Guest Article

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

State Bad-Faith Claims Related to COBRA Coverage Are Preempted, Courts Rule

(Sept. 17, 2001) - Two federal district courts separately ruled that state-law bad faith claims that related to COBRA coverage are preempted. The cases are Estate of Joan Audrey Coggins v. Wagner Hopkins, Inc., No. 01-C-199-C (W.D. Wisc., Aug. 3, 2001) and Harrelson v. Blue Cross and Blue Shield of Alabama, 2001 WL 849378 (M.D. Ala., July 25, 2001).

Coggins Case

Joan Audrey Coggins was a former employee of Wagner Hopkins, Inc. United Wisconsin Life Insurance Co. (UWLI) was the insurer of the company's group health plan. American Medical Security, Inc. (AMS), was the third-party administrator. Coggin's estate sued Wagner, UWLI and AMS in state court for bad faith and negligent infliction of emotional distress after AMS terminated her COBRA coverage in error, and allegedly failed to inform her about Wisconsin's risk pool coverage, as required by state law.

The court indicated that Coggin's claims turned on the question of whether the defendants improperly terminated her COBRA coverage. Because this raised an ERISA issue, the court deemed those claims to be preempted. However, the court did not dismiss the state-law claims. Rather, it allowed Coggins to amend her complaint to cite ERISA violations.

On the other hand, the court concluded that Coggin's claim regarding the state's notice requirement was not preempted by ERISA, because it does not differentiate between ERISA plans and those not governed by ERISA. But for other procedural reasons, the court dismissed that claim.

Harrelson Case

Kathy Harrelson had COBRA coverage under a group health plan issued by Blue Cross and Blue Shield of Alabama (BCBS). She received a letter from BCBS informing her that her insurance had expired. She selected one of two other plans BCBS offered to her. Harrelson later sued BCBS in state court for, among other things, bad faith related to an alleged delay in benefits approval.

BCBS alleged that because Harrelson's COBRA coverage was a continuation of coverage under an ERISA plan, her claims related to an ERISA plan and were preempted. Harrelson disagreed, and sought remand to state court.

The court noted that the 11th U.S. Circuit Court of Appeals (under which the case was being heard) uses a four-part test to determine ERISA preemption:

1. there must be a relevant ERISA plan;
2. the plaintiff must have standing to sue under the plan;
3. the defendant must be an ERISA entity; and
4. the complaint must seek compensatory relief akin to that available under ERISA.

Because all parties agreed that the first three tests were satisfied, the key issue was whether a claim for bad faith under Alabama law seeks compensatory relief like that available under ERISA. Harrelson argued that because the state law allows punitive damages -- which ERISA does not -- Harrelson was not seeking the same relief as under ERISA. However, the court rejected this argument based on prior 11th Circuit precedent.

Harrelson then argued that the state law was saved from preemption because it regulates insurance. Here, too, the court rejected this argument based on prior 11th Circuit precedent, and because her bad-faith claim conflicted with ERISA's civil enforcement provisions by creating an alternative remedy for obtaining benefits under an ERISA plan.

Implications

These cases reinforce the point that state law rules on "bad faith" or similar claims simply do not apply when the question is whether COBRA coverage was properly terminated. If a qualified beneficiary claims to be aggrieved due to a loss (or inappropriate denial) of COBRA coverage, the only available remedies are federal law remedies under COBRA.

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

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