The Sixth Circuit's recent unpublished opinion, Clarcor, Inc. v. Madison Nat. Life Ins. Co, Inc., highlights the potential consequences that employers may face if they fail to timely notify employees of qualification for COBRA coverage in accordance with the procedures set forth in their plan documents.

In Clarcor, the employer provided health insurance for its employees through a self-funded medical plan and maintained a stop-loss policy with Madison National Life Insurance Company, Inc. to insure against individual claims in excess of $250,000. The policy covered all amounts over $250,000 that were covered under the terms of the health plan. The health plan provided that employees were eligible for benefits so long as they remained full-time employees. Despite plan provisions to the contrary, the employer had a "corporate practice" of continuing benefit deductions for employees receiving short-term disability, including beyond the end of an employee's FMLA leave. This practice proved to be costly for Clarcor when an employee on short-term disability leave that extended for several months beyond the end of her FMLA leave incurred claims in excess of $250,000.

The Court of Appeals affirmed the district court's decision that no stop-loss coverage was available for expenses incurred under a former employee's COBRA coverage where COBRA continuation coverage was not timely offered after the expiration of a former employee's FMLA leave. Because neither the plan document nor the stop-loss policy provided for continued coverage during an employee's entire short-term disability leave period, the court concluded that COBRA continuation coverage was not timely offered. Thus, Madison National Life had no obligation to provide stop-loss coverage to Clarcor.

This recent case is an excellent example of the importance of insuring that employers follow the terms of their written benefit plans and timely provide notice of COBRA coverage upon the occurrence of a qualifying event. In addition, employers should verify that the terms of their stop-loss policies are consistent with the terms of the underlying plans. Even if its actions are well-intentioned, an employer will be held to the terms of its plan document where it fails to provide such timely notice to qualifying employees. In addition, although Clarcor specifically involved a dispute with a stop-loss carrier, the same concerns apply where a plan is fully-insured and an employer fails to provide timely notice of COBRA coverage under the terms of the plan.