A federal court concluded that an employer-sponsor or a health plan failed to follow its own health plan eligibility terms while managing an employee on a series of leaves of absence. Clarcor, Inc. v. Madison Nat. Life Ins. Co. (2011 WL 3878376, M.D. Tenn. 2011) is the second decision in a dispute between an employer-sponsor of a medical plan and its stop-loss carrier about significant medical expenses incurred by an employee on short-term disability leave. The employee in question had taken FMLA leave based on her own personal medical condition. When she failed to return from that leave, she was not offered COBRA. Instead, she was placed on short-term disability and the employer treated her as covered under the medical plan for another six months.
Following expiration of the disability leave, the employee was terminated from employment and offered COBRA. The stop-loss carrier refused to reimburse the expenses incurred during the disability leave, arguing that the employee’s move to short-term disability, without electing COBRA, made her ineligible under the terms of the plan. In the prior decision, the court agreed with the insurer, ruling that under the plain language of the plan, the employee was ineligible for coverage under the plan after her FMLA leave ended (except through COBRA). The court dismissed the claim by without considering whether any exclusions to coverage under the stop-loss contract applied.
In this second decision, the employer asked the court to amend its judgment, arguing that the stop-loss carrier improperly relied on a clause in the stop-loss policy that excluded coverage when COBRA was not timely offered. The employer argued that the exclusion did not apply because there was no qualifying event (and therefore no notice requirements) until the employee actually lost coverage when her employment terminated. Noting that the employer continued to ignore the plain language of the plan—under which coverage ended when the FMLA leave ended— the court concluded that the employer still failed to explain how the employee allegedly regained plan eligibility after the FMLA leave. Furthermore, the court ruled that the contract exclusion actually favored the insurer because the termination of FMLA leave was the COBRA qualifying event and therefore the employer’s much-later offer of COBRA was, indeed, not timely.
The court rejected the employer’s lawsuit because it found that, under the plan terms, the employee’s loss of coverage (and therefore her COBRA qualifying event) occurred when her FMLA leave ended. This is what mattered for purposes of the stop-loss insurer’s liability and it did not matter that the employer, contrary to plan terms, continued to cover the employee during the disability leave. The decision highlights the need for a clear understanding of health plan eligibility rules in connection with leaves of absence, especially combined FMLA/non-FMLA leaves. This same issue exists when an employer purchases traditional health insurance from a carrier and fails to internally administer the health coverage eligibility rules consistent with the carrier’s rules of eligibility.
To avoid paying large claims (and legal) expenses, employers should monitor plan eligibility requirements closely and, specifically, manage employees on leaves of absence carefully. It is also important to ensure that short-term disability plans, long-term disability plans and any other types of paid or unpaid leaves of absence include health plan eligibility language that is consistent with the health plan itself. This should be reviewed as often as the employer has any changes to governing insurance and/or stop-loss contracts.