A Self-Funded Employer’s Worst Nightmare

by Stinson Leonard Street - Employee Benefits & Compensation

Employers who sponsor health plans for their employees can purchase insurance contracts to fund those plans. Alternatively, employers can self-fund or self-insure those benefits, agreeing to pay the claims themselves. Many employers who provide self-funded plans also buy stop-loss insurance to cover the risk of exceptionally large claims. However, employers must be careful that their stop-loss coverage provides adequate protection.

A recent case from Alabama highlights the risk of a disconnect between the employer’s plan and the stop-loss coverage. The employer changed to a self-funded plan and purchased stop-loss that provided coverage for member claims that exceeded $75,000 up to a $1 million lifetime maximum. The employer thought that the health plan imposed a $1 million lifetime maximum on benefits. However, the Blue Cross plan that the employer offered its employees had a lifetime maximum only for certain services, such as out of network coverage. Other services did not have a lifetime maximum. (Under health care reform, all plans must eliminate lifetime maximums for essential health benefits so in the future employers should have less difficulty understanding this portion of their plan design.)

A participant in the employer’s plan gave birth to premature twins, one of whom had a serious medical condition and quickly amassed costly medical bills, amounting to over $2.8 million in claims over a several year period. That series of claims exhausted the maximum stop-loss reimbursement and the employer found itself paying an additional $1.8 million dollars in claims above the stop-loss. The employer sued a number of vendors to the plan, including the insurance agents and Blue Cross claiming that they should have alerted the employer to the difference between the plan design and the stop-loss coverage.

Although the employer suggested a number of legal theories under which the vendors might be responsible for the employer’s predicament, the court rejected most of those theories. All claims against Blue Cross were dismissed and most claims against the insurance agents were dismissed. The one remaining claim was a breach of fiduciary duty claim, where the employer argued that the agents had a special relationship with the employer in the design of the plan and the stop-loss coverage. Because the agents were purported to have acted as trusted advisors in the transaction, the court refused to dismiss that claim. Thus, the employer will have the opportunity to show the court that there was a fiduciary relationship between the insurance agents and the employer and that the insurance agents should cover the losses not covered by the stop-loss insurance.

One impediment that the employer will have with its claim relates to the fact that stop-loss coverage is not issued on a guaranteed basis and that stop-loss carriers can underwrite coverage and reduce risk by limiting particular claims. The medical claims of the baby were insured over several policy years. Even if the stop-loss coverage had not contained a lifetime limit, after the first policy year, it was likely that the stop-loss carrier would have refused to cover the medical claims of the child or would have severely limited the extent to which it would have provided that stop-loss coverage in any event. Thus, it is not clear that the employer could have obtained adequate stop-loss coverage once the premature baby was born and it was known that there would be substantial medical claims in future policy years.

There are (at least) two lessons for employers. First, make sure that if your plan is self-funded, your stop-loss coverage does not have restrictions and limitations not reflected in your plan design – or that you are aware of those differences and are comfortable accepting the risk. Second, understand that even if you have adequate stop-loss coverage consistent with your plan design, a high claim that continues through multiple policy years is likely to be limited or excluded from stop-loss coverage after the first policy year. You need to understand that one of the risks of self-funding is that the adequate stop-loss coverage might not be available for claims that span multiple policy years.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Stinson Leonard Street - Employee Benefits & Compensation | Attorney Advertising

Written by:

Stinson Leonard Street - Employee Benefits & Compensation

Stinson Leonard Street - Employee Benefits & Compensation on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.