If a health insurer issues coverage to an employer group, stipulating that coverage is available to employees regularly working 30 hours per week, who may decide whether an employee meets the eligibility requirement – the employer or the health insurer?

That was the issue in Carolina Care Plan v. Audie Brown Auto Sales, a case recently decided by a South Carolina Circuit Court.

When one of the employees covered under the plan became seriously ill, she took time off from work. Ultimately, the expenditures on her care reached some $650,000.

In December 2005, it appears that the health maintenance organization picked up on the fact that the employee, one Gloria Follett, had not worked for the employer since June 2004. So, the insurer sues to recover benefits paid during the period that Gloria was not, on its view, entitled to coverage.

The case was filed as a state court action, seeking recovery on theories of breach of contract and negligent misrepresentation.

The defendant removed the case to federal court. In remanding to state court, the federal judge opined:

In the case at bar, the Court concludes that the HMO was not performing a fiduciary function in connection with the decision of whether an employee was an active employee who was working more than 30 hours per week. It relied solely on the employer, who was the plan administrator, to maintain information and provide to it as to which employees worked sufficient hours to qualify for coverage under the policy. (See GBA Resource Manual, Section 4, attached to Complaint.) Therefore, although the plaintiff may have served as a fiduciary as to benefits decisions, and actions relating to those decisions would be preempted by ERISA, its functions relating to the instant action were not fiduciary in nature. Therefore, complete preemption would not apply.

The Court finds the case analogous to Sonoco which was an action by the employer against the group health insurer, PHP, who was the predecessor to Carolina Care Plan, the plaintiff in the case at bar. The complaint alleged causes of action for breach of contract and breach of contract accompanied by fraudulent act based upon the cancellation of the policy. The District Judge denied the motion to remand, but the Fourth Circuit reversed on the basis that the employer lacked standing to assert claims under ERISA’s civil enforcement provision and held the action was not completely preempted. The Court reasoned that the employer was not a participant or beneficiary under § 502(a)(3) and that it therefore would not be considered a fiduciary under ERISA unless it was a fiduciary under ERISA and it was “asserting the breach of contract claims in its fiduciary capacity.” Id., 338 F.3d at 372.

The Court explained that a plan sponsor such as Sonoco “may function as an ERISA fiduciary in some contexts, but not in others,” citing Darcangelo v. Verizon Communications, Inc., 292 F.3d 181, 192 (4th Cir. 2002). “Where, however, a plan sponsor’s claims in a lawsuit relate solely to its own injuries, and not to its fiduciary responsibilities to the plan or to the plan’s participants and beneficiaries, it is not acting as an ERISA fiduciary under 29 U.S.C. § 1002(21)(A).” Id., 338 F.3d at 373.

The United States Supreme Court has held that provisions of HMO documents are not ERISA plans as such but that the agreement between an HMO and an employer may provide certain elements of a plan by setting out rules under which beneficiaries are entitled to care. Pegram v. Herdrich, 530 U.S. 211 (2000). Although an HMO is not an ERISA fiduciary merely because it has discretionary authority over its own HMO business, it may be considered a fiduciary within the meaning of ERISA if it administers the Plan. However, a mixed eligibility and treatment decision made by HMO is not a fiduciary act and cannot serve as basis for breach of fiduciary duty claim under ERISA.) Pegram, 530 U.S. at ____. As in Pegram, in the case at bar, the HMO was not acting as a fiduciary with regard to
the recordkeeping function of determining which employees were working at least 30 hours for the company.

Remanded to state court, the case proceeded to a bench trial.

The state court held for the employer, finding that the state law claims were, notwithstanding the federal court’s opinion, preempted, but that nonetheless, the health insurer had not proved its case on the state law claims in any event.

Note: Thanks to Rob Hoskins, counsel to the defendant employer, for providing me with a copy of the decision.

Fiduciary Status Of Employer – Key to the state court opinion was the aspect of the policy characterizing the employer as a fiduciary. While designed to protect the carrier from liability, the state court concluded that the role conferred upon the employer carried with it the discretion to make eligibility determinations.

Source Of Obligations – The state court also viewed the decision in Great-West Life & Annuity Ins. Co. v. Information Systems & Networks Corp. — F.3d —-, 2008 WL 1211993 (C.A.4 (Md.)) (April 11, 2008) (read here) as supporting its view that the state law claims were preempted. This decision was not handed down until after the remand opinion was written. The Fourth Circuit in Great-West had focused on the fact that the duties at issue were imposed by documents extraneous to the plan. The plaintiff in CCP v. Audie Motors pled its case in terms of duties arising under the plan document.

In the Great West Life & Annuity case cited above, the Fourth Circuit held that ERISA did not preempt a stop loss carrier’s claims for reimbursement of funds “fronted” to pay claims where the resolution of the case did not require interpretation
of the plan terms nor was in any way dependant upon the plan being governed by ERISA.

See also – Canada Life Assuranc v. Lebowitz 185 F3d 231 (4th Cir. 1999), relied upon by the state court on the active at work issue.