Court holds employer liable for COBRA coverage even though employee was not eligible.

The Eleventh Circuit has held an employer liable for COBRA coverage to a terminated employee, even though the employee was not eligible for COBRA coverage under the terms of the plan, because the employee relied to his detriment on the employer's representations that coverage was available (National Companies Health Benefit Plan v. St. Joseph's Hospital, 11th Cir., 1991).

Facts

While Robert Hersh was employed by National Distributing Company (NDC), he and his family were covered under NDC's self-insured health plan (the Plan). On terminating his employment with NDC, Hersh informed his manager of his desire to continue medical coverage under the Plan pursuant to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). The manager consulted with the benefits claims clerk - who was aware that Hersh was also covered under his wife's employer's medical plan - and subsequently informed Hersh he was eligible. Hersh signed the continuation coverage agreement on his last day of work and paid the first monthly premium.

The continuation coverage agreement provided for up to 36 months of coverage, which could be terminated for "becoming covered under another group health plan because of either employment or remarriage." Hersh continued to pay the premiums, which NDC accepted and deposited. Hersh submitted minor claims, which were less than his deductible amount.

When Hersh's wife prematurely gave birth to twins, NDC informed Hersh that he was not eligible for COBRA coverage and that NDC was revoking his coverage retroactive to his date of resignation. NDC based the revocation on the fact that Hersh and his dependents were covered under another group health insurance plan. Hersh and his wife's employer (whose coverage of the Hershes was secondary to the NDC plan except for Mrs. Hersh, for whom it was primary insurer) sued for payment of claims, attorney's fees and prejudgment interest. A district court in Georgia found for Hersh and the secondary plan on all counts.

Eligibility for benefits

The Eleventh Circuit first examined Hersh's rights under the Employee Retirement Income Security Act of 1974 (ERISA) - and held that Hersh was ineligible for COBRA coverage because of his coverage under his wife's plan. The court looked to Congress's intent in enacting COBRA, and determined that, since there were no gaps in the NDC coverage and the coverage under the secondary plan, Hersh was ineligible for continuation coverage under the NDC plan. It was immaterial when the employee acquired other group health coverage; the only relevant question was when, after the election date, did that coverage take effect. In this case, that coverage took effect immediately.

Equitable estoppel 

Although Hersh was ineligible for coverage under ERISA, the Eleventh Circuit held that under the doctrine of "equitable estoppel," NDC could not deny Hersh coverage once it had made an offer of coverage and Hersh had relied on that offer in declining to obtain additional outside coverage. The doctrine of equitable estoppel consists of five elements.

* The party to be estopped misrepresented material facts.

* The party to be estopped was aware of the true facts.

* The party to be estopped intended that the misrepresentation be acted on or had reason to believe the party asserting the estoppel would rely on it.

* The party asserting the estoppel did not know, nor should it have known, the true facts.

* The party asserting the estoppel reasonably and detrimentally relied on the misrepresentation.

Hersh relied on a written memorandum and the verbal assertion of NDC representatives as to his eligibility for continuation coverage. NDC's benefits claim clerk was aware of Hersh's other coverage before he was offered COBRA coverage under the NDC plan. Had Hersh not relied on the availability of continuation coverage under the NDC plan, he would have bought additional outside health coverage, and had in fact found outside coverage for his family that would cover his wife's pregnancy and delivery. Thus, all the elements necessary to estop NDC from revoking the continuation coverage under its health plan were present.

Damage award

Because the NDC plan was the primary insurer of Hersh and his children, and the medical bills under the continuation coverage resulted from the birth and care of the premature twins, the court awarded Hersh all medical expenses of the children, plus the 18% interest that had been charged by the hospital on the unpaid claims. The court also awarded attorney's fees to both Hersh and his wife's employer, who joined in the suit, because NDC acted in bad faith by attempting to avoid its obligation after Hersh relied to his detriment on NDC's representations.

The Eleventh Circuit agreed with the Fifth Circuit in Brock v. Primedica, Inc., 904 F2d 295 (5th Cir. 1990); the existence of any comparable group coverage at the time of the employee's election for COBRA coverage renders the employee ineligible for coverage. However, if the employer offers coverage and the employee accepts and complies with the terms of the coverage agreement, the Eleventh Circuit held the employer responsible for continuation coverage under the plan. The Brock court found no detrimental reliance on the employer's representations, and did not hold the employer responsible for continued coverage.