A federal court was recently
asked to determine whether an employer could liable for monetary
damages when it erroneously extended COBRA coverage to an employee,
even though the employer was exempt from COBRA because it had fewer
than 20 employees.
In Hanysh v. Buckeye
Extrusion Dies, Inc., a former employee sued his employer after
his COBRA continuation coverage was retroactively terminated by the
employer's insurer. In January 2009, the employer had terminated the
employee's employment and provided him with a COBRA election notice.
The employee elected COBRA coverage and paid the required premiums
for 13 months.
For reasons undisclosed, the
employee filed a complaint with the U.S. Department of Labor
("DOL") regarding his COBRA coverage. The DOL investigated
the complaint and subsequently informed the employer that it was not
subject to COBRA because it employed fewer than 20 employees. In
response, the employer's insurer retroactively terminated the
employee's COBRA coverage. As a result of the retroactive
cancellation, the employee incurred over $7,000 in unreimbursed
The employee sued to stop
the employer from denying his COBRA coverage. He asserted that the
employer was liable for his medical expenses because he had relied on
its material misrepresentations about his COBRA eligibility. The
employer, in turn, said it had relied on the insurer's representation
that the employee was eligible for COBRA coverage and that, pursuant
to the terms of the insurance contract, the insurer was responsible
for determining eligibility.
On review, the court
determined that the employer could be liable for the employee's
continuation coverage for the following reasons: (1) the employer,
not the insurer, knew the exact number of persons it employed; (2)
the insurance contract placed the burden for complying with federal
laws such as COBRA squarely on the employer; and, (3) under the terms
of the insurance contract, the insurer expressly disclaimed any
warranties or representations that the employer's health plan
complied with federal law.
This court ruling highlights
how important it is for employers to fully understand the scope of
their relationship with insurers concerning compliance with federal
laws. Generally, insurers that provide group health coverage to
insured plans do not know whether an employer purchasing such
coverage is subject to COBRA. Most insurers merely package COBRA
coverage as part of the overall coverage offering without even
investigating whether the employer is, in fact, subject to COBRA.
Likewise, brokers selling insurance policies may not know whether an
employer is actually subject to COBRA.
To avoid costly
administrative mistakes like the one in Hanysh, employers
must clearly understand which laws actually apply to their
businesses. To that end, employers should retain competent benefits
assistance to assess which compliance obligations exist under COBRA
and other numerous, and equally complex, federal laws that apply to
group health plans.