:: Is Stop Loss Reimbursement Subject To State Law?

Connecticut Steel Corp. v. Cordova (D. Conn) is a most unusual subrogation case.  It’s not a new case but it is remarkable and worthy of comment.  The case proceeds under (a)(1)(B), not (a)(3), though the plaintiff is the plan. The former is typically relied upon by plan participants in a claim for benefits, so that aspect of the case alone is peculiar.

Then, it appears that either the court misunderstood the facts, the facts were inadequately developed or the stop loss reimbursement was atypical – because the opinion proceeds on the view that the stop loss policy directly reimbursed the plan participant. That is inconsistent with the nature of stop loss insurance – which is issued to the plan sponsor or plan, but never the plan participant.

The court then proceeds to bifurcate the preemption analysis, applying state law to the “insured” portion, but not the “self-insured” portion of the reimbursement claim.

In the end, the case outcome really comes full circle with the court finding that the plan is entitled to attorneys’ fees on a substantially prevailing position – the self-insured claim – and the net economic position of the plan participant appears little the better for having a partial application of state law.

The courts that have addressed the issue have concluded that stop-loss insurance covers the employer not the employee, so the case is peculiar. See, Thompson v. Talquin Bldg. Prods. Co., 928 F.2d 649, 653 (4th Cir. 1991) (finding that “the purpose of the stop-loss insurance is to protect [the employer] from catastrophic losses, it is not accident and health insurance for employees). The Second Circuit has not spoken directly to the issue, but it did arise in passing in the Traveler/Blue Cross preemption case and I think the Second would agree with the Fourth on this.

Of course, states can regulate stop loss carriers – and an interesting question would arise if a state prohibited a carrier from demanding reimbursement from an employer/plan where there has been a subrogation/reimbursement recovery. Would that restriction constitute the regulation of insurance and be saved from preeemption? An interesting query.

For more on this case. see the review here.  I discuss this issue in more detail in :: The Myth Of the “Partially Self-Insured” Group Health Plan but the facts assumed in that post are that the employer or the plan is the policy holder.

Thanks to Roger Baron for calling attention to this case