Employers concerned about incurring fines or criminal liability for hiring undocumented workers now face a new challenge: large healthcare payouts and contract litigation when stop loss carriers refuse to honor claims arising from an undocumented employee’s policy. In a recent case before a U.S. District California Court, a small business sued its stop-loss carrier to compel payment of medical expenses resulting from the care of an undocumented worker’s U.S. citizen children.  Stop-loss insurance is purchased by companies who self-fund their employee benefit health plans and is designed to protect employers from incurring catastrophic or unpredictable losses by shifting liability to an insurance company for eligible losses that exceed deductibles.

The employee, who, it was later discovered, presented an invalid Social Security number at the time of hire, enrolled his newborn children in his company’s self-funded multi-employer health and welfare plan, which included a stop-loss contract to cover large claims. However, upon discovering the employee’s misrepresentation, the stop-loss carrier denied coverage on the grounds that the employee’s possibly undocumented status precluded his and his family members’ eligibility for benefits. Specifically, the stop-loss carrier argued that a worker without valid U.S. work authorization could not be an “eligible employee” under the terms of the plan. In response, the employer countered that the individual had presented a facially valid U.S. Permanent Resident Card during the Form I-9 employment verification process, leading the company to reasonably believe that he was work-authorized.

In the ensuing lawsuit, the Court interpreted federal and California contract law to conclude that the stop-loss carrier could not deny benefits based solely on the employee’s undocumented  status. However, the ruling turned on the fact that California’s Senate Bill 1818 specifically provided “all protections, rights, and remedies available under state law, except any reinstatement remedy prohibited by federal law” to “all individuals, regardless of immigration status who have applied for employment, or who are or who have been employed” in California. Thus, although the Court held against the stop-loss carrier in this instance, companies operating in states without laws that explicitly protect undocumented workers may face a very different outcome if their employees turn out to be undocumented despite presenting a reasonably valid work authorization document during the Form I-9 process. Accordingly, employers who use stop-loss contracts to guard against high claims in self-funded healthcare plans should carefully review such contracts for any inconsistencies in terms and coverage. Moreover, companies should also ensure that the plan document, summary plan description, and enrollment materials are clear as to eligibility and the right to rescind coverage (retroactively) in cases of fraud and intentional misrepresentation, as is permitted under the Affordable Care Act. Finally, all employers are advised to adopt comprehensive Form I-9 compliance policies in order to minimize the risk of hiring undocumented workers, which has been shown to trigger a host of known and novel legal liabilities.