In a case that highlights several potential problems in employee benefit plan design, the Sixth Circuit Court of Appeals in Clarcor, Inc. v. Madison National Life Insurance Company, Inc., No. 11-6177 (6th Cir. Jul. 31, 2012) (unpublished), held that an insurance policy covering certain health care costs for employees did not cover an employee once she was placed on short-term disability leave.
Clarcor involved a dispute between an employer and its insurer regarding health insurance. Clarcor, Inc. (“Clarcor”) provided medical benefits to its employees through Clarcor’s self-funded benefits plan (the “Plan”). Clarcor also purchased excess loss insurance (the “Policy”) from Madison National Life Insurance Company (“Madison”), to cover major employee health care expenses incurred under the Plan.
The major issue in the case concerned two definitions and an exclusion. The Policy defined a “covered person” as “an individual eligible for coverage, and covered under the Plan”. The Policy defined “eligible expenses” generally as losses incurred under the Plan, but excluded coverage for “any payment [by Clarcor] which does not strictly comply with the provisions of the Plan” and also has been “received and accepted” by Madison. In essence, Madison agreed to insure Clarcor’s excess Plan self-insured benefit losses but only if those losses were covered under the Plan and Madison had also reviewed and approved the coverage of the specific losses.
The case was triggered by Clarcor’s claim under the Policy for reimbursement of significant health care costs that Clarcor incurred for one of its employees. The employee’s last regularly scheduled work day was October 20, 2007. She was subsequently placed on FMLA leave, which lasted until January 12, 2008. At that time, the employee was granted short-term disability benefits. During this period, Clarcor continued to take benefit deductions from the employee’s compensation for health care coverage and continued to submit her name to Madison as a Plan beneficiary.
The employee was terminated from employment on June 23, 2008. The next day, Clarcor offered her continuation coverage under the Plan pursuant to rights granted in the Consolidated Omnibus Budget Reconciliation Act of 1985 (commonly called “COBRA” coverage). By June 2009, the employee’s health care costs exceeded $250,000, in excess of the level of losses eligible for coverage under the Policy.
Madison denied Clarcor’s claim with respect to expenses incurred after the employee ended her FMLA leave on January 12, 2008, on the basis that she was no longer an eligible employee within the meaning of the Plan itself and therefore not a covered person under the Policy. The Plan limited eligible employees to “regularly assigned, full-time employee[s] . . . regularly scheduled to work a minimum of 40 hours per week” with exceptions for (1) qualified retirees, (2) employees on FMLA leave, and (3) employees receiving COBRA coverage. There was no exception for employees receiving short-term disability benefits. Madison contended that when the employee began her short-term disability status, she ended her eligible employment within the meaning of the Plan. Therefore, any medical benefit costs she incurred after that point did not satisfy the Policy’s definition of eligible expenses and could not avoid the above-mentioned Policy exclusion.
Clarcor sued Madison for a declaratory judgment that the employee’s excess medical costs were covered under the Policy. All of Clarcor’s arguments were rejected by the district court and, on appeal, by the Sixth Circuit.
Among its most notable holdings, the Sixth Circuit ruled that, as of the end of her FMLA leave, the employee lost her eligibility under the Plan’s own terms, since the Plan did not have an exception for employees on short-term disability. Clarcor’s continued payment of her premiums did not extend the employee’s eligibility for Plan benefits contrary to the Plan’s provisions. As a further consequence, Madison’s Policy was not liable to cover her medical expenses after the end of her FMLA leave, because the Policy did not cover expenses that were not incurred under the Plan or in strict compliance with Plan provisions. As the Court concluded, “Madison could not be forced to reimburse Clarcor for payments made to an ineligible employee.”
The Sixth Circuit also rejected Clarcor’s argument that the excess health care expenses should be reimbursed under the Policy for periods in which the former employee received COBRA coverage. The employee’s “qualifying event” for COBRA coverage was the end of her FMLA leave, because that was the event that caused her loss of Plan coverage. Therefore, she should have been given her notice of a right to COBRA coverage within thirty days of that date. Clarcor’s offer of COBRA coverage in June 2008, after her short-term disability status ended, was untimely, and the employee was no longer eligible for COBRA coverage.
Clarcor thus serves as a caution to employers to carefully examine their plan provisions and determine who is covered under the terms of their employee benefit plan, particularly when employees are terminated, on FMLA leave or receiving disability benefits. In Clarcor, the employee fell into a gap in coverage once she went on disability leave, as well as a gap at the time she applied for COBRA coverage. Employers that wish to provide their employees with health care benefits during any of those periods of time should ensure that their employee benefit plan is expressly designed to allow for such coverage.