:: Promises Of Coverage To Employees – What Happens When The Coverage Falls Through? (Part 1)

When an employer makes a commitment to provide long term disability benefits to employees, the employer has typically relied upon assumptions of insurance coverage for claims under the plan. In Hopper v. Standard Ins. Co., Slip Copy, 2007 WL 433366 (D.N.H.) (February 07, 2007), the court addressed the consequences of a failure in coverage following employer’s assurances of plan eligibility to an employee who had a serious medical condition.

The Offer of Employment And Promise Of Continuous Insurance Coverage

Hopper suffered from multiple sclerosis. On February 13, 2003, Hopper was offered a job by a company called Cubic Wafer located in Merrimack, New Hampshire.

Given his medical condition, Hopper naturally had concerns about maintaining continuous benefits coverage.

Given his medical condition, maintaining continuous health and disability insurance coverage was of critical importance to Hopper. Accordingly, before giving up his in-place coverage and accepting the position as Cubic Wafer’s Materials Manager, he made a point of discussing insurance coverage issues with the appropriate human resources personnel.

Cubic Wafer turned to its insurance broker for assistance. At the time, William Gallagher Associates (“WGA”) filled that role. The opinion relates that “WGA’s primary duties involved assisting in identifying coverage limitations and identifying and recommending new coverage options that might be of interest” to its client Cubic Wafer. WGA also acted as “liaison between Standard Insurance Company (which underwrote the benefits provided) and Cubic Wafer’s employees.”

Continuous Coverage Assured

The appropriate parties conferred and agreed that continuous coverage would be assured under the Cubic Wafer benefits plan.

After first speaking with representatives from WGA, Cubic Wafer’s staff assured Hopper that were he to accept the offered position, his health and disability insurance coverage and benefits would continue uninterrupted, and that he would not be subjected to a waiting period, because he had been covered under “a current, similar disability policy, and had held uninterrupted coverage for many years preceding his diagnosis.”

Hopper accepted the position and allowed his existing coverages to lapse in May, 2003. The opinion states:

Hopper, relying upon Cubic Wafer’s express representations, accepted the Materials Manager position and, believing that his health and disability insurance coverage would transition seamlessly, allowed his existing disability policy to lapse in May of 2003.

Continuous Coverage Promises Put To The Test

The assurances made in 2003 moved from the hypothetical to the practical in 2004. Hopper became very ill in September 2004:

[Hopper] underwent intensive chemotherapy and other treatment that necessitated a leave of absence. When discussing short term disability leave with Cubic Wafer’s human resources department, Hopper was again assured that, following short-term disability, he was eligible for long-term disability benefits and that those long-term benefits would become available automatically if Hopper was still unable to work when his short-term disability insurance benefits were exhausted.

Relying upon his employer’s “repeated assurances” that his long term disability benefits would become effective immediately upon exhaustion of short term disability benefits, Hopper accepted a severance package offered by Cubic Wafer.

Continuous Coverage Denied – A Failure To Communicate

In November 2004, Standard and WGA notify Cubic Wafer that the long-term disability policy providing plan benefits included a 24 month waiting period provision, and that Standard was unwilling to retroactively amend the policy to alter or remove that requirement. In December of 2004, Hopper was denied long-term disability benefits on grounds that he had not yet satisfied the 24 month waiting period. Oddly, in discussions with his employer, Hopper continued to receive assurances of coverage.

Hopper discussed the issue with Cubic Wafer’s human resources personnel, who again assured him that he was, in fact, entitled to long-term disability benefits, and that the 24-month waiting period provision upon which Standard relied in denying benefits was inapplicable to him. As a result of those discussions, and relying on the statements made by Cubic Wafer regarding the disability insurance coverage available to him, Hopper elected not to seek re-employment with Cubic Wafer, but instead pursued an administrative appeal of Standard’s benefits denial.

Standard did not view the matter so sanguinely. On February 16, 2005, Standard denied Hopper’s administrative appeal, and the appeal was upheld on view just ten days later.

Litigation Ensues

Hopper filed a claim under the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq., and after receiving his right to sue letter, filed suit against Cubic Wafer based on an ADA claim. In addition, Hopper sued Cubic Wafer, WGA and Standard under a number of State law theories, all of which derived from an allegation of misrepresentation of the benefits available.

The litigation unfolded in two parts. First, the court rendered an opinion on Hopper’s claims against the defendants. Second, in a separate opinion, the court rendered an opinion on Cubic Wafer’s cross claims against WGA and Standard.

Part I – WGA and Standard’s Motion To Dismiss

WGA and Standard moved to dismiss claims against them, arguing that the claims were preempted by ERISA. The district court agreed as to Standard, but rejected the preemption argument as to WGA.

- Standard’s Preemption Arguments Accepted

The Court stated:

Invoking ERISA preemption, Standard relies principally on two controlling precedents, Vartanian v. Monsanto Co., 14 F.3d 697 (1st Cir.1994), and Carlo v. Reed Rolled Thread Die Co., 49 F.3d 790 (1st Cir.1995). In Vartanian, the employee-plaintiff claimed that he retired in reliance upon misleading statements suggesting that his employer had no intention of offering an “enhanced severance program.” 14 F.3d at 699. . . . Similarly in Carlo, the plaintiffs, Carlo and his wife, alleged that the employer-defendant made misleading statements about the scope of his retirement benefits. 49 F.3d at 793 n. 5.

In both cases, the plaintiffs’ claims failed on the view that the claims required interpretation of the ERISA plans and thus were preempted.

The Court rejected Hopper’s attempts to distinguish these cases, stating:

As in Carlo, although Hopper does not seek to extend or enlarge the coverage afforded him under the disability benefit (insurance) plan, ‘any money [he] obtained from [his] suit would be functionally a benefit to which the terms of the plan did not entitle [him].’ . . . Hopper argues, alternatively, that neither Vartanian nor Carlo remain viable in view of the Supreme Court’s decision in Travelers, which, he asserts, limited the expansive nature of the ERISA preemption clause as applied in Vartanian and Carlo. . . [Yet] while Travelers serves to focus the ERISA preemption inquiry, by ensuring that courts remain cognizant of the original goals and objectives of the preemption clause, it did not overrule or otherwise call into question prior preemption cases. The plain language of Hopper’s complaint makes clear that the misrepresentation claims against Standard “relate to” the ERISA plan, since adjudication of those claims would necessarily require the court to compare the representations made to Hopper with the coverage provided under the plan.

- Claims Against “Insurance Broker” Escape Preemption

The district court distinguished Hopper’s misrepresentation claims against WGA from those against Standard. “Unlike Standard, which functions as an ERISA entity”, stated the court, “WGA is strictly an insurance broker, engaged in sales and marketing functions.” Thus, the court opined:

WGA had no direct control over Standard’s insurance policy or the benefits plan. WGA did not administer the plan, and did not determine participant eligibility for benefits or consider appeals of benefit denial. Put differently, Hopper’s claims against WGA are limited to WGA’s “role as a seller of insurance, not as an administrator of an employee benefits plan.” Woodworker’s Supply, Inc. v. Principal Mut. Life Ins. Co., 170 F.3d 985, 991 (10th Cir.1999).

- Fiduciary Claims Against Insurance Broker Viable

While holding that fiduciary claims against Standard were preempted, the district court denied WGA’s motion to dismiss. In the view of the district court:

[B]ecause WGA is not an ERISA entity, any fiduciary duty that WGA allegedly owes to Hopper arises, if at all, independently of the ERISA plan and, therefore, would not be sufficiently “related” to justify preemption. It is true that if Hopper were to prevail on these counts, the subsequent damages inquiry would necessarily require a review of the plan. Courts have recognized, however, that immunizing insurance brokers from improper conduct in the sales process would not serve Congress’s purpose for ERISA because “··· employees, beneficiaries, and employers choosing among various plans will no longer be able to rely on the representations of the insurance agent regarding the terms of the plan.”

Note: The nature of the case was that of a set of State law claims against the defendants. No ERISA claims were stated. The opinion did not suggest whether an amendment of the complaint to state ERISA claims against Standard was contemplated.

Since the case was in the posture of motions to dismiss by defendants WGA and Standard, it does not address the employer’s liability. That aspect of a misrepresentation of benefits case was recently addressed, however, in :: “Instatement” In LTD Plan Appropriate Remedy Where Employer Fails To Enroll Employee.

Insurance Professionals - The case does underscore the vulnerability of insurance brokers and professionals to State law claims. The issue of whether the case is styled as an ERISA action or not has great consequence for consultants. Cf. Mertens v. Hewitt Associates, 508 U.S. 248 (1993) (ERISA Section 502(a) “appropriate equitable relief” does not permit money damages against actuary)

LTD Carrier - The court’s evaluation of the carrier’s status as an ERISA entity is questionable. The decision gave little or no consideration to the argument that WGA acted as an agent of Standard and that Standard was thus liable on respondeat superior principles. Hopper had alleged:

that employees of WGA and Cubic Wafer, as agents of Standard, were improperly trained with regard to the scope of the ERISA plan and, as a result, misrepresented material terms of the insurance coverage benefits available to Hopper under the plan.

Accepting for the sake of argument the agency relationship, if WGA did not act as an ERISA entity, it is difficult to understand how Standard performed as an ERISA entity. Cf. Bank Of Louisiana v. Aetna US Healthcare Inc., 2006 WL 2959792 (October 18, 2006) (though that case involved employer plaintiff, not an employee).

Further, Hopper had never become a plan participant in the first place and had terminated employment thereby raising a serious ERISA standing question. See, Mead v. Intermec Techs. Corp., 271 F.3d 715, 717 (8th Cir.2001) (plaintiff was held not to be a plan participant because he had no colorable claim for benefits) See, also, Johnson v. Buckley, 356 F.3d 1067 (9th Cir. 2004) (employees’ claims fail as they were permanently terminated and not temporarily laid off and thus had no colorable claim for benefits). The district court simply assumed the standing question without analysis despite the jurisdictional implications of the issue.

See also, :: ERISA Does Not Preempt Claims Of Breach Of Agreement To Pay Medical Benefits for consideration of extraneous agreements and negligent misrepresentation of benefits cases not preempted by ERISA.

Part 2 – In a second part of this discussion, the district court’s other opinion will be considered, i.e., the case by the employer against WGA and Standard by way of cross claims. As will be discussed in more detail, the district court makes serious errors in that decision.

Comments