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| Inadequate COBRA Notice Results In Damages And Penalties |
September 3, 2003
Santa Rosa, CA |
This recent federal appeals court case looks at the COBRA election notice used by an employer/plan administrator and finds it lacking. So much so, that the trial court was ordered to assess the amount of damages the employer must pay for the beneficiary's medical expenses. And, for failure to comply with repeated requests for its Summary Plan Description, ERISA penalties were ordered as well.
What happened in this lawsuit:
Marie Emilien's employer, Stull Technologies, closed the plant at which she worked and
transferred its operations to another location. Marie chose not to work at the other plant
and Stull offered her group medical benefits through the end of the month following her
termination so long as she worked continuously through November 6, 1998. But Marie became
ill and was hospitalized on October 21, 1998. (She subsequently died on January 7, 1999.)
Stull claims that it sent Marie a letter on October 30 that contained two critically important
pieces of information: 1) notice of her termination date and 2) notice that due to her termination,
she would need to file a COBRA election form to maintain her health coverage. Marie's husband,
as her representative, claimed they never received that letter from Stull. Moreover, they only
learned that Marie had been terminated from the health plan when her husband tried to fill a
prescription for her in November.
The Letter:
The letter in question was the only means by which Stull informed Marie that her employment had been terminated retroactively to October 21 due to her failure to remain at work until November 6. But equally important, this letter also purported to inform Marie that she was being excluded from the company's group medical plan and would have to complete and return COBRA election forms in order to retain coverage. Stull could find no copy of the letter and could not show that it had been mailed according to customary business procedures. Marie made no COBRA election and Stull refused to pay her medical bills.
Insufficient COBRA Notice: Marie's husband argued in his lawsuit that the October 30
letter from Stull was inadequate and did not fulfill the plan administrator's legal obligation
under ERISA to give accurate information in clearly understood language about COBRA election rights. The appeals court agreed.
Stull's letter contained a form entitled "COBRA ELECTION FORM AND NOTICE," which used the term "qualifying event"
but did not define that term. The judge noted, "It is highly unlikely that a lay person would understand the meaning of the term 'Qualifying Event' without any explanation of that term." And in fact, Stull's human resource administrator was herself confused by the wording of the letter: She testified that the form gave Marie 45 days in which to elect COBRA, even though the law requires a minimum of 60 days' notice.
The appeals court ruled that because Stull failed to provide Marie with a readily comprehensible COBRA election
form, it was liable for her health costs, which were to be determined by the trial court.
Request for Summary Plan Description: Stull compounded its problems by failing to respond to
repeated requests for a Summary Plan Description. ERISA requires plan administrators to comply with requests
for plan information within 30 days or be liable to the beneficiary in the amount of up to $100 per day.
Stull did not supply a complete copy of the plan document until 13 months after it was requested. The appeals
court ruled that ERISA sanctions were appropriate and ordered the trial court to set the amount of the penalty,
with this hint: "Since bad faith can be a factor in determining the size of the penalty, the district court may
want to consider its existence."
Conclusion: Although current regulations do not spell out the required contents of COBRA election notices, guidelines have evolved that require adequate notice of rights and benefits in a manner that the average beneficiary can understand. (Recently proposed COBRA regulations contain more specific requirements, along with a model notice, but are not yet final.) As the Emilien case illustrates, to avoid costly litigation, employers must use COBRA notices that are legally adequate and clearly understood, and must provide Summary Plan Descriptions containing the required COBRA information when requested.
(Emilien v. Stull Technologies, Corp., U.S. Court of Appeals, Third Circuit, Dkt.
No. 02-1422, July 18, 2003)
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