Employers that grant generous leaves for disability or maternity can run afoul of insurance contracts for medical, disability or life coverage. Here are two tips for employers to avoid leave-related lawsuits:
1. With self-funded health plans, make sure eligibility policies that are more generous than FMLA or other federal laws are approved by the reinsurance carrier.
A recent court case, Clarcor, Inc. v. Madison National Life Insurance Company, highlights a common error that employers make. An employee was granted leave under the Family and Medical Leave Act and, in accordance with the law, remained active under the employer's self-funded group health plan. Once FMLA leave had been exhausted, she did not return to work and was granted additional leave under the employer's short-term disability plan. The employee remained in active status under the group health plan until the end of the short-term disability leave, then terminated from employment and offered COBRA. However, the reinsurance carrier for the employer's self-funded health plan argued that the medical claims incurred during the short-term disability leave were ineligible for reimbursement because employees who are not actively working only are eligible during approved FMLA or COBRA absences. The court agreed with the reinsurance carrier.
While many group term life and disability insurance plans will allow an employee to remain active during leave of absences covered under FMLA, most plans do not extend eligibility beyond this required leave. This is especially true when the employee is not on leave due to his or her own disability and therefore would not be eligible for any "waiver of premium" coverage available under the group term life insurance plan.
Maternity leaves that are more generous than FMLA are another great example. Some employers allow new mothers to take unpaid leaves beyond the 12 weeks required by FMLA. While an employer's internal policy might consider employees on maternity leave after 12 weeks to be active employees, most group term life and disability insurance policies would not consider these employees to be covered after FMLA has expired.
2. Clearly communicate conversion rights and termination of coverage to employees on leave.
Employers must make sure they are communicating a lapse in group term life and disability insurance coverage to employees, who likely would assume that all benefits will continue. In addition, when an employee loses eligibility for coverage, employers should also make sure to offer any conversion coverage that is available under the terms of the policy as well.
Conversion options are more common under group life insurance plans and although these options are rarely exercised, some employees on extended leaves of absence may consider taking advantage of this feature if they are informed of the lapse of their coverage.
Even in circumstances where an extended leave is caused by the employee's own disability, employers must ensure that any loss of life insurance coverage is communicated to employees. Many employers believe that this is unnecessary since life insurance will continue automatically if the policy includes a "waiver of premium" clause. Waiver-of-premium clauses generally continue life insurance coverage without premium payment for employees who are not actively at work due to their own total disability.
However, there are limitations that employers should keep in mind.
One of the most common exceptions to waiver-of-premium clauses is that employees are only eligible if the disability occurs prior to reaching age 60. An employee age 60 or older usually is ineligible for waiver of premium when granted a leave due to his or her own total disability. The employer then must notify the employee that the life insurance coverage is not available anymore. The terms of most policies rarely go longer than FMLA.
In this example, communicating conversion rights is even more important. If an employee is disabled due to a terminal illness, life insurance coverage could be of utmost importance, and any failure by the employer to administer the plan correctly could have devastating consequences.
John F. Galvin, CEBS, is vice president of Longfellow Benefits, a Boston-based benefits consulting firm. He can be reached at
