Is Your Company Subject to COBRA Requirements?

It is quite common for insurance companies that offer fully insured benefits to automatically pair the coverage with COBRA coverage as a part of the “product” offering. Often times insurers aren’t aware of whether the employer that is purchasing the coverage is subject to COBRA or not. Even a small business of less than 20 employees could be part of a larger controlled group. In that instance, the small business would actually be subject to COBRA rules so it’s important to remember that the insurer cannot judge whether a company must follow COBRA rules simply by counting the number of employees in its workforce. Furthermore, the brokers that are selling these policies to insured plans may need to do further investigating when determining whether an employer is indeed subject to COBRA coverage rules. It is critical that that insurers and brokers be aware of the basic rules in order to instruct their clients, and ultimately let the employer make the determination. Under COBRA’s small employer exception, companies with less than 20 employers are not required to be subject to COBRA coverage after what would otherwise be regarded as a “qualifying event.” This criterion is based upon how many workers were employed, on average, during the preceding calendar year.

To add to this confusion, many states have “mini-COBRA” laws that apply to small employers with insured group health plans. Often this state-law continuation coverage is mistakenly referred to as “COBRA coverage” by both brokers and insurers because it does offer a similar level of coverage than that of federally mandated COBRA coverage; however, the two should not be confused. This mini COBRA coverage may not be required to last as long as federal COBRA coverage and other terms & conditions may vary as well. It is imperative that employers be well advised of the applicable rules; otherwise they could be vulnerable to claims based on estoppel principles from former employees who mistakenly believed they had broader rights. In most cases, the courts do not side with an employer’s ignorance of the law as a defense to an estoppel claim. In fact, this ignorance can be proven to be evidence of gross negligence. A recent decision raised questions in this scenario regarding the responsibilities of the employer and the insurer. In the case, Hanysh v. Buckeye Extrusion Dies Inc., 2012 WL 3852569 (N.D. Ohio, Sept.5, 2012) the beneficiary’s claim for equitable estoppel survived a motion to dismiss after the court found the employer was grossly negligent when it did not realize it was not subject to federal COBRA rules because it employed less than 20 employees. After mistakenly offering Michael Hanysh COBRA coverage and accepting payments for several months, Buckeye later realized the error and promptly cancelled Haynsh’s coverage retroactively and refunded the premiums. Needless to say, the Hanyshes sued Buckeye for equitable estoppel, claiming that because of its material misrepresentations regarding their COBRA coverage, they were left with unreimbursed medical bills of over $16,000. The court concluded that Buckeye demonstrated gross negligence amounting “constructive fraud.” The 6th U.S. Circuit Court of Appeals has made the following definition of constructive fraud:

“A breach of legal or equitable duty which, in spite of the fact that there is no moral guilt resulting from the beach of duty, the law declares fraudulent because of its tendency to deceive others, to violate public or private confidence or to injure public interests. Constructive fraud may be found merely from the relation of the parties to a transaction or from the relation of the parties to a transaction or from circumstances and surroundings under which it takes place. It is said that constructive fraud is a term that means, essentially, nothing more than the receipts and retention of unmerited benefits.” U.S. v Lichota, 351 F.2d 81, 90 (6th Cir. 1965)


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