Including exclusions on your priority list

There is a myriad of factors to consider when making changes to health benefit plan documents, many of which span well over one hundred pages and involve thousands of provisions. However, there is arguably no more important element to examine than that of exclusions — and how subsequent changes to such plan terms will manifest themselves going forward. To that end, it is worth considering the recent court case of Foote v. Beverly Hills Hotel & Bungalows Employee Benefit Employee Welfare Plan, 2022 WL 3134120 (C.D. Cal. 2022) which stemmed from a participant involved in a costly accident and later revolved around whether the participant’s revised health benefits plan, one that removed its illegal acts exclusion and was in effect at the time of the eventual benefit denial, would take precedence over the original plan that was effective when the accident occurred.

The legal development leading to this case being decided at the United States District Court for the Central District of California went as follows: A person who was severely injured in a motor scooter accident incurred over $4 million in medical expenses. However, said individual’s claims for benefits under his employer’s self-insured health plan were denied because the plan, as of 2019, had an “illegal acts” exclusion and at the time of the accident in late 2019, the employee’s driver’s license did not include the credential required for operating a scooter. Also of note, subsequent communication between the employer and its then-TPA about the participant’s medical expenses occurred in late 2019, during which time the employer’s health plan had the “illegal acts” exclusion. From the employer’s perspective, the employee had been injured in the midst of committing an illegal act, which, as the plan had stated at the time, meant no benefits were payable.

After failing to achieve desired results in the plan’s claim and appeals process, the participant filed a lawsuit. As the participant argued to the court, his claim for benefits was denied in 2020, when the new plan, one that did not have an “illegal acts” exclusion, was in effect. As the participant further reasoned, the new plan, the one effective January 1, 2020, should be applicable to his situation. Consequently, the court ruled in favor of the participant, citing Ninth Circuit precedent establishing that an ERISA cause of action (grounds for bringing a lawsuit) surfaces when benefits are denied. As such, once the 2019 plan — and its illegal acts exclusion — was no longer in effect, neither the plaintiff nor the defendant could abide by its terms. Sans the illegal acts exclusion, logistical matters regarding the driver’s license endorsement were now irrelevant, and it was decided that the proper remedy was payment of benefits due under the new health plan’s terms.

This case, and its subsequent outcome, speaks to a very critical, and often overlooked, matter — changing exclusion language in plan documents, whether it be via amendments or restatements, can trigger confusion as to whether modifications are in effect at the time of the accident or rather when a subsequent claim is processed. Evidently, it is the latter and as this particular case demonstrated, if a plan wishes to change its terms of coverage so as to provide benefits for medical expenses incurred from accidents involving illegal acts, the amended language will be effective for all subsequent proceedings as of the new plan’s effective date. As such, it is incumbent upon plan administrators charged with adjudicating benefit claims to ensure that the proper plan terms are applied within the respective timeframes.

Related: The 10 biggest benefits issues to watch in 2023

On another level, Foote elucidates the significance of incorporating properly intended language into plan documents. A one-sentence exclusion, or rather lack thereof, can literally cost a health plan millions of dollars, leading to considerably higher premiums and reduced plan assets. Regardless of how an employer chooses to develop their plan document, it is of paramount importance to ensure not only the language is precisely tailored to the circumstances of the plan participants, but that any wording changes, even the most seemingly subtle ones, are scrutinized for the sake of anticipating future outcomes. In terms of the illegal act exclusions, which are often complex due to variations in state law, it is vital that plan administrators use their discretionary authority wisely to regularly assess the applicability of these exclusions and understand how such language aligns with the manner in which claims are administered.