Kobold v. Aetna Life Insurance Company – 3/31/2016

April 5, 2016

Arizona Court of Appeals Division One holds that 5 U.S.C. § 8902(m)(1) of the Federal Employee Health Benefits Act preempts Arizona law barring subrogation in personal injury cases.

An insured was injured in a motorcycle accident and his insurance company paid $25,000 for his related medical treatment.  The insured later recovered $145,000 in a settlement with the parties allegedly responsible for the accident.  The insurance company, pursuant to a subrogation and reimbursement clause in the insurance contract, then asserted a lien on the settlement proceeds to recover the medical expenses it had paid.

Under Arizona law, subrogation in personal injury cases is forbidden.  The insurance company argued, however, that 5 U.S.C. § 8902(m)(1) of the Federal Employee Health Benefits Act (“FEHBA”) preempts Arizona anti-subrogation law.  In 2013, the Court of Appeals, applying general principles of statutory construction, disagreed and held that § 8902(m)(1) did not preempt Arizona law.  Subsequently, however, the Office of Personnel Management (“OPM”) promulgated new regulations that expressly construe § 8902(m)(1) as preempting any state or local law barring subrogation.

In light of these new regulations, the United States Supreme Court vacated the Arizona Court of Appeals’ 2013 decision and remanded for reconsideration of whether the FEHBA preempts Arizona law.  On remand, the Court of Appeals determined that the OPM’s interpretation of the § 8902(m)(1) was reasonable and entitled to deference.  It, therefore, held that § 8902(m)(1) preempts Arizona law forbidding subrogation in personal injury cases.

Judge Swann authored the opinion; Presiding Judge Orozco and Judge Cattani concurred.