The Missed Recovery Opportunity: Legal Malpractice Claims and Health Plan Reimbursement

By: Rhys Cundiff, Esq.

Health plan administrators and recovery professionals spend a great deal of time pursuing reimbursement from traditional third-party recoveries arising from motor vehicle accidents, premises liability claims, medical malpractice cases, and similar actions. But what happens when the participant’s attorney mishandles the underlying case, and the participant’s only remaining avenue of recovery is a legal malpractice action?

Many plans may be tempted to write these cases off as unrecoverable. However, doing so may mean leaving significant recovery dollars on the table.

Consider the following example: A plan member is seriously injured in an automobile accident, and the health plan pays $500,000 in accident-related medical expenses. The participant hires an attorney to pursue a claim against the negligent driver. Unfortunately, the attorney does not settle the case or file suit against the negligent driver before the statute of limitations expires, which forecloses any recovery in the personal injury case. The plan member then hires a new attorney who files a legal malpractice action against the former attorney and ultimately recovers $1 million.

Should the plan have a right to reimbursement from those proceeds? The answer may depend largely upon the language contained in the governing plan document.

At first glance, the member’s attorney handling the legal malpractice case may argue that the plan has no claim because the attorney did not cause the plan member’s injuries.  Unlike the negligent driver, the attorney was not the original tortfeasor. Instead, counsel may characterize the legal malpractice action as an entirely separate claim intended to compensate the participant for a lost legal opportunity rather than for personal injury damages.

While that argument may have some surface appeal, plans should not automatically accept it.

In many instances, a legal malpractice recovery effectively serves as a substitute for proceeds that would have been recovered in the underlying personal injury or medical malpractice action. If the participant alleges that, but for his prior attorney’s negligence, he or she would have recovered damages that included medical expenses paid by the plan, reimbursement rights may still be implicated. This is where plan language becomes critical.

For example, a reimbursement provision stating that the plan may only recover from “a third party responsible for the participant’s injury” may invite arguments that a legal malpractice recovery falls outside the scope of the plan’s rights. After all, the attorney was not responsible for causing the underlying injury.

Broader language, however, may produce a different result. A provision granting the plan the right to recover from “any settlement, judgment, award, insurance proceeds, or other recovery arising out of, related to, or connected with an illness, injury, or condition for which the plan paid benefits” places the plan in a much stronger position.

Plans may wish to go even further by expressly including recoveries arising from professional negligence or legal malpractice actions involving an underlying claim for which the plan paid benefits.  Likewise, language permitting recovery from any action in which medical expenses paid by the plan are claimed as damages, or represent a lost opportunity for recovery, can help avoid disputes later.

Even with strong plan language, recovery professionals should expect resistance. Plaintiffs’ attorneys prosecuting legal malpractice cases may be particularly averse to reimbursement claims because their client’s original case has already been precluded, and the malpractice recovery may be viewed as a second chance to make the participant whole.

Nevertheless, plans and their recovery vendors should not shy away from these cases. Instead, they should carefully review the allegations in the malpractice complaint, analyze the damages being sought, obtain relevant pleadings, and evaluate whether the plan’s reimbursement provisions reach the proceeds at issue.  Plans should not hesitate to take affirmative steps to protect their interests, including intervention in pending litigation if it is warranted.

Ultimately, every dollar successfully recovered is a dollar returned to the plan for the benefit of all participants. Protecting plan assets through thoughtful and assertive recovery efforts helps employers continue to offer comprehensive, affordable healthcare coverage to hardworking employees and their families. Legal malpractice cases may present unique challenges, but they may also represent the final opportunity to preserve significant plan assets that otherwise would be permanently lost.