Another Health Insurance/Disability Insurance Coverage Issue

[author: Angela Bohmann]

I recently blogged about an employer who continued health insurance coverage for an employee on short term disability in contravention of the health plan document. The employer lost its stop-loss coverage for health claims incurred by the disabled employee because the health plan document did not specifically allow for continued coverage during disability. Today’s blog post concerns another scenario involving disability and health insurance but with a different twist. Today’s case involves an employee who became unable to work in 2004 as a result of knee problems. He applied for long term disability coverage and was denied, but ultimately sued the LTD carrier and recovered benefits. That lawsuit was settled in 2008. The employee also had a worker’s compensation claim that was being evaluated in 2004 and 2005. In connection with that claim, the carrier videotaped the employee building a barn in 2005 during the time that he was supposedly disabled. Based on the videotaped evidence, the employer terminated the employee in 2005 for dishonesty. The employee’s health coverage terminated at the same time. The case does not explain why the LTD carrier agreed to pay benefits to the employee in light of the worker’s compensation evidence that he was less disabled than might otherwise appear.

The employer had an unwritten policy that it would waive health insurance premiums for employees on long term disability. In 2005 when the employee was terminated for dishonesty, the employer had sent COBRA information but the employee had not elected COBRA or if he elected COBRA did not continue it during the COBRA continuation period. In 2009, the now former employee sued the employer claiming that the employer should reinstate him to health plan coverage and should waive the health insurance premiums since he was on LTD.

The employer’s insurance contract with Blue Cross Blue Shield contained an eligibility requirement that an employee be “a full-time Employee of the Group who is Actively At Work” to be eligible to enroll in the plan. The definition of “Actively At Work” included a proviso to the effect that someone not at work due to health-related factors is considered actively at work for purposes of determining eligibility for coverage.

The court concluded that the former employee did not meet the eligibility requirements for coverage because the reason he was not at work was his termination for dishonesty, not his disability. Therefore, regardless of whether the unwritten policy would otherwise have covered the employee, he was not eligible for the benefit.

From the employer’s point of view, the result of this case was a win. The employer did not have to reinstate the former employee to health coverage and did not have to cover the former employee’s health insurance premium. However, the employer is now in a position where it may need to provide coverage for employees on long term disability on an indefinite basis based upon the court’s interpretation of the insurance contract and the employer’s unwritten policy regarding waivers of insurance premiums.

Because of HIPAA portability rules, employers with eligibility requirements that provide that employees must complete a period of service, for example, 30 days, before becoming eligible for coverage under a health insurance policy must not use that requirement to deny coverage to someone who is not at work as a result of a health condition. It is for that reason that health insurance contracts often include an “actively at work” requirement and waive that requirement for someone not at work because of a health condition. The health contracts also typically have provisions that provide for loss of coverage in the event the employee no longer meets eligibility requirements. Although this employer may have intended the result in this case ‒ that employees on LTD be able to continue coverage indefinitely ‒ many employers do not want or expect disabled employees to continue their coverage for so long. Instead, they expect that employees no longer able to work because of disabled status will be able to elect COBRA, including the 11 month extension of COBRA if the employee becomes eligible for social security disability benefits. During that 11 month extension, employers are permitted to charge up to 150% of the normal employer and employee premium for the coverage.

The lesson for employers in this case is twofold. First, employers should document their policies relating to subsidization of coverage for situations such as disability. With a written policy, there are fewer instances where lawsuits could be brought and it is more clear to the employer, the employee and the insurance carrier who is entitled to coverage. The second lesson is that employers should review provisions of their plans relating to eligibility and loss of coverage to make sure that the coverage begins and ends when the employer expects coverage to begin and end. Otherwise, employers could find themselves required to provide coverage they did not want to provide. Particularly if the unwritten policy is not one accepted by the insurance carrier, the employer could find itself having promised health insurance coverage without an insurance carrier backstopping that promise.