Firms That Self-Insure Win Key Supreme Court Ruling

Accident and malpractice victims whose expenses are covered under their companies’ self-insurance plans may be forced to reimburse such insurers with money won in lawsuits or settlements, the Supreme Court ruled Tuesday.

The court decided, 7 to 1, that self-insurance plans are exempt from state laws and regulations. California and some other states have prevented insurers from attempting to recoup money paid to individuals who later win lawsuits related to their injuries.

Among companies and unions with more than 5,000 employees, four of five fund their own insurance plans. More than 9.5 million Americans were covered by these self-insurance plans in 1988, according to the Labor Department.

The ruling will help the self-insurance funds but hurt individual employees who suffer severe injuries.

In the case in question, Cynthia Holliday, a Pennsylvania teen-ager, was injured in 1987 in an auto accident. Her medical expenses in the next year exceeded $178,000, all of which was paid by the self-insurance fund of the FMC Corp., her father’s employer.

An attorney for Holliday sued the driver who caused the accident and won a settlement of nearly $50,000 for the teen-ager.

FMC sought that money to partly recoup its expenses. Holliday refused, citing a Pennsylvania law that protects accident and malpractice victims from being forced to reimburse an insurer.

FMC Corp. challenged the state law in a federal court and lost twice. But the Supreme Court concluded that the company was correct.

Traditionally, states have regulated insurance. But since 1974, the federal government has exclusively regulated pensions and other employee benefit programs.

In essence, the high court concluded Tuesday that self-insurance funds are employee benefit programs, not insurance, and therefore state law doesn’t apply to them.

FMC’s self-insurance fund is “an employee benefit plan” regulated by the federal Employee Retirement Income Security Act of 1974, the court said. And it was “Congress’ clear intent to exempt from direct state insurance regulation” employee benefit programs, Justice Sandra Day O’Connor said in her opinion in the case (FMC Corp. vs. Holliday, 89-1048).

“This is a very important victory for self-funded health insurance plans,” said H. Woodruff Turner, a Pittsburgh attorney who represented FMC, a Chicago-based conglomerate.

States also have considered taxing insurance premiums and requiring companies to offer employees “freedom of choice” in seeking medical care. These sorts of laws or regulations cannot be applied to self-insurance funds, Turner said.

California, as does Pennsylvania, has a law protecting money awards. But in December, 1988, U.S. District Judge Fern Smith in San Francisco ruled that the state’s law is preempted by the 1974 federal law. Tuesday’s ruling by the Supreme Court in effect upholds that decision.

In dissent, Justice John Paul Stevens complained that the court has created “an illogical distinction” between companies that buy insurance and those, such as FMC, that fund it themselves.