Under COBRA’s small-employer exception, employers with fewer than 20 employees do not have to offer COBRA coverage upon what would otherwise be “qualifying events.” This determination is made based on how many employees were employed, on average, during the prior calendar year. When purchasing group coverage, it is important for employers to be mindful of whether COBRA applies to the particular work force.
A qualified beneficiary’s claim for equitable estoppel survived a motion to dismiss due to the court’s finding that the employer was grossly negligent when it did not know that it was not subject to federal COBRA requirements because it employed fewer than 20 employees. Genuine issues of material fact also remain on whether the qualified beneficiary had a duty to mitigate his damages by failing to purchase available conversion coverage. As a result, further proceedings will ensue. The case is Hanysh v. Buckeye Extrusion Dies, Inc., 2012 WL 3852569 (N.D. Ohio, Sept. 5, 2012).
Michael Hanysh was a company officer with Buckeye Extrusions Dies Inc., and was involved in securing Anthem as the insurer of its group health plan in 1985. He was laid off on Jan. 5, 2009. On Jan. 9, 2009, Buckeye provided him with a COBRA election notice. He paid premiums for 13 months. For an unspecified reason,
Hanysh filed a complaint with the U.S. Department of Labor. Shortly thereafter, DOL informed Buckeye that Buckeye was not subject to the federal COBRA requirements because it employed fewer than 20 employees. As a result, Anthem, Buckeye’s insurer, retroactively terminated Hanysh’s coverage effective Jan. 14, 2010. Buckeye subsequently reimbursed Hanysh for his premium payments, but apparently incurred more than $7,000 in medical expenses due to the error. His wife later enrolled in individual coverage from Anthem, which Hanysh declined.
The Hanyshs sued Buckeye in federal district court for equitable estoppel, claiming that because of Buckeye’s material misrepresentations about their COBRA coverage. Buckeye denied the allegation; one argument it made was that it relied on Anthem’s representation that Hanysh was eligible for coverage because Anthem was responsible for determining eligibility under the insurance contract terms. Both parties sought a ruling in their favor.
One element of equitable estoppel is an awareness of the true facts by the party to be estopped — an element of fraud via intended deception or gross negligence must be involved, a mere mistake is generally insufficient. The court found that Buckeye meant this element, and may be estopped from denying coverage, for several reasons: (1) the number of persons employed by Buckeye was solely within Buckeye’s knowledge; (2) the plain language of the insurance contract placed the responsibility for complying with federal and state law squarely upon Buckeye, which was also responsible for communicating with employees about their eligibility; (3) the contract terms further stated that Anthem expressly disclaimed any warranties or representations that the Buckeye’s health plan complied with state and federal laws; and (4) in a letter to DOL, Buckeye informed the agency it had only 14 employees.
Accordingly, the court denied the summary judgment motions of both parties, and proceedings will continue on the issue of damages.
The Hanysh decision raises questions regarding the relationship between the employer and the insurer. Generally, insurance companies that provide fully insured benefits automatically couple the coverage with COBRA coverage — it is part of the “product” offering. Insurers usually do not know whether an employer purchasing the coverage is or is not subject to COBRA. Similarly, brokers who sell the policies to insured plans may not really know for sure whether an employer is subject to COBRA without doing further investigating. Therefore, it is important for insurers and brokers to know enough to instruct their clients on the basic rules and then have the employer make that determination. Overall, it is imperative that employers have a basic understanding of the laws affecting their businesses to effectively avoid costly mistakes.
For more details on how to avoid costly COBRA administrative mistakes, see Thompson’s employee benefits library, including Mandated Health Benefits — The COBRA Guide.