Plans With Stop-Loss Coverage Require Review

Posted by BAS - 30 August, 2012

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Employers with self-funded health plans should make certain that all stop-loss policies associated with the plan provide adequate and intended protection for large claims. Moreover, any current plan administrative practice that deviates from the terms of the official plan documents should be drafted into the plan documentation and cleared with the stop loss insurer.

In a recent court case, Clarcor, Inc. v. Madison National Life Insurance Company, the Sixth Circuit Court of Appeals held that a stop-loss insurer rightly denied payment of claims because the individual in question was no longer eligible to be covered under the employer's health plan. The employer's plan document limited eligibility to regularly assigned, full-time employees scheduled to work 40 or more hours per week. The plan documents also extended eligibility to employees on FMLA leave and COBRA continuation coverage.

The individual in question had an FMLA leave of absence and did not return to work after the FMLA leave. Instead, at the expiration of FMLA, she was place on short-term disability. The plan documentation did not specifically extend coverage to individuals on short-term disability, although the employer had a corporate policy of extending coverage to such individuals. The individual's plan coverage continued until the end of her six-moth STD period. At that time, her employment was terminated and she was offered COBRA continuation coverage, which she elected. The individual incurred significant expenses during her disability leave, which were paid by the plan. The employer submitted the excess claim amounts to the stop-loss insurer for payment, but the claim was denied.

The court held that the stop-loss insurer did not have to pay the excess claims because the stop-loss policy applied only to claims paid under the terms of the written plan document. Under the terms of the plan document, the employee lost eligibility for coverage when she began her STD leave. Therefore, the stop-loss carrier was under no obligation to pay benefits, even if the employer had a corporate policy of extending coverage during STD. In addition, because the employee was wrongly offered COBRA coverage at the end of her disability leave instead of the end of her FMLA leave, the stop-loss carrier did not have to pay for excess claims during the COBRA period.

This case should serve as a warning to employers with self-funded health plans supplemented by stop-loss insurance to review the terms of their plan documents. Benefits should be administered only in accordance with the written plan terms. If an employer has a practice that is not reflected in the written plan documentation, the plan should be amended to properly capture plan administration. Any changes to the plan's documentation should be approved by the stop-loss insurer to make sure that expenses will be covered by the stop-loss insurer. This will avoid the unwelcome result of being without stop-loss coverage for claims paid by the plan.

Topics: HR & Benefits Compliance


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