further documents ensuring its rights to subrogation, reimbursement, repayment, and assignment. It provides in pertinent part:

This Plan will take advantage of its right to subrogation if you or an eligible dependent are paid benefits by the Plan due to accidental injuries for which someone else may be liable.

Subrogation means that the Plan can recover from the person who caused the injury, or that person's insurance company, the benefits paid on your behalf by the Plan for that injury, including but not limited to . . . tortious conduct by a third party.

* * *

[Y]ou or your dependants will have certain responsibilities to the Plan. When you or your eligible dependent submit a claim to this Plan for injuries, the Fund Office will have you complete a form requesting information as to how the injuries occurred and the identity of any potentially responsible third parties. At the request of the Fund Office, you must also sign any other documents and do whatever else is reasonably necessary to secure this Plan's right of subrogation. You must not do anything to impair or negate this Plan's right of subrogation; if any of your acts or omissions to act compromise this Plan's right of subrogation, this Plan will seek reimbursement of all appropriate benefits paid directly to you. . . .

If you recover lost wage benefits from another source, e.g. from an individual who caused the injury which resulted in your receiving Time Loss Weekly Benefits, the Plan has the right to seek repayment from you. . . . [Emphasis added.]

Under this plan, the fund declared "subrogation" rights in order to recover from a third party medical expense benefits it paid. In contrast, it declared the right to "repayment" from plaintiff for lost wage benefits it paid in the event that plaintiff recovered the lost wages "from any other source."

Traditional subrogation is defined by Black's Law Dictionary (4th ed); p 1595, as "[t]he substitution of one person in the place of another with reference to a lawful claim, demand or right, . . . so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities." As a subrogee, one stands in the shoes of the subrogor and acquires no greater rights than those possessed by the subrogor. Shermer v. Merrill, 33 Mich. 284, 287 (1876). In this case, the fund provided its own definition for "subrogation" in the second paragraph of that subsection. It explains that subrogation means the fund may "recover from the person who caused the injury, or that person's insurance company. . . ." This is consistent with the traditional definition.

Although the agreement provides that the fund may "recover from the person who caused the injury," the fund seeks to recover instead from plaintiff. It has done so by arguing that the second agreement signed by plaintiff required plaintiff to repay, reimburse, subrogate, and assign sums and rights to the fund. It is agreed that plaintiff signed the second agreement — that greatly expanded her duties under the plan agreement — only after the fund conditioned the payment of medical expenses on her signing the second agreement.

The second agreement provides in pertinent part:

Under the plan agreement, the fund was entitled to seek recovery from the negligent driver for the medical expenses it paid. Plaintiff, in return, was required to sign documents necessary to secure the fund's right of subrogation. Plaintiff was also required to provide any information requested regarding the injuries and the identity of the tortfeasor. If plaintiff impaired that right of "subrogation," the fund could then seek reimbursement. Plaintiff has done nothing to hinder or obstruct the fund's rights of subrogation. Plaintiff did not sue the tortfeasor for medical expenses or any economic damages. Instead, plaintiff recovered from the tortfeasor purely noneconomic damages for pain and suffering. The fund does not claim that it has paid noneconomic damages. It does not claim that it had a right of subrogation for noneconomic damages, only for benefits it paid. It paid only medical expense benefits. Nor does the plan agreement provide that it may seek reimbursement from plaintiff for medical expenses from plaintiff's noneconomic damage recovery. Under the language of the plan agreement, the fund's right of reimbursement is triggered only if the plaintiff impairs or negates the fund's right of subrogation. This was not triggered. In fact, the fund may step into plaintiff's shoes and sue the negligent driver for medical expenses incurred, because plaintiff has yet to seek them.

We make no assertion about the validity or probable success of such a suit.

Moreover, the fund might have, but did not, place language in the plan agreement requiring reimbursement of medical expenses from plaintiff. Instead, it sought only subrogation as defined in the second paragraph. Therefore, it has no right to reimbursement from plaintiff for medical expenses. This view is strengthened by examining the final paragraph quoted from the plan agreement where the fund demanded "repayment" from the plaintiff for lost wage benefits, in contrast to the "subrogation" clause, which allows recovery from the person who caused the injury for medical expense benefits.

The fund argues that subrogation and reimbursement rights are triggered whenever a plan participant recovers monies for the same injury or accident from a third party. It also urges that we should apply an "arbitrary and capricious" standard of review to the fund's interpretation of the plan agreement, citing Firestone Tire Rubber Co v. Bruch, 489 U.S. 101; 109 S.Ct. 948; 103 L.Ed. 80 (1989). Even under such a standard, we cannot read into the plan agreement that which does not exist. The fund had the opportunity to write into its agreement repayment or reimbursement rights. It did not.

Whether the second agreement entitled the fund to reimbursement is irrelevant to our analysis because the fund was under a preexisting duty to pay plaintiff's medical expenses and could not require her to take on additional duties absent additional consideration.

PREEXISTING DUTY RULE

An essential element of a contract is legal consideration. Detroit Trust Co v. Struggles, 289 Mich. 595, 599; 286 N.W. 844 (1939). Under the preexisting duty rule, it is well settled that doing what one is legally bound to do is not consideration for a new promise. Puett v. Walker, 332 Mich. 117, 122; 50 N.W.2d 740 (1952). This rule bars the modification of an existing contractual relationship when the purported consideration for the modification consists of the performance or promise to perform that which one party was already required to do under the terms of the existing agreement. Borg-Warner Acceptance Corp v. Dep't of State, 433 Mich. 16, 22, n 3; 444 N.W.2d 786 (1989).

In this case, the plan agreement provided that the fund had a preexisting duty to pay plaintiff's medical expenses. This promise was conditioned upon the fund's right of subrogation being protected. As stated, these rights were protected.

Although the parties focus on the second agreement, we find it is void for lack of consideration. Plaintiff was required only to sign documents ensuring the fund's right of subrogation as defined by the fund. The second agreement instead attempted to add to plaintiff's duties and burdens. The second agreement added an obligation to "repay" sums paid by the fund out of "any judgment or settlement" she received. The next paragraph required her to "reimburse" the fund out of any recovery she received. Although the third paragraph included subrogation rights, we will not interpret the language to allow greater rights or duties than those in the original plan agreement. The final paragraphs added assignments of plaintiff's claims and rights to the fund. The result is that plaintiff took on additional obligations, without consideration, in order to be paid that which she was already owed. All such additional obligations are unenforceable.

CONCLUSION

The original plan agreement between plaintiff and the fund required the fund to pay plaintiff's medical expenses as long as its right of subrogation was protected. Absent a breach by plaintiff, the fund had no rights of reimbursement for medical expense benefits from plaintiff. We hold that the preexisting duty rule barred the fund from requiring plaintiff to take on additional burdens, without consideration, in order to get paid that which she was owed. Because the second contract was invalid for lack of consideration, we hold that the fund was not entitled to a reimbursement from plaintiff. We, therefore, reverse the Court of Appeals affirmance of the trial court's grant of summary disposition and order defendant fund to repay to the plaintiff any sums plaintiff paid to reimburse the fund.

WEAVER, C.J., and TAYLOR, and CORRIGAN, JJ., concurred with CAVANAGH, J.

KELLY, J. (dissenting).

I would affirm the Court of Appeals decision. The trial court correctly granted summary disposition in favor of plaintiff Yerkovich and against defendant AAA. The no-fault insurance act requires defendant AAA to pay plaintiff's medical expenses.

MCL 500.3101 et seq.; MSA 24.13101 et seq.

Because the fund is an employee benefits plan under the Employee Retirement Income Security Act (ERISA), federal law preempts any state law that applies to insurance in general. Sibley v. DAIIE, 431 Mich. 164, 170; 427 N.W.2d 528 (1988). If an ERISA plan grants its administrators complete discretion to interpret the terms of the plan agreement, their interpretation is reviewed under an "arbitrary and capricious" standard. Firestone Tire Rubber Co v. Bruch, 489 U.S. 101, 114; 109 S.Ct. 948; 103 L.Ed.2d 80 (1989). Here, the fund's plan agreement did grant its administrators complete discretion in construing its terms. Michigan United Food and Commercial Workers Unions and Food Employers Health and Welfare Plan, dated April 1, 1993, § 2.

29 U.S.C. § 1001 et seq.

On the basis of the standard enunciated in Firestone and the principles of federal preemption under the Supremacy Clause, I would defer to the fund's interpretation of its own agreement. Language in the first agreement required plaintiff to sign any documents needed to protect the fund's subrogation rights. This language could be interpreted to require her to sign the second agreement at the time she did. The preexisting duty rule would not preclude enforcing the second agreement.

US Const, art VI.

Instead of picking apart the plan's interpretation of its agreement, I would analyze this case according to the schema of the no-fault insurance act, MCL 500.3101 et seq.; MSA 24.13101 et seq.

Under the no-fault act, a no-fault insurer must provide "all reasonable charges incurred for reasonably necessary products, services and accommodations for an injured person's care, recovery, or rehabilitation." MCL 500.3107(1)(a); MSA 24.13107(1)(a). The act allows an insured party to elect coordinated coverage. MCL 500.3109a; MSA 24.13109(1). The insured pays a lower premium. In return, the no-fault carrier is secondarily responsible for certain expenses arising from an accident. The insured's other insurer, such as a health insurer, becomes primarily responsible to the extent of the risk it contracted to cover. ACIA v. Frederick Herrud, Inc, ( After Remand) 443 Mich. 358, 384, 390; 505 N.W.2d 820 (1993).

A coordinated benefits provision, like the one between plaintiff and the AAA, may lower the AAA's responsibility for some expenses arising from an automobile accident, but it does not eliminate it. If the health insurer does not cover the full costs of medical expenses related to an automobile accident, the no-fault insurer is responsible for the balance. Transamerica v IBA Health, 190 Mich. App. 190, 196; 475 N.W.2d 431 (1991).

The no-fault act is construed liberally in favor of persons intended to benefit from the act, those injured in automobile accidents. Reed v. Citizens Ins Co, 198 Mich. App. 443, 451; 499 N.W.2d 22 (1993). "The act is designed to minimize administrative delays and factual disputes that would interfere with achievement of the goal of expeditious compensation of damages suffered in motor vehicle accidents." Miller v. State Farm, 410 Mich. 538, 568; 302 N.W.2d 537 (1981).

Hence, defendant AAA agreed to cover any medical expenses arising from an automobile accident not covered by the insurance company primarily responsible for medical expenses. Whether and how much of the medical expenses are covered is determined by the agreement between the insured and the other insurance company. Tousignant v. Allstate Ins Co, 444 Mich. 301, 312; 506 N.W.2d 844 (1993).

When an insured's health insurance is an ERISA plan, sometimes the no-fault insurer is primarily responsible for medical expenses arising from an automobile accident. Frederick Herrud, 443 Mich. 390. As among the parties, defendant AAA is in the best position to calculate and cover the risk that arises when its insureds sign subrogation agreements, like the one at issue. It should not be heard to complain when they sign agreements with ERISA-based health insurers that strip it of the benefit of the bargain under the coordinated benefits provisions of the no-fault act.

Conclusion

Although plaintiff Yerkovich paid premiums for no-fault automobile coverage, she suffered unreasonable delay and expense in recovering her losses arising from an automobile accident. This delay is contrary to the no-fault act's purpose of "expeditious compensation of damages suffered in motor vehicle accidents." Miller, 410 Mich. 568. The majority opinion's approach to this case does not further the purpose of the act. To avoid the same delay to an insured in the future, and for the reasons set forth above, I would affirm the Court of Appeals decision. Defendant AAA should be required to compensate plaintiff for her medical expenses arising from her daughter's automobile accident.

YOUNG and MARKMAN, JJ., took no part in the decision of this case.