We have often urged our clients to make sure that they have a written welfare benefit plan, and that the plan clearly describes when coverage begins and, more importantly, when coverage ends (particularly for employees absent from work due to illness or injury whose employment status has not technically ended). Typically, these problems surface when the employer discovers that someone has been out on a disability leave far in excess of the FMLA period, but has never been taken off the benefit plan. A decision from the Sixth Circuit Court of Appeals reveals another problem that arises when the employer seeks stop-loss coverage for the COBRA expenses of a former employee who was offered COBRA “late” under the terms of the written plan.

CLARCOR Inc. v. Madison National Life Insurance Co., No. 11-6177 (6th Cir. July 31, 2012) (unpublished), held that the employer’s stop-loss insurer did not have to cover excess claims incurred by a former employee who was offered COBRA at the expiration of her short-term disability (“STD”) leave. The employer had a practice of allowing employees on STD leave to continue coverage as if they were active employees, but this practice was not written into a plan document or the stop-loss policy. The stop-loss policy included COBRA and FMLA coverage provisions, but specified that if COBRA was not timely offered by the employer (during the period specified by law), no stop-loss coverage would be available. 

The Court of Appeals affirmed the district court’s holding that no stop-loss coverage was available for expenses incurred under the former employee’s COBRA coverage because she was not an eligible participant under the terms of the employer’s plan or stop-loss policy (neither of which included coverage for the STD leave period). Because the STD leave period was not provided for in the plan documents, the court concluded that the COBRA coverage the employee had elected was not timely offered. And that specific exclusion for late COBRA notice provided an alternative basis for the court to uphold the denial of insurance coverage for her claims, regardless of whether or not she had been an eligible participant.

Lessons Learned

This case underscores the importance of ensuring that the employer has a written welfare benefit plan, and that the plan reflects all of the employer’s practices with respect to loss of coverage and COBRA elections. In addition, the terms of a stop-loss policy need to be reviewed against the employer’s plan provisions, to ensure that they are consistent. When there is a COBRA notice failure, any resolution that involves the offer of late enrollment should be coordinated with the stop-loss carrier in advance, if possible, to avoid imposition of an exclusion of the type seen in this case.