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12 May 2014 | The Self-Insurer © Self-Insurers’ Publishing Corp. All rights reserved.

Bench BenchFrom the

by Thomas A. Croft, Esq.

What’s the Plan, Stan?

Eligibility issues, in my anecdotal experience, are replacing disclosure issues as the number one stop loss claims problem. I

offer some thoughts this month.

First, the basics. Most every stop loss form in current use adopts something resembling the following schema: 1) specifi c benefi ts are stated in terms of reimbursement for “eligible expenses,” “eligible claims payments” or some similar defi ned term; 2) “eligible expenses” are defi ned as being incurred with respect to “covered persons” or “covered units”; 3) “covered persons” are defi ned as those individuals “covered under the employee benefi t plan”; and 4) “the Plan” is usually defi ned as “the master plan document” of the insured

group, though, in practice, it is the Summary Plan Description (“SPD”) that is provided to the MGU/carrier at underwriting time.

One important intended effect of this stop loss policy structure is to confi ne stop loss reimbursements to expenses incurred by individuals covered under the Plan. Most typically, the Plan is specifi cally incorporated into the terms of the stop loss contract and explicitly made a part of the bargain between the carrier and the group via the “entire contract” clause in the stop loss policy form.

Thus, the written terms of the Plan govern who is or isn’t a “covered person” for stop loss reimbursement purposes – a time-honored tradition of “mirroring” established well before the

recent “mirroring” fad regarding stop loss policy exclusions.

In order to determine who is eligible under the terms of the Plan, one consults the “eligibility” section of the Plan Document. This usually describes the requirements for eligibility in terms of being an employee in a defi ned class of persons, e.g., those working some minimum number of hours per week, and perhaps other requirements. The eligibility section will also describe eligibility criteria for dependents of covered employees. One must also consult the “termination” section of the Plan Document, which describes when and how formerly eligible persons can lose coverage under the Plan. Often, the termination section circularly describes

© Self-Insurers’ Publishing Corp. All rights reserved. The Self-Insurer | May 2014 13

a loss of coverage as being an event which causes one to lose his or her status as a member of an eligible class, like a reduction in hours.

Upon an event of termination, one must next determine what options the Plan Document offers for continuation of coverage. At minimum, these will include a section describing FMLA continuation coverage and COBRA. The Plan Document may also include, however, provisions addressing continuation of coverage during approved leaves of absence, periods of disability, and the like. Once FMLA and other options for continuation of coverage have been exhausted, then the issue of continuation of coverage comes down to whether COBRA was offered and accepted or not.

All of the above is relatively straightforward in theory, and sometimes impossibly messy in practice. Let me count the ways.

Practice Makes Imperfect. For reasons that elude me, Plan Documents very often do not refl ect what employer groups actually do when it comes to continuing medical coverage. Outside the four corners of the Plan Document, employers often have policies or procedures which extend leave beyond that described in the Plan. These may appear in employee handbooks, internal memoranda distributed to employees, be posted on a company website, or sometimes simply reside in the minds of the HR folks who implement them. On occasion, they are just ad hoc, made up on the fl y to fi t a compelling need to continue coverage for a key employee without any basis in a formal company policy.

Of course, it is no business of the stop loss carrier if an employer wishes to provide coverage for someone outside the language of the Plan Document. (It theoretically could be a concern to other contributing Plan participants, but that is an issue of proper administration of the Plan itself – something that the stop loss carrier has nothing to do with). The problem arises when the group wants a stop loss reimbursement for someone not covered by the terms of the Plan. I’ve seen many disputes that turn on one or more variations of the following themes:

• “It’s right there in the employee handbook on page 7. We give leaves of absence for up to six months and medical coverage continues during such absences.” That may be so, but unless the terms of the employee handbook are expressly incorporated in the Plan Document by some specifi c language in the Plan, its provisions are not part of the deal made between the group and the stop loss carrier. The stop loss policy incorporates the Plan Document, only. Underwriting for the risk involved was done in the context of the SPD submitted to the MGU/carrier, and unless the SPD put the underwriter on notice that the terms of a handbook were somehow relevant to the eligibility provisions appearing in the Plan, those terms simply don’t count. [But see discussion of “side agreements,” below].

• “The Plan says that we have full discretion to interpret Plan terms, make decisions regarding eligibility, and resolve factual questions. We’ve decided this person was eligible, and you can’t question that.” Such provisions are common, and give the Plan Administrator wide latitude in determining coverage questions under the Plan. But they do not permit a Plan Administrator to ignore clear and controlling Plan language, or to add benefi ts to the Plan Document that are not there and thereby bind the stop loss carrier. Many current stop loss policy forms contain express “anti-discretion” clauses, which, in effect, state that any “discretionary authority” given in the Plan Document is not binding on the carrier, which remains free to make its own independent

judgment about Plan coverage based on the written terms of the Plan for purposes of adjudicating its liability under the stop loss contract. Even without such a clause, virtually every stop loss policy prohibits the group from amending the Plan terms mid-stream without written consent of the carrier. Adding a continuation of coverage provision under the rubric of the exercise of “discretion” violates the letter and spirit of the anti-amendment clause in the stop loss policy.

• “We offer long-term disability coverage for our employees through another insurer, and we always continue medical benefi ts for employees out on LTD.” Again, unless the continuation of coverage for persons out on LTD is spelled out in the Plan Document, or the LTD benefi t and the extension of coverage is somehow referenced in the Plan Document itself, it isn’t part of the deal between the group and the carrier. As stated in The Majestic Star Casino v. Trustmark Ins. Co., http://stoplosslaw.com/wp-content/uploads/2009/11/majestic-star.pdf, at pp. 11-12: “[I]t is the terms of the plan that control here, not Majestic’s interpretation or implementation of the plan. Majestic and Trustmark entered into the stop loss agreement based on the language of Majestic’s health plan. Majestic cannot avoid [the terms of the stop loss policy] by not following its health plan’s express terms.”

Muddier Waters. The above examples are relatively clear-cut. But leave it to market forces to muddy the legal waters (don’t they always?).

Here’s mud in your eye: Some


brokers/TPAs, perhaps recognizing the oft-extant disconnect between what the Plan says and what the group really wants, have cut side agreements with some MGU/carriers whereby the continuation of coverage provisions found outside the Plan Document (say, in employee manuals, LTD policies, etc.) “count” for eligibility purposes. Laying aside the wisdom or market necessity of such side deals, there is the technical problem that such agreements contradict the express terms of the stop loss policy forms, which clearly describe what the “entire contract” between the parties consists of. The side agreement, of course, is not listed. Nevertheless, the MGU/carrier would certainly be hard-pressed to defend a claim on the grounds that the side agreement didn’t bind them because it was just an unenforceable extra-contractual promise. But in order to protect themselves, the broker/TPA should insist on a formal endorsement to the stop loss policy to include the

coverage provisions not found in the Plan Document itself.

The more acute problem is that sometimes these side agreements are not even

reduced to writing, or if they are, they are poorly drafted or ambiguous. Unless

carefully drawn and reviewed by counsel, such market-driven deals can complicate

more than they solve with regard to eligibility issues. Again, using the vehicle of a

formal endorsement would require a level of specificity not often found in a side

letter agreement, or worse, in some vague oral agreement. Both MGUs/carriers and

insured groups (as well as their brokers/TPAs) would benefit by this approach. Clarity

in contractual arrangements behooves everyone.

Another potentially muddying situation deserves mention. Sometimes, an

individual who is being continued on the Plan outside the coverage provisions of

the Plan itself has been disclosed in connection with the standard disclosure process

during underwriting, perhaps due to disability, hospitalization, or similar condition.

Such disclosures often lead to a documented back-and-forth between the stop loss

underwriter and the broker/TPA concerning the particulars of such an individual’s

condition, and then either a decision to laser – or not to laser – the person in

question. The decision to laser or not to laser is likely documented as well. In short,

the disclosure process shines a bright light on a given individual. Once a large stop

loss claim comes in for such a person, there is an argument to be made by the

group that the MGU/carrier consciously assumed stop loss coverage in respect of

the individual involved, and priced the stop loss coverage accordingly.

To be sure, stop loss underwriters do not undertake eligibility reviews at the

time of underwriting; it is the claims department that performs that function, after

the fact of a claim. And the MGU/carrier has the argument that underwriting risk is

always undertaken with the underlying eligibility provisions of the Plan Document


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in mind, so that mere inclusion of an individual’s name on an employee census, for example, submitted during underwriting hardly waives the carrier’s right to dispute eligibility when a claim comes in. But the question is somewhat harder with respect to a disclosed claimant – particularly one who was the subject of inquiry and discussion between the underwriter and the broker/TPA/group – a person who was “lit up” in the bargaining process. One can imagine some good deposition questions to the underwriter involved: “When you quoted this group, you were assuming, were you not, that his claims would be in the pool of risk your company was reinsuring?... So, when you priced this coverage (or established the laser) your assumption was that he would be an eligible person under the Plan?... So you charged my client premium consistent with this person being eligible, right?... So when your company denied this claim on eligibility grounds, that was profit you weren’t expecting, correct?

Of course, a properly prepared underwriter witness could give some strong responses to these kinds of questions, but the trap is there for the unwary. From the MGU/carrier’s perspective, the addition of some language to the disclosure statement disavowing any intent to waive eligibility issues as to any disclosed claimant would eliminate this type of issue.

Eligibility issues come up all the time in my experience. Proper policy language, the use of endorsements to expand coverage beyond the four corners of the Plan Document where desired, and the use of a disclaimer in the disclosure process all seem wise policies, i.e., “best practices” in the current vernacular. In these ways, “What’s the Plan, Stan?” eligibility disputes might be minimized. n

Known for his extensive writing on medical stop loss insurance issues, both in The Self-Insurer and on his comprehensive website, www.stoplosslaw.com, Tom has been practicing law for 34 years. Currently he practices through his own firm, CROFT LAW LLC, in Atlanta, GA. He regularly advises and represents stop loss carriers, MGUs, and occasionally TPAs, brokers, and self-insured groups, in connection with matters relating to stop loss insurance and the disputes that may arise among these entities regarding it. He currently serves on SIIA’s Healthcare Committee. He has been honored as a Georgia “Super-Lawyer” for the past six years running, and is listed as “Tier 1” in insurance by Best Lawyers. He is an honors graduate of Duke University and Duke University School of Law, where he formerly served as Senior Lecturer and Associate Dean.

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