Tuesday, August 25, 2009

Self-Funded Benefits

Posted by Michael Russell

Handling a NJ PI case for a Connecticut resident. Lien alleged for plan that is not fully self-funded. Does CT recognize the made whole doctrine?

Thanks in advance,
NJ Attorney

Before delving into the state specific issues it is important to clarify the status of this plan which is described as “not fully self-funded.” I hope the points below are helpful to you….

Partially Funded Plans. First and foremost, a benefits Plan may have certain components which are self-funded and others which are insured. Thus, it is possible that certain components, including the component which paid for a client’s medical benefits, are fully self-funded while other components remain partially or fully insured. The different components, while part of the same Plan, remain independent of one another. The self-funded components will be exempt from state law but the insured components will be subject to state law. Thus it is important to first verify whether your client’s benefits were provided by a part of the Plan that is fully self-funded or only partially self-funded. If the specific benefits provided were only partially self-funded then our analysis goes on.

Making the Determination. To determine whether a plan is insured it is necessary to go beyond the plan language. To verify a plan’s classification it is helpful to inspect the Form 5500. This Form is filed annually with the Department of Labor. Lines 7 and 9 on Schedule A of this form will provide you with the answer.

“Stop-Loss” Coverage. If the Plan benefits provided were both partially funded and partially insured we are dealing with a “stop-loss” coverage situation. These situations arise when an employer or Plan purchases insurance coverage intended to reimburse it for higher or catastrophic losses. In the case of a higher loss, a self-funded Plan would pay the entire loss but would be reimbursed for any amount above where the insurance policy began to assume responsibility (known as the “attachment point”). The use of “stop-loss” insurance does not change a self-funded plan into an insured plan. However, there is one exception.

In some cases, the attachment point is set very low and the Plan is attempting to function as and enjoy the benefits of a self-funded plan under ERISA when in fact it is really an insured plan. Such examples would include a specific attachment point of $500 (individual claim) or $25,000 for an aggregate attachment point (total benefits paid for all participants). In such cases, courts will look to the substance of the Plan rather than its alleged form. In determining whether a stop-loss Plan is truly self-funded or merely illusory, a court will look to the loss experience and how often the stop-loss coverage has applied.

Connecticut. Connecticut is an anti-subrogation state, although plans with specific subrogation language may fall outside the state statute. The “made whole doctrine” has not been directly addressed by Connecticut. The one exception is a bankruptcy case (In re De Lucia, 261 BR 561). While the doctrine has not been specifically addressed it appears that the doctrine may be able to be overridden by the contract terms of the Plan or policy. (The Auto. Ins. Co. of Hartford v. Conlon, 216 A.2d 828, 829 (Conn. 1966)).

My best,
Michael Russell