COBRA Case Shows Why Indemnification is Important

June 10 , 2008

A Nevada employer thought it had its benefit responsibilities all taken care of. It hired a third party administrator (TPA) to manage its health administration, including communication of eligibility information to the carrier.

What the employer did not realize is that mistakes happen. When they do, you want to be protected. In the case of Hecht v. Summerlin Life, the TPA sent a terminated employee a COBRA election notice. The TPA communicated the loss of coverage to the carrier but it did not communicate the qualified beneficiary’s COBRA election until six months later. As a result, her medical claims were denied.

She sued the employer and the carrier, which brought the TPA into the lawsuit. The TPA argued that it could not be sued under COBRA because it was neither the employer nor the plan fiduciary. The TPA made a motion to be dismissed from the case, but the motion was denied, and the case continues.

Employers should carefully examine indemnification clauses in their benefits-related service agreements. Key elements of a fair and reasonable indemnification provision include:

• Holding the TPA to a standard of care consistent with industry practice
• Protection when the TPA makes a mistake
• No dollar limitation on the amount of protection
• Numerous hidden disclaimers

It is fairly common to see many TPAs and benefit vendors seek to limit their liability by capping it at a dollar amount or some multiple of monthly fees.

Infinisource has an excellent indemnification clause without such limitations. It is part of our standard service agreement for any service that we provide. It is backed up by errors and omissions policy coverage. You can ask your Regional Sales Manager about our indemnification protection, then compare it with your other vendors. Do not make the same mistake that the Nevada employer did, assuming that a benefit obligation, once delegated, is no longer a concern.