COBRA and Severance Agreements

Employer’s need to be careful when providing alternative continuation coverage to a COBRA qualified beneficiary. In order to eliminate and employer’s COBRA obligations the alternative coverage needs to satisfy all of COBRA’s requirements and last for longer than the required COBRA continuation period and extend that period if an additional or secondary qualifying event occurs during that period.

In the case of City of McAllen v. Casso, 2013 WL 1281992 (Tex. App.-Corpus Christi, March 28, 2013) the City was found liable for a breach of contract and fraud in a lawsuit where the former employee sued the City for how health coverage was to be provided under a severance agreement. The court awarded more than $440,000 in damages and $150,000 in attorney fees (however an appeals court reduced the amount of these damages).

In 1991 Dahlila Guerra Casso was a municipal court judge in McAllen Texas when she was diagnosed with lupus in which she believed was aggravated due to the unsanitary conditions in the building where she worked. Due to her illness she had to resign her position of presiding judge and negotiated a severance agreement with the city. Under the agreement she would receive a lump-sum financial payment and sign a waiver of liability. The agreement stated “The City will continue to pay Casso’s health insurance premiums for Health Insurance Coverage with The City of McAllen throughout the period of time from the date of the execution of this Agreement through June 2002.”

The agreement was executed on April 12, 1999, however in 2001, the City sent a blank “Enrollment/Change/Cancellation Form” to Casso asking her to just sign it. Casso assumed this blank form was just giving the City authorization to make payroll deductions and signed the blank form on a signature line underneath the following statement: “I authorize my employer to make the appropriate payroll deductions as a result of this enrollment and/or change.”

The City paid Casso’s insurance premiums until June 1, 2002 but believed they were not obligated under the agreement to keep Casso enrolled indefinitely under its plan even if Casso continued to pay the premiums. The City believed that Casso was eligible for COBRA beginning in June 2002 for 18 months of coverage.

The City sent the signed enrollment/change/cancellation form to their third party claims administrator TASB along with a letter from the city’s benefits coordinator stating that Casso was enrolling in COBRA coverage. This letter which was submitted into evidence at the trial claimed that Casso is “eligible for C[OBRA] benefits effective July 1, 2002 through December 31, 2003.” The form had the words “COBRA Coverage” handwritten on a line next to the words ‘Qualifying Event”. Casso stated that she never intended for this form to be used to enroll her in COBRA because she believed she was covered under the City’s health plan as long as she paid her premiums.

The city terminated Casso’s health coverage in December 2003. Casso made a number of attempts to obtain new health coverage but was denied. Casso incurred large out of pocket medical expenses as a result of being uninsured since December 2003. She sued the city for various state-law claims, including breach of contract. Casso specifically stated during the trial that she negotiated certain terms of her agreement that did not include reference to COBRA eligibility. She stated that by the terms of the agreement that the city was to keep her on its health plan until she turned age 65 in which she would be eligible for Medicare.

The court stated that the agreement was ambiguous because it specified the date when the city would stop paying her insurance premiums, it did not specify the date when her plan enrollment would end. Casso stated that to resolve the ambiguity they needed to look at the definition of ‘participant’ under the plans terms which were: 1) a regular full-time employee; 2) a spouse or child of a participant; 3) a retired employee; or 4) a COBRA participant. Casso stated that she was no longer a full-time employee and because COBRA is legally available for only 18 months post employment, she must have been covered as a ‘retiree” participant from 1999 until December 2003. Under the plans terms, a “retiree” is entitled to buy in to coverage until the time he or she turns age 65 and becomes eligible for Medicare and the city breached the agreement by terminating her coverage before the age of 65.

The court agreed with Casso and awarded roughly $600,000 in damages, including medical costs, lost profits and attorney fees. The city appealed however the state appeals affirmed most of the claims with the exception of attorney fees.

Anytime an employer is considering alternative coverage to a qualified beneficiary, it should seek experienced guidance to make sure that the alternative coverage satisfies all of COBRA’s requirements and is structured to ensure that it reduces or eliminates the employers COBRA obligations.

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