Guest Article

From Mandated Health Benefits--The COBRA Guide, published by Thompson Publishing Group, Inc.

State Law Continuation Coverage Still Governed by ERISA, Court Rules

Summary: A federal district court rules that state law continuation coverage extends a group member's coverage and therefore falls under the original ERISA plan.

(May 7, 2001) - Based upon New York law and group health plan terms, state law continuation coverage extends the group member's coverage and therefore falls under the original ERISA plan, a federal district court found. Therefore, the court held that a covered dependent's state law claims against a group health insurer were preempted by ERISA. The case is Rubin-Schneiderman v. Merit Behavioral Care Corp., 2001 WL 363050 (S.D.N.Y., April 10, 2001).

Facts of the Case

Eric Rubin-Schneiderman's parents owned Barson Hardware Co., Inc. Barson's group health plan, a preferred provider organization (PPO), was insured by Empire Blue Cross. Barson typically had fewer than 20 employees and therefore was exempt from the federal COBRA law. However, the company was obligated to follow continuation coverage requirements under New York State law, which provides that a disqualified individual can either continue coverage under the "group contract's terms and conditions" for 18, 29 or 36 months -- depending on the qualifying event -- or convert to an individual policy. Rubin-Schneiderman was a covered dependent under the plan until he no longer met eligibility requirements by turning age 19. He then elected state law continuation coverage under the group contract.

After a dispute arose regarding Merit's denial of out-of-network care, Rubin-Schneiderman brought state law negligence claims against Empire, Merit and an Empire physician. After the defendants had the case removed to federal court on ERISA preemption grounds, Rubin-Schneiderman asked that the case be remanded back to state court on the basis that his policy was not governed by ERISA.

The court noted that for ERISA to govern the terms of an insurance policy, that policy must be sufficiently connected to an ERISA plan. Rubin-Schneiderman argued that his continuation coverage essentially severed his plan from his parents' ERISA plan because the continuation was not a plan benefit, but a "creature of state law."

The court disagreed, indicating that based upon New York law and the policy terms, continuation coverage extends a group member's coverage for a limited time when group membership ends, which suggests that the continuation coverage falls under the original ERISA plan. The court noted that, regarding the federal COBRA law, courts have held that COBRA coverage remains part of the ERISA plan.

Rubin-Schneiderman asked the court to follow the reasoning of a few courts that conversion to an individual policy severs the policy from the ERISA plan. However, the court pointed out that most courts have held that a conversion policy remains part of the ERISA plan. Moreover, even the cases cited by Rubin-Schneiderman stated that continuation coverage remains part of the ERISA plan.

The court determined that the reasoning in various court decisions on COBRA coverage applies in Rubin-Schneiderman's case regarding state law continuation coverage, in that:

1. the ability to continue coverage arises as the result of enrollment in an ERISA plan;
2. the terms of the continuation coverage are identical to those of the group contract; and
3. the employer has continuing obligations in administering the policy (the court noted that New York explicitly provides that premiums are to be sent directly to the employer).

Therefore, the court held that Rubin-Schneiderman's continuation coverage did not sever his policy from his parents' ERISA plan. Therefore, his coverage remained subject to ERISA's provisions, and his motion to remand was denied.

Conversion Principles Reinforced in Separate Case

The principles involving how ERISA applies to conversion options under COBRA coverage were considered in a case involving an insurer's alleged failure to convert a group life insurance policy to individual coverage. In noting that state law claims against the insurer were preempted by ERISA, the court in Levine v. Transamerica Life Companies, 20001 WL 333119 (E.D. La., April 5, 2001) cited COBRA case law, including:

• Painter v. Golden Rule Insurance Co., in which the 8th U.S. Circuit Court of Appeals found that:

  [T]he conversion policy came into being as a result of Painter exercising her right under the group policy to obtain this specific insurance policy. Thus, the right to a conversion policy was part of the plan or program "established" by [her former employer] to provide medical benefits for its current and former employees. As such, the conversion Policy is a component of [her former employer's] ERISA plan. A suit to recover Conversion Policy benefits is governed by [ERISA].

• Greany v. Western Farm Bureau Life Insurance Co., where the 9th Circuit reached a similar conclusion.

Implications

These two cases raise interesting interpretations on applying ERISA and ERISA preemption rules to individual conversion health policies. To the extent the Rubin-Schneiderman case involves state law continuation coverage rules (and not individual conversion policies), the outcome is probably correct. State continuation coverage requirements mean that coverage under the group health plan is continuing. Therefore, claims for coverage under that continued group health plan (which is maintained by the employer) should be governed by ERISA.

However, these cases appear to be incorrectly interpreting the law where they deal with individual conversion policies. If a court considers the legal requirements carefully, it will find a distinction between administering the right to convert to an individual policy and the coverage provided under an individual policy. Typically, the administrative rules governing conversion rights under a group plan are spelled out in the plan and actually can be said to derive from the terms of the ERISA group health plan. On the other hand, once the individual conversion policy is issued, the employer typically has no involvement with the coverage terms. Indeed, it is possible that the employer maintaining the group health plan could terminate that plan and yet the former employees who converted coverage would still have their coverage through the insurer. In such a case, it is hard to see how that coverage could be construed as being through an ERISA plan (which must be a plan maintained by an employer).

Excerpted from the June 2001 supplement to Mandated Health Benefits-The COBRA Guide, ©Thompson Publishing Group, Inc., 2001. All rights reserved

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