Starr v. Metro Systems, Inc. (8th Circuit, 8-24-06)

Failure to Provide Proper COBRA Notices Can be a Very Costly Mistake

Gary Starr worked for Metro Systems, Inc., a Minnesota corporation, and he was covered under a health insurance plan provided by Metro. After Starr was terminated, he sued Metro in federal district court in Minnesota for failure to provide notice of his rights under COBRA to continue his health insurance coverage.

Starr won at trial and the court ordered Metro to pay $113,000.00 of medical expenses which would have been covered if Starr had received notice and chosen to continue coverage.

However, the trial court did not award Starr's claim for attorneys' fees and statutory damages ($100 per day) for failure to provide notice. Starr appealed the failure to award statutory damages and attorneys' fees.

Deborah Masanz, Metro's vice president, prepared the notice on March 3, 2000, seven days after Starr's termination. However, Starr's computer expert testified that the notice apparently got deleted from her computer shortly after being prepared. It was stored by William Meyers, Metro's chief financial officer, in an area of the server unavailable to Masanz.

After Starr complained to Masanz that he never received a COBRA notice, Masanz replied that her records indicated that she had sent it on March 3 and she sent a "duplicate copy" which was not actually a copy but a recreated document which was not exactly identical to the document later found stored on Meyers' computer.

In her depositions and initially in court, Masanz testified that she remembered mailing the notice, but later in court she ultimately admitted that she could not remember if she mailed it or not. There were no records indicating that it was actually mailed.

The 8th Circuit Court of Appeals stated that although it might have originally decided differently, the award of statutory damages was within the discretion of the trial court and the failure to award statutory damages was not an abuse of the trial court's discretion. The trial court had found that Masanz had not acted in bad faith by failing to give timely notice to Starr. She had created the notice and she did not willfully fail to send the notice. The record keeping system failed, but not due to a disregard of COBRA's notice requirement.

The 8th Circuit did hold that the trial court abused its discretion in failing to award attorneys' fees. The five factors to be considered in determining whether to award attorneys' fees are:

(1) bad faith;
(2) ability to pay;
(3) whether the award might have a future deterrent effect;
(4) whether the case would benefit all plan participants or resolve a significant legal question with regard to ERISA; and
(5) the relative merits of the positions of the parties.

The 8th Circuit Court of Appeals held that although the trial court did not find any bad faith and there was no benefit to all plan participants, the other three factors: ability to pay, future deterrent effect, and relative merits of the case all weighed toward an award of attorneys' fees.

Conclusion

It seems like the trial court could have found bad faith by Metro in light of Masanz's conflicting testimony and her previous response to Starr that "her records indicated that she had sent a notice on March 3" when she in fact had no such records and she sent a recreated notice purporting to be the original notice when she in fact knew it was not the original notice.

Even without a finding of bad faith, this company was required to pay its former employee's medical expenses as if he had chosen to continue his insurance. In this case it was $113,000, but it could have been almost any amount.

In addition, the company had to pay an unstated amount of attorneys' fees to its former employee's attorney, could easily have also been held liable for the $100 per day penalty, and, of course, had to pay its own attorneys.

Employment Notes is a general discussion of legal issues and is not intended to be legal advice. Readers should seek the advice of competent legal counsel to review the specific facts and law regarding any given legal matter.

@ Sharon Hobbs, Rinke Noonan, 2006