Tag Archives: federal court

Federal Court OKs Huge Wellness Fines

While most of us were buying supplies for partying on New Year’s Eve (in my case, I was in charge of bringing broccoli and Boggle), the federal court in the Western District of Wisconsin quietly handed down an earth-shattering decision in the Flambeau case, which went pretty much unnoticed due to the timing. You may recall this was the case where employees refusing wellness lost all insurance benefits. The case looked like it would be a layup win for the Equal Employment Opportunity Commission (EEOC).  After all, the Affordable Care Act (ACA) clearly states that penalties for non-smokers are capped at 30%, and this penalty was 100%.

But, here’s the rub: Flambeau conditioned the entire insurance benefit on participation in its “pry, poke and prod” program.  The company knew most employees hate “pry, poke and prod” programs to begin with, so they created a program so onerous that some number of employees would prefer to forego insurance altogether rather than participate in wellness.  And, indeed, that’s what happened at Flambeau. This decision means the company is getting away with it, saving thousands of dollars for each employee who refused to submit.

Make sure you catch that distinction between the 30% penalties and the 100% penalties:

(1) It is not OK to penalize an employee more than 30% for refusing to submit to a “pry, poke and prod” program if they already have insurance, or they can get insurance through the employer without this requirement.

(2) However, it is OK to say: “There is no incentive or penalty for wellness once you have insurance, but you can’t have insurance at all unless you submit.” If that seems like an artificial distinction, well, that’s because it is.  All an employer has to do is require pry-poke-and-prod before you get insurance.

Assuming other federal courts follow this district’s lead (as they usually do), employers create a 100% de facto non-participation penalty: If you don’t participate, you don’t get insurance, period.

The implications of this case:

(1) It will allow some vendors, such as Bravo, to double down on bragging about the “savings” from wellness by creating programs employees don’t like;

(2) Because the decision only applies to participatory programs and not outcomes-based programs, many companies will either not switch to outcomes-based programs or else maybe switch back.

The court’s decision also puts pressure on the EEOC to put the kibosh on this end-run around the Affordable Care Act’s wellness provision. The decision can, and should, be appealed. Otherwise, it is a de facto repeal of a big chunk of the Affordable Care Act.

The bottom line is that there is now universal agreement (albeit inadvertently in the case of HERO, which apparently didn’t mean to tell the truth, but failed to proofread their own document) that wellness loses money. Any pretense of “pry, poke and prod” being about the employee is gone. Obviously, forced wellness isn’t about trying to save the $0.99 PMPM (before program fees!) that HERO says can be saved with healthier employees. It’s about gutting the key ACA requirement that employers provide insurance.

And, unless the EEOC steps up in its final regulations or prevails on appeal of Flambeau, the opponents of ACA will have succeeded.

New Questions on Uber and Lyft

One of the more interesting and challenging issues to surface is the status of drivers at transportation network companies (TNCs) such as Uber and Lyft. Are some or all of them employees? A federal court in California just ruled that this issue may be resolved in a class action (although this is subject to appeal).

That, alone, is a difficult call. Here are two web sites discussing the issue.

http://www.newyorker.com/magazine/2015/07/06/gigs-with-benefits

http://www.thelegalintelligencer.com/latest-news/id=1202730474534/Avoiding-Penalties-When-Classifying-Independent-Contractors?slreturn=20150602053546

Commentary addressing this issue has focused primarily on the added expense created by employee status. “For an employer, the main difference between contractors and W-2 employees is that employers have to ‘withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee,'” according to the Internal Revenue Service.

Apart from these added expenses, status as an employee creates some difficult insurance challenges. Here a few:

–If you write a workers’ compensation policy for the TNC’s employees, how many employees are you insuring? Only those who work in the office, or the hundreds or thousands of drivers on the road?

–Most statutes or regulations covering TNCs such as Uber and Lyft require them to carry insurance on their drivers in various amounts — e.g., $1 million from from the time of agreeing on a ride to after the dropoff. Usually, there is a lower amount required for the time the driver is cruising with the app on looking to connect with a fare ($50,000 primary and $200,000 “excess” in California).

If the driver is an employee, these limits become largely irrelevant because the TNC, as the employer, is liable without limit for any injuries caused by an employee driving within the scope of employment. Put another way, the injuries are backed by all of the TNC’s assets, including any insurance it may carry.

–But the issue is more complex than that. What if the driver has a collision on the way to the city, but before turning on the app? Usually, when one is going to or coming from work, the commute is not considered to be in the scope of employment – i.e., no liability on the part of the employer. This “going and coming” rule changes, however, when the employee must use her car in the work. Obviously, TNC drivers must use their cars.

Take the case of Judy Bamberger. She used her car during work to visit clients and carry out other work-related chores. On her way home, she decided to stop for yoga and yogurt. As she made a left turn, she collided with a motorcyclist. Is the employer responsible? “Yes,” said the California Court of Appeal. In Moradi v. Marsh USA, Inc., 210 Cal. App.4th 886 (2013), the court held that her driving fell within the scope of her employment because, since she used her car in her work, going to and from work conferred an “incidental benefit” on the employer.

Thus, the TNCs’ liability may extend well beyond the “app on-app off” brackets.

–If this is not complex enough, consider this. Many drivers keep several apps on as they cruise. If a driver keeps three apps on and has a collision, is the driver an employee of all three TNCs? Does that change once the driver accepts a fare? What about the going and coming rule? If the app is not yet turned on, is the driver an employee of each company for whom the driver has an arrangement to drive?

One may imagine other “shared economy” scenarios where status as an employee will affect not only expenses line benefits, but also liability and related insurance issues.

Montana Clarifies Notice-Prejudice

On May 29, 2015, the Montana Supreme Court affirmed the application of the notice-prejudice rule in cases of third-party claims for damages. Atlantic Casualty Ins. Co. v. Greytak, 2015 MT 149, OP 14-0412 (Mt. 2015). The rule requires the insurer to establish prejudice as a condition to denying coverage when an insured fails to provide timely notice of a claim.

Background
This case arose from a lawsuit initiated by GTL Inc. against John P. Greytak and Tanglewood Investors Limited Partnership (collectively, Greytak), based on Greytak’s failure to pay GTL for obligations arising from a construction project. In response, Greytak filed construction defect counterclaims against GTL. Greytak and GTL later entered into a settlement whereby GTL would notify its insurer, Atlantic Casualty Insurance Co. (Atlantic), of Greytak’s claims. According to the agreement, if Atlantic did not defend GTL or initiate a declaratory judgment action regarding coverage, then GTL would allow a $624,685.14 judgment to be entered against it and Greytak would pursue Atlantic only for recovery of the judgment. GTL notified Atlantic of Greytak’s counterclaims approximately one month after the agreement with Greytak and approximately one year after GTL first received notice of Greytak’s potential counterclaims.

Atlantic initiated an action in the U.S. District Court for the District of Montana seeking a declaration as to whether it was required to defend or indemnify GTL. The District Court granted Atlantic’s motion for summary judgment and found that (a) Atlantic did not receive timely notice of Greytak’s claims against GTL and that (b) Montana law did not mandate Atlantic to demonstrate prejudice from GTL’s untimely notice. Greytak subsequently appealed to the U.S. Court of Appeals for the Ninth Circuit, which certified the question regarding the application of the notice-prejudice rule in the third-party liability context to the Montana Supreme Court.

Montana Supreme Court Decision
The Supreme Court followed the majority of jurisdictions, and its own ruling issued a week earlier when it adopted the notice-prejudice rule in the first-party context, and held that prejudice must be demonstrated to deny coverage when an insured provides untimely notice of a claim. The court reasoned that the purpose of the notification requirement was to provide the insurer with the opportunity to “defend its interest and to prevent or mitigate adverse judgments.” Additionally, the court noted that Montana public policy required a narrow and strict interpretation of insurance coverage exclusions to accomplish the “fundamental protective purpose” of insurance.

Despite discussing the rationale of the rule, which includes mitigating adverse judgments, the court declined to address the merits of the insurer’s claims of prejudice, reasoning that such determination was outside the scope of the certified question. Significantly, however, two justices issued separate specially concurring opinions, which effectively concluded that when an insurer receives notice of a claim almost a year after the insured engaged in litigation, executed a settlement agreement without the insurer’s knowledge and deprived the insurer of any opportunity to defend its interest and to prevent or mitigate adverse judgments, prejudice is presumed as a matter of law. Moreover, in her special concurrence, Justice Laurie McKinnon proposed a limited exception to the notice-prejudice rule to provide that prejudice to the insurer would be presumed as a matter of law when an insured failed to notify the insurer of a pending lawsuit until after judgment has been entered. 

Implications of the Decision
As a result of the Montana Supreme Court’s holding, Montana courts affirmatively join the majority of jurisdictions that similarly hold that the notice provision of an insurance policy is essentially ineffective to deny coverage for late notice of a claim, unless the insurer can demonstrate that it was prejudiced by the untimely notice. Notwithstanding and based on the Supreme Court’s analysis, if the insurer can establish that it was deprived of the opportunity to defend its interest and to prevent or mitigate adverse judgments or that the delay was not merely technical, then there is sufficient basis to deny coverage.

The court did not specifically state whether its holding was limited to occurrence-based policies, but quoted the “as soon as practicable” notice language from the typical commercial general liability policy, and footnoted that this language did not impose a specific time within which the insured must provide notice. Thus, whether the court would impose the notice-prejudice rule to claims made and reported policies is an open question under Montana law, but given the court’s footnote, it appears it would likely join the majority of jurisdictions that do not require an insurer to demonstrate prejudice resulting from late notice under a claims made and reported policy.