Guest Article

Plan Did Not Prove Illegal Actions Led to Medical Expenses, So Benefits Denial Based on Illegal Act Provision Was Improper

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Summary: A federal district court ruled that a group health plan's denial of benefits based on its exclusion of coverage for "illegal acts" was arbitrary and capricious because no evidence existed that a plan participant's illegal behavior caused his injuries.

A group health plan could not prove that a plan participant's illegal actions caused an accident in which he was injured and incurred medical expenses, a federal district court ruled. Therefore, the plan's denial of benefits based on its illegal act exclusion provision was arbitrary and capricious. The case is Celardo v. GNY Automobile Dealers Health & Welfare Trust, 2002 WL 192446 (E.D.N.Y., Jan. 11, 2002).

The ruling is disturbing because the plan language did not require causation to deny coverage. Rather it merely required participation in an illegal act. A lower standard of review should be reversed if unreasonable. Driving on the wrong side of the road and the subsequent accident involved participation in an illegal act. The injury, it would appear, reasonably could have occurred during participation in an illegal act.

Facts of the Case

Anthony Celardo was employed by Oyster Bay Nissan, which participated in the Greater New York Automobile Dealers Health & Welfare Trust. MagnaCare was the plan's third-party administrator. Celardo and his girlfriend were seriously injured when his car crashed into a tree. Before the accident, Celardo had placed dealer license plates on the car, which was uninsured, uninspected and unregistered. After the accident, he was issued summonses for, among other things: (1) driving a car that was uninsured, uninspected and unregistered; (2) driving on the left side of a double-line highway marking; and (3) improper use of dealer license plates (Celardo and Oyster Bay disputed whether he had permission to use the license plates on his care when the accident occurred). Celardo was also ticketed for having bald tires.

When the hospital submitted claims to MagnaCare, it denied coverage based on the plan's exclusion provision, which said:

In addition to any benefit limitations or exclusions listed in this Plan, the following charges are excluded charges and services with respect to the benefits under the Plan, and no benefits will be paid for any of the following charges or services: * * * (5) charges incurred resulting from . . . participation in a riot, insurrection or participation in or in consequence of having participated in an illegal act.

MagnaCare's denial letter listed the traffic summonses -- excluding the bald tire summons -- as the illegal acts. After an unsuccessful appeal of the denial, Celardo sued GNYADA in federal district court.

Both Celardo and MagnaCare noted that the court must determine whether the denial was arbitrary and capricious. The court noted that no basis existed for a determination that Celardo's accident and resulting health expenses resulted from the conduct that led to the summonses. Even if it could be assumed that Celardo's behavior constituted "illegal acts," no evidence existed that this behavior caused the accident and the resulting medical expenses.

Furthermore, MagnaCare did not claim that Celardo's summons for bald tires was an illegal act, even though it possibly could have been a factor in the accident as well, according to the court. As such, the court ruled that GNYADA's denial was arbitrary and capricious.

The court said that the dispute over the dealer's license plates did not influence its decision because no evidence existed that Celardo's injuries and subsequent medical expenses were incurred as a result of using those plates.

Implications

Under the arbitrary and capricious standard, the plan's decision must be upheld unless it is unreasonable. The plan's exclusion does not necessarily require causation. Participation in an illegal act is sufficient.

The ruling suggests more definitive language may be necessary to eliminate the causation element that this court required, regardless of whether the illegal act directly or indirectly caused the injury. The court did not decide whether the acts here were illegal, although a reasonable conclusion could infer the illegality of driving on the wrong side of the road that is plainly marked with double lines.

Other courts have deemed conclusions to be that injuries incurred in an accident occurred when an individual had a blood-alcohol content that was above the legal limit.

As health care cost inflation reaches double-digit amounts, plan sponsors are looking for means to cut costs. One way is to deny coverage when participants act irresponsibly. Questionable court rulings such as this thwart legitimate efforts to force responsibility onto the participants. Transfer of costs to the employer results in more costs to other responsible participants.

Excerpted from the April 2002 supplement to Employer's Guide to Self-Insuring Health Benefits, © Thompson Publishing Group, Inc., 2002. All rights reserved.

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