Under COBRA, an employee who loses health insurance coverage as a result of a qualifying event must be given an opportunity to continue coverage at his or her own expense. The employer generally is responsible for identifying when a qualifying event occurs and providing the employee with a timely COBRA election notice. Continuing an employee's coverage as an active employee outside of COBRA after a qualifying event may leave the employer paying out of pocket for medical expenses incurred by an employee.

For example, as a result of a Tennessee federal district court's decision in Clarcor, Inc. v. Madison Nat. Life Ins. Co., an employer will pay over $250,000 in uninsured medical expenses for an employee who was not given proper COBRA election notice when she was unable to return to work following the expiration of her FMLA leave. When the employee did not return to work after FMLA leave, contrary to the terms of the medical plan, the employer continued her medical coverage as an active employee while she was on short-term disability leave for another six months, at which time it offered her COBRA coverage.

The employer submitted a claim to its stop-loss carrier for reimbursement of medical expenses incurred by the employee while on STD leave. In turn, the carrier refused to reimburse the employer for expenses incurred after FMLA leave, on the grounds that the employee should have been offered COBRA upon the expiration of her FMLA leave, and that the policy excluded expenses where COBRA notice was not timely provided. The court agreed with the stop-loss carrier, holding that the employee was ineligible for coverage after her FMLA leave ended except through COBRA, and held that the stop-loss carrier did not have to pay the claim.

This decision highlights the importance of being familiar with and following the provisions of medical plan language with respect to eligibility for coverage in order to identify qualifying events, and to avoid exclusions of coverage under either stop-loss contracts or fully insured medical plans when an employee remains employed, but is no longer eligible for coverage outside of COBRA.