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Benefits

Court Declines to Enforce Indemnification Provision Against Negligent Pharmacy Benefits Manager

EBIA  

EBIA  

 

Bon Secours Health System, Inc. v. Express Scripts, Inc., 2019 WL 1427746 (D. Md. 2019)

This contractual dispute arose between the plan sponsor of a self-insured prescription plan and its pharmacy benefits manager (PBM) because the PBM failed to auto-enroll the plan sponsor in its program designed to combat pharmacy fraud and abuse. After the plan sponsor filed a claim with its insurer and was reimbursed for over $4.5 million of fraudulent prescription claims, it sued the allegedly negligent PBM for indemnification. The plan sponsor argued that, under the indemnification provisions in their agreement, the PBM was obligated to reimburse it for every cost resulting from the PBM’s negligence. The PBM asked the court to dismiss the claim, contending that it was obligated to, at most, defend the plan sponsor from claims brought against it by third parties, which did not apply here since no third party had brought a claim.

The court agreed with the PBM and dismissed the claim. After reviewing the specific contractual language and applying the applicable state contract construction laws required by the agreement, even viewing the situation in the light most favorable to the plan sponsor, the court held that the PBM’s interpretation was objectively plausible, as compared to the overly broad reading argued by the plan sponsor. The court rejected the plan sponsor’s argument that the language in the agreement that called for indemnification against “any loss, cost, damage, expense or other liability, including, without limitation, reasonable costs and attorney fees (“Costs”) incurred in connection with any and all third[-]party claims” provided examples of when the PBM’s indemnity obligations could be triggered, with third-party claims being one example. Instead, the court concluded that this interpretation would have required it to read in a missing comma after “(‘Costs’)” and to reach an unreasonable conclusion: Total indemnification by the PBM.

EBIA Comment: Punctuation counts. This case underscores the importance of using clear and unambiguous language in plan agreements, particularly in the all-important indemnification provisions. A plan sponsor should negotiate the broadest provision possible (to reduce its exposure to liability arising from the negligence of the third-party administrator), while third-party administrators will prefer the narrowest provision possible (to limit reimbursement obligations). Any gaps resulting in financial exposure will generally remain the responsibility of the employer or plan. For more information, see EBIA’s ERISA Compliance manual at Sections XXIX.G.3 (“Indemnification”), XXX.E (“Content of the TPA Agreement”), and XXX.G (“Litigation Involving TPAs”). See also EBIA’s Self-Insured Health Plans manual at Sections VIII.E (“Managing the Plan Sponsor’s Dual Roles in a Self-Insured Health Plan”) and XXIII.B (“Contracting With Service Providers”).

Contributing Editors: EBIA Staff.

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