"Stop-Loss" Scenarios in ERISA Plans

Question
Does the fact that a self-funded ERISA plan purchased stop loss insurance bring it back under NYs new anti-subrogation law? If so is it complete or does the plan still have a lien up to its deductible?

Answer
“Stop-Loss” Scenarios. 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 (between the plan and carrier) took effect (known as the “attachment point”). The use of “stop-loss” insurance does not change a self-funded plan into an insured plan. Bill Gray Enter., Inc. Emp. Health & Welfare Plan v. Gourley, 248 F.3d 206 (3rd Cir. 2001), American Medical Security, Inc. v. Bartlett, 111 F.3d 358 (4th Cir. 1997). Courts have reasoned that stop loss arrangements do not change the fact that the ultimate liability to plan participants remains with the Plan.

However, there is one potential exception. In some cases an attachment point could be 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 could look to the substance of the Plan rather than its alleged form. See Brown v. Granatelli, 897 F.2d 1351, 1355 (5th Cir. 1990). 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.

Thus if there is a low attachment point then it could be argued that the plan functions as insurance and NY anti-subro law should apply. Additionally the argument could be made that any payments made above the attachment point should be deemed an insurance arrangement and thus these amounts could be voided by the anti-subro law. A logical argument but there is no caselaw to substantiate and you would be hard pressed to find a plan which would agree to such an argument. However it never hurts to try. I would also note that sometimes stop loss carriers will actually assert a claim as well. These claims should not be honored as 1) there is no contractual privity between the stop loss carrier and the insured and 2) any claim would be barred by the anti-subro law.

I hope you found this helpful and please let me know if you have any additional questions.

My Best,
Michael D. Russell, Esq.