A new case underscores just how costly a mistake it can be to not provide departing employees with timely notice of their rights under COBRA to continue their group health coverage.
PEO Takes on Benefits Responsibilities
John Delcastillo, a worker for Texas-based railcar company GLNX, suffered an industrial injury and became unable to work in 1996. He began collecting workers’ comp benefits, and GLNX continued to provide health insurance benefits for Delcastillo and his wife.
The following year, GLNX was sold to Integrated Rail Products (IRP). Integrated then contracted with professional employer organization (PEO) Odyssey Management Company to take over IRP’s employment and HR services, including administering IRP’s health benefits plans and providing COBRA notices.
Coverage Canceled
Health benefits for Delcastillo and his wife, who had serious health problems, terminated in February 1999 because of an administrative error, although the Delcastillos were never notified of the termination. The first indication that something was wrong came a month later when a pharmacy, stating that she had no insurance coverage, refused to fill a prescription for Delcastillo’s wife. Although IRP and Odyssey repeatedly assured the Delcastillos that they were covered, providers continued to tell them otherwise, and their medical expenses were never reimbursed.
Medical Bills Mount; Lawsuit Filed
Finally, in July 2000, the Delcastillos received a letter informing them that their medical coverage was terminated the previous month (even though they had not had coverage for more than a year). The letter included a notice of Delcastillo’s right to elect continuation coverage under COBRA. By this time, his wife had incurred a number of substantial medical expenses and couldn’t obtain private health insurance at any price. The Delcastillos eventually divorced just so Mrs. Delcastillo could qualify for public assistance.
The Delcastillos sued Odyssey for not giving them proper COBRA notice and for breaching its fiduciary duties with respect to benefits coverage. Odyssey responded that Delcastillo was not an employee eligible for coverage under its plan. But a federal district court in Nebraska agreed with the Delcastillos and awarded them more than $306,000.1
Notice Arrived Too Late
The court said that Odyssey, as the plan sponsor, was responsible for notifying the Delcastillos of their COBRA continuation rights. This notice must be given within 14 days of a qualifying event”—such as a death, divorce, termination, or reduction of hours that will result in the loss of insurance coverage.
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In John Delcastillo’s case, it was unclear when the alleged qualifying event might have happened. That’s because he and his wife received health insurance coverage for more than two years after his injury caused him to stop working, and IRP told Delcastillo as late as 1999 that it continued to regard him as an employee. But in any event, the Delcastillos had no insurance coverage after February 1999 and didn’t receive a COBRA notice until July 2000—far too late to do them any good. Additionally, the court said, Odyssey’s and IRP’s repeated misrepresentations that the Delcastillos were covered by insurance made it more difficult for the Delcastillos to make other arrangements.
For More Information
Several months ago, the U.S. Department of Labor released revised COBRA notice rules. To ensure compliance, check out “Benefits: DOL Issues Final Rules on COBRA Notice Requirements” in CEA July 2004.
(1) Delcastillo v. Odyssey Resource Management Inc., U.S.D.C. (Neb.) No. 8:01CV342, 2004