Liens: Continued viability of the make-whole defense for insured ERISA plans

Insured ERISA plans are fully subject to state law, including the make-whole rule, but self-funded plans are subject to federal preemption

2025 December

This article was originally published in CAOC Forum June/July 2025.

In US Airways v. McCutchen (2013) 569 U.S. 88, the Supreme Court declined to apply the make-whole rule as a defense to the reimbursement provision in a self-funded ERISA plan, as it was considered inconsistent with the terms of the plan calling for full reimbursement. Despite having no bearing on insured ERISA plans, this case seemed to cause a near complete absence of successful make-whole defenses in cases in the federal reporters. (Research has not revealed a single successful make-whole defense to an ERISA reimbursement claim in the U.S. since US Airways was decided by the Supreme Cour in 2013, prior to the Aetna case discussed below.) The case also seemed to embolden some insurers to pursue reimbursement even in plans without express waivers of the make-whole rule.

Origin of the make-whole doctrine

The make-whole rule developed as an equitable defense to subrogation claims. Under the rule, an insurance carrier seeking subrogation was denied any recovery until and unless the insured was made whole. In California, the doctrine is not codified in any statute, but rather, was adopted through a series of cases. The lead California case is Sapiano v. Williamsburg National Insurance Co. (1994) 28 Cal.App.4th 533, where the court held that the insured must be fully compensated before an insurer could recover under its subrogation provision. Both Sapiano and the Ninth Circuit Barnes case, infra, cited 16 Couch, Insurance (2d ed), § 61 in support of the rule.

In Progressive West Insurance Co.
v. Yolo County Superior Ct. (2005) 135
Cal.App.4th 263, the court engaged in a lengthy discussion of the make-whole rule. The court there noted that subrogation has its source in equity and arises by operation of law and that the general subrogation provisions of most insurance contracts “add nothing to the rights of subrogation that arise as a matter of law.” (135 Cal.App.4th at 272.) The court also referenced the fact that “the insurance company may not assert its subrogation claim directly against the third party tortfeasor on its own behalf” citing Fifield Manor v. Finston (1960) 54 Cal.2d 632. (Id. at 272.) The Progressive West court then suggested that the carrier could preserve its right to subrogation by “interplead(ing) itself into any action brought by the insured against the third party tortfeasor…” (Id. at 273.) Based upon this rationale, the court held that:

Thus, when an insurer elects not to participate in the insured’s action against a tortfeasor, the insurer is entitled to subrogation only after the insured has recouped his loss and some or all of his litigation expenses incurred in the action against the tortfeasor.

(Quoting from Plut v. Fireman’s Fund Ins. Co. (2000) 85 Cal.App.4th 98, 104-105, 135 Cal.App.4th at 273.)

It is questionable whether the Progressive West court really meant to suggest that different rights would arise depending on whether the carrier sought reimbursement versus subrogation with intervention. In a subsequent case, 21st Century v. Superior Court (2009) 47 Cal.4th 511, 518, the Supreme Court held that subrogation against third-party tortfeasors was not permitted under the law because personal injury cases are not assignable. The California Supreme Court in 21st Century also validated the application of the make-whole rule to insurance reimbursement clauses as follows: “The made-whole rule is a common law principle that limits the insurer’s reimbursement right in situations where the insured has not recovered his or her ‘entire debt.’”

The Ninth Circuit has adopted the make-whole rule as fully applicable to ERISA cases. In Barnes v. Independent Auto Assn. of CA H&B Plan, 64 F.3d 1389 (9th Cir. 1995), the court noted that the make-whole rule was consistent with “ERISA’s purpose of protecting participants... in plans” and “compatible with the remedial principles of ERISA” (id. at 1394-1395) and held as follows: “We adopt as federal common law this generally accepted rule that, in the absence of a clear contract provision to the contrary, an insured must be made whole before an insurer can enforce
its right to subrogation.”
(64 F.3d at 1395 (emphasis supplied).)

The Ninth Circuit also cited California’s make-whole rule with approval in Chandler v. State Farm Mut. Auto Ins. Co. (9th Cir. 2010) 598 F.3d 1115, 1120 as follows:

As between insureds and insurers, California law is clear that an insurer may seek subrogation from an insured only if the insured’s recovery exceeds that to which he is entitled, i.e. only after the insured has been made whole. This is to prevent situations in which an insured is not made whole, but the insurer, who has already received premium payments from the insured,
is able to recoup the proceeds of its payout.

Waiver of the make-whole rule

Both the federal and state cases cited above are in agreement that application of the rule can be waived by clear language in the contract or policy. (See Barnes, Sapiano, Progressive West, supra.) Several older cases held that language in the plan or policy assigning all rights of recovery to the plan was sufficient to effectuate a waiver. Despite this, the Progressive West court correctly noted that, “The more recent cases, however, require that the contractual provision that intends to vitiate this rule must ‘clearly and specifically (give) the insurer a priority out of proceeds from the tortfeasor regardless of whether the insured was first made whole.” (Id. at 274, quoting from Sapiano, supra, 28 Cal.App.4th at 538-539.) In Progressive West, supra, the policy provided that Progressive was “entitled to all the rights of recovery that the insured person to whom payment was made has against another” and “the amount recovered will be held by the insured person in trust…and reimbursed to the extent of our payment.” The court held that, “These two provisions, individually or taken together do not clearly indicate that Progressive’s rights are first in priority. … We conclude the made whole rule is not vitiated by this policy language.” (Id. at 275.)

Likewise, in Providence Health System v. Bush, supra, the ERISA plan argued that language in the reimbursement provision that the member must “reimburse the plan for up to 100% of any benefits the plan paid” constituted a waiver of the make-whole rule. The court disagreed, holding:

Nowhere in the plan language is there a suggestion, let alone a clear statement, that a plan beneficiary is signing away his or her make whole rights. Neither the make whole doctrine nor any euphemism sounding like the make whole doctrine is mentioned in the plan.

(461 F.Supp.2d at 1234-1235.)

Subrogation and reimbursement as interchangeable terms

Under both ERISA and California insurance law, reimbursement and subrogation provisions are considered to create identical substantive rights. In Reynolds Metals Co v. Ellis (9th Cir. 2000) 202 F.3d 1246 cert. granted 121 S.Ct. 562, cert. dismissed 1211 S.Ct. 674 (2000), the Ninth Circuit confirmed that reimbursement clauses are “also known as ‘subrogation’ clauses.” (Emphasis supplied.) The California courts have reached the same conclusion. In Progressive West Insurance Co. v. Yolo County Superior Ct. (2005) 135 Cal.App.4th 263, 273 the court held:

In California, both the subrogation rights and reimbursement rights of the insurance company fall within the rubric of subrogation. Thus, both of
those rights are limited by the made-whole rule.

(Citations omitted, emphasis supplied.)

Consequently, the make-whole defense applies with equal force to
both subrogation and reimbursement provisions.

Using state case law under the insurance “saving” clause in ERISA’s preemption section

The ERISA preemption section in 29 USC §1144(b)(2)(A) saves to the states the power to regulate insurance. In FMC Corp. v. Holliday, 498 U.S. 52, 61 (1990), the court held:

An insurance company that insures
a plan remains an insurer for purposes of state laws “purporting to regulate insurance” after application of the deemer clause. The insurance company is therefore not relieved from state insurance regulation. The ERISA plan is consequently bound by state insurance regulations insofar as they apply to the plan’s insurer.

Clearly, the above authority mandates that state insurance statutes and regulations are exempt from ERISA preemption for insured plans. However, the make-whole rule exists only in state case law. Fortunately, Supreme Court case law establishes that the saving clause also saves insurance rules and case law from preemption, and not just statutes. In Unum Life Ins. Co. of Am. v. Ward, 526 U.S. 358, 368-375, the Court upheld the California notice-prejudice rule as saved from preemption, even though it appears only in case law. The Court held that this simply requires that the statute or rule be directed toward entities engaged in insurance and that it substantially affects the risk pooling arrangement. (See also Orzechowski v. Boeing Co. Non-Union LTD Plan (9th Cir. 2017) 856 F.3d 686, 693-694.) Clearly, the make-whole rule meets both prongs of this test, while allowing the insurer to circumvent it through a properly drafted waiver.

Exemplar test case

My office was retained in a lien case where a woman had been severely injured while insured by a health plan issued to her private employer by Aetna Health of Cal., Inc. Consequently, it was an insured ERISA plan subject to California law. The Aetna plan paid $1.134 million of her medical expenses and asserted a reimbursement lien in that amount. Her personal-injury case was later settled for the available policy limits of $12 million. Her injury attorneys opined that the full value of her case was in excess of $25 million, so she was not made whole. 

The Aetna plan’s reimbursement provision was not listed in the policy’s two-inch-long table of contents but appeared at page 56 of the policy under the title, “When you are injured.” In terms relevant to the make-whole doctrine, it provided that, 1) it was entitled to any money that the insured recovered, up to the amount that it had paid; 2) insured agreed to cooperate with Aetna “so we can get paid back in full”; 3) holding any money the insured receives “until we are paid in full”; and 4) “you’ll give us the right to money you get ahead of everyone else.”

In three prior cases with Aetna policies with similar language not expressly waiving the make whole rule, Aetna subs had waived after certified mail demands to the presidents of the Aetna sub and its parent company, Aetna, Inc. Therefore, I followed the same practice of sending a 10-page demand letter with multiple exhibits by certified mail to the presidents of Aetna, Inc. and Aetna Health. No response was ever received directly from Aetna despite sending follow-up letters. Our office declined to make any offer in the case because of the make-whole rule. Ultimately, Rawlings Group (the provider of recovery services to Aetna) sent the case to its California counsel, who ultimately advised that he had been authorized to file suit. Prior to his filing, I had requested a stipulation that our client was not made whole. Aetna’s counsel declined to stipulate to that, but did agree that if we contended she was not made whole, they would not contest it. I also requested that they attach the entire 110-page policy document to the Aetna complaint,
which they agreed to do.

Ultimately, the case was filed
in the Central District federal court in December 2024. Inexplicably, Aetna sought the entire amount that it had paid, $1.134 million, without any reduction for common fund under Civil Code section 3040, along with attorneys’ fees and costs. The case was assigned to Judge Wesley L. Hsu. We filed an FRCP 12(b)(6) motion to dismiss, based primarily on the make-whole rule, which was argued in Los Angeles on March 14, 2025. On March 18, 2025, Judge Hsu granted our motion to dismiss with prejudice based upon the fact that the Aetna policy did not expressly waive the make-whole rule, and Aetna did not contest the fact that the insured was not made whole. (See Central District case no. 2:25-cv-00762, 2025 US District Lexis 75368 (CD CA 2025).) (Judge Hsu’s ruling also ruled against the Defendant on the “legally inconspicuous” defense we had raised. We were precluded from bringing an MSJ motion concurrently with our 12(b)(6) motion because Judge Hsu’s Chambers Orders required all MSJ’s to be joint and the timeline for same was far outside the 21 days we had to file the motion to dismiss. The MSJ that was drafted had additional exhibits relevant to the reasonable expectations doctrine that could not be raised in a motion to dismiss.)

Following the dismissal of Aetna’s case, I advised Aetna’s attorney that we would be bringing a motion for attorneys’ fees under ERISA’s strong “special circumstances” presumption in favor of an award of fees to a prevailing ERISA plan participant. (See Carpenters’ H&W Trust v. Vonderharr, 384 F.3d 667 (9th Cir. 2004), cert. denied 126 S.Ct. 729 (2005).) To avoid having to also pay the fees entailed in the attorneys’ fee motion, Aetna agreed to pay $53,500 in fees to its insured, waive any right to challenge or appeal the ruling, and agreed that a final judgment could be entered. Following the dismissal of the Aetna case, I filed a request for entry of final judgment under FRCP 58(a). Judge Hsu then ordered my office to file a proposed judgment, which I did on April 21, 2025. The final judgment in the case was entered on July 31, 2025.

It is apparently a widespread practice of Aetna to pursue these liens even though their standard reimbursement provision makes no attempt to clearly waive the make-whole rule. At the time of the ruling in the above case my office had four lien cases pending with Rawlings on behalf of either Aetna Health or Aetna Life, where the liens were being actively asserted.

Collateral estoppel (Issue preclusion)

Once a final judgment is entered, the ruling against Aetna Health would be res judicata against that company. However,
the remaining three cases are with Aetna Life. Our investigation in the initial case determined that both the Health and Life subs are wholly owned by the parent company, Aetna, Inc. All three companies do business under the registered trademark, “aetna.” At the time of the accident in the first case, all three companies shared the same mailing address in Hartford and the same corporate secretary. They all used the same language in their reimbursement provisions. They all used the same collection agency (Rawlings) and the same attorney.

The Ninth Circuit follows the federal common law of issue preclusion (aka collateral estoppel) where the prior judgment was rendered by a federal court. Under that law, issue preclusion applies if:
1. The issue in both actions is identical;
2. The issue was actually litigated and necessarily decided in the prior action;
3. The decision in the prior action was a final judgment on the merits;
4. The party against whom preclusion is asserted was a party or in privity with a party to the prior action.
(See Howard v. City of Coos Bay (9th Cir. 2017) 871 F.3d 1032, 1041.) Under federal law, privity is a flexible concept, which exists when the parties share a “substantial identity” or “close relationship.” (See Headwaters Inc. v. U.S. Forest Service, 399 F.3d 1047, 1052-1053 (9th Cit. 2005); Montana v. United States (1979) 440 U.S. 147 [govt. stopped from relitigating issue previously decided against a related agency].)

My office prepared a Memo of Law on collateral estoppel citing the above (and other) authorities. On the day that the check for fees arrived in case #1, we sent a demand for waiver in case #2 to Aetna Life c/o Rawlings by email. On the next day at 5:14 a.m., Rawlings, on behalf of Aetna Life, waived the Aetna lien in case #2. Several days later, the demand for waiver in case #3 was emailed to the Rawlings house counsel, who signed and returned the requested waiver on April 28, 2025. On April 30, 2025, a demand for waiver in case #4 was sent to Rawlings counsel. Notably, all four of these cases were policy-limit cases where the claimants were clearly undercompensated. The total of the liens asserted in the
four cases by Aetna/Rawlings was approximately $3.2 million.

Analysis markedly different with self-funded plans

Where the ERISA plan is self-funded, state law does not apply because of federal preemption. There, Supreme Court cases are controlling. The most disturbing and most flawed of the four Supreme Court cases on point is US Airways v. McCutchen, supra, from
2013. There, the Court ruled against application of the make-whole rule because it was deemed inconsistent
with the promise to repay in the reimbursement provision. Moreover, the discussion of the make-whole rule in US Airways is internally inconsistent and is also inconsistent with its previous holding in Sereboff v. Mid-Atlantic Med. Svcs., Inc. (2006) 547 U.S. 356, which it was trying to follow and clarify. (The Court also refused to follow its own prior ruling in CIGNA v. Amara (2011) 131 S.Ct. 1866, holding that it is the formal plan document and not the SPD which is enforceable, even though the formal plan had been provided while the case was pending before the Court. As a result, the court found that the US Air claim against McCutchen’s $110,000 recovery was enforceable but for the common fund reduction. When the case was remanded to the district court, that court complied with the Amara rule and found that the formal plan did not reach McCutchen’s $100,000 UIM recovery, thereby reducing US Air’s recovery to about $6,600.)

The reason that US Airways is internally inconsistent is that the plan’s reimbursement provision there did not expressly waive the make-whole rule. (See US Airways, id. at 92, Fn. 1.) Thus, the make-whole aspect of the case should have followed the same “gap-filler” analysis that the Court used in extending the common fund reduction to Mr. McCutchen. (Id. at 102.) In Sereboff, the Court had rejected the Sereboffs’ attempt to raise the make-whole rule as a defense as “beside the point” when an equitable lien by agreement was asserted. Upon reviewing the decision, it is clear that the reason for that statement was that the Sereboff self-funded plan, unlike the US Airways plan, clearly waived the make-whole rule, with the following language: “Mid-Atlantic’s share of the recovery shall not be reduced because (the beneficiary) has not received the full damages claimed… 547 U.S. 356, 359.” Finally,
the make-whole rule was not even properly before the Court in US Airways because it was not raised by McCutchen in the Third Circuit on appeal, “and we do not address it.” (See 663 F.3d 671, 680, fn. 2.) Notably as well, the Court in US Airways did not comment on the clear split in the circuits as to the make-whole rule, so it does not appear that the Court was attempting to resolve that split.

Conclusion

Insured ERISA plans are fully subject to state law, including the make-whole
rule. Plan language should be examined carefully to determine if it properly waives make whole by expressly waiving or disclaiming the rule or stating that the plan gets fully repaid even if the insured is not fully compensated. In the standard Aetna plans, the final judgment in the exemplar case cited above should preclude any attempt for the Aetna subs to enforce reimbursement under the doctrines of collateral estoppel and issue preclusion. Where it is a self-funded plan, it is unclear whether the effect of US Airways is to eliminate the make-whole rule even where the plan fails to expressly waive it. Note that Judge Hsu’s opinion dismissing Aetna’s claim relied in part on the Ninth Circuit Barnes case, apparently assuming it to be good law post-US Airways.

Donald de Camara is a sole practitioner in San Marcos, specializing in lien litigation and resolution.
He has lectured at well over 120 trial lawyers’ seminars throughout California about liens and has presented four nationwide webinars on ERISA liens. He has had dozens of articles on liens published in various trial lawyer magazines. He was lead counsel for the eight defendants in the case of Carpenters Health v. Vonderharr, 384 F.3d 667 (2004), cert. denied 126 S.Ct. 729 (2005), establishing that defendants prevailing in litigation with their ERISA plan are equally as entitled as plaintiffs to the strong “special circumstances” presumption in favor of an award of attorneys’ fees. 

He briefed and argued AC Houston v. Berg (9th Cir. 2010) 407 Fed. Appx. 208 as amicus counsel for CAOC in the 9th Cir., resulting in the court reversing the district court judgment holding a plaintiff’s attorney liable on an ERISA lien.