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Late COBRA Notice Voids Stop-Loss Coverage

A recent decision by an Illinois federal court (Majestic Star Casino, LLC v. Trustmark Insurance Co.) carries two important lessons for sponsors and administrators of self-funded health plans. Unfortunately for the plan sponsor involved in this case, those lessons came at a steep price — in the form of denied stop-loss claims.

Majestic sponsored a self-funded health plan. It purchased a stop-loss policy from Trustmark, with a specific attachment point of $100,000. Although the stop-loss policy covered COBRA participants, it specifically conditioned that coverage on each COBRA qualified beneficiary receiving “a valid COBRA extension offer within the 30 days immediately following a COBRA qualifying event.”

The Plan contained a provision under which coverage would continue — at the active employee premium — during the first 90 days of a medical leave of absence. According to the Plan, however, “[c]overage under this provision runs concurrently with coverage continued under COBRA.”

Two Majestic employees incurred substantial medical claims while on 90-day medical leaves. Consistent with Majestic’s standard policy of issuing COBRA election notices only after the 90th day of such a leave, neither employee received a COBRA notice within 30 days after the leave began. One employee returned to work within two months, and therefore never received a COBRA notice. The other employee was terminated at the end of the 90-day leave and was issued a COBRA notice shortly thereafter.

Trustmark denied stop-loss claims filed in connection with both of these employees. Although the parties disagreed as to the amount of stop-loss reimbursements at stake, it was somewhere between $208,000 and $345,000. According to Trustmark, Majestic’s failure to provide a COBRA election notice within 30 days of each leave’s commencement violated the policy provision on this point, and therefore relieved Trustmark of any obligation under the policy.

The Court agreed with Trustmark, pointing to language in the Plan document stating that coverage under the leave continuation provision “runs concurrently with coverage under COBRA.” The COBRA qualifying event was therefore the commencement of a leave. Because the stop-loss policy clearly conditioned coverage of COBRA beneficiaries on their receiving a COBRA election notice within 30 days of a COBRA qualifying event, Majestic’s policy of deferring such notices until the end of a 90-day leave voided its right to coverage under the policy.

Majestic argued that the Plan’s continuation of coverage at the active employee premium during the first 90 days of a leave meant that an employee did not “lose coverage” — and therefore did not experience a COBRA qualifying event — until the end of the leave. Moreover, Majestic employees testified that their consistent practice was to offer employees both the 90-day leave continuation and 18 months of COBRA coverage.

According to the court, however, Trustmark issued its stop-loss policy on the basis of the Plan language, rather than Majestic’s (rather strained) interpretation of that language. Accordingly, Trustmark could not be forced to pay claims incurred by COBRA beneficiaries who did not receive a COBRA election notice within 30 days of a leave’s commencement.

Sponsors and administrators of self-funded health plans should draw two important lessons from this decision. First, know what your plan provides concerning the interaction of COBRA coverage and other coverage continuation rights. Does that other continuation coverage run concurrently with COBRA coverage? Or does COBRA coverage commence only after the other continuation coverage has expired?

If the two types of coverage run concurrently, the total period of continuation coverage will be shorter. On the other hand, deferring the commencement of COBRA coverage to the end of the non-COBRA continuation period allows more time to provide a COBRA election notice. And in certain instances — as in the case of the employee who returned to work during the 90-day medical leave — this approach may even eliminate the need to provide a COBRA election notice.

Second, know what your stop-loss policy requires. If the policy contains notification deadlines that are inconsistent with your current practice, either negotiate changes to the policy or change your notification practices to comply with the policy conditions. Absent one of these two approaches, the plan (or the sponsoring employer) may be on the hook for substantial claims that would otherwise be reimbursable under the stop-loss policy.