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A state law requiring an employer to extend group health insurance coverage to new employees permits an insurer to restrict coverage to "eligible" new employees, according to an Illinois appellate court.

Linda Johnson-Maday began working for North Suburban Medical Consultants Ltd. in June 1991. She met with her employer's insurance agent and filled out an application for group health coverage. The application did not mention Linda's extensive hospitalizations in 1989 and 1990 for pancreatitis and related disorders. Her insurance application was accepted.

In 1991, she was admitted to a hospital for viral gastritis. She remained at the hospital for two months. The insurer refused to pay the hospital bill on the ground that Ms. Johnson-Maday materially misrepresented her medical history. She was readmitted to a hospital in 1992 for septicemia and again stayed two months. Her bill from the two hospitalizations totaled almost $300,000. The insurer again refused to pay. Ms. Johnson-Maday sued the insurer for breach of the insurance contract. The insurer countersued, seeking rescission of the insurance contract. The trial court ruled for the insurer.

On appeal, Ms. Johnson-Maday argued that state law required the insurer to offer coverage to all new employees of North Suburban regardless of pre-existing conditions. According to the court, the state law permits the insurer to restrict coverage to "eligible" new employees and did not prevent the insurer from establishing any contractual limit on eligibility.

The court said the law did not require the insurer to cover all new employees regardless of eligibility. Ms. Johnson-Maday's misrepresentation of her medical condition could have materially affected the insurer's risk, the court said. The trial court decision was affirmed.

Johnson-Maday vs. The Prudential Insurance Co. of America, Nov. 9, 1995; rehearing denied, Nov. 29, 1995 (BI/02/A.-$10).

Company wins early retirement ruling

Does the Employee Retirement Income Security Act require an employer that sells a business but retains the pension plan covering the employees of that business to credit service with the purchaser when determining the eligibility of those employees for an early retirement benefit subsidy? The 3rd U.S. Circuit Court of Appeals ruled it did not.

North American Philips Corp. sold its Magnavox division in October 1993 to MESC Electronics Systems Inc. The plaintiffs in this case were Magnavox employees who had participated in Philips' pension plan prior to the sale. Under the Philips plan, 65 was the normal retirement age. However, participants who were at least 55 could elect to retire earlier with reduced benefits, except that the benefits would not be reduced if the sum of the participant's age and years of service at retirement was at least 85 (the Rule of 85). Philips retained sponsorship of the plan after the sale. But the plan was amended to allow no credit for subsequent service with MESC except for one year. The employees here sued, claiming Philips violated ERISA's prohibition against decreasing accrued benefits by the plan amendment. The trial court ruled against the employees.

The appellate court said ERISA does not mandate the creation of pension plans, nor does it dictate the benefits to be afforded once a decision is made to create one. Thus, Philips was at liberty to define the early retirement benefits in any way it chose, the court said, including a stipulation that only service to Philips or an affiliate would be credited toward the Rule of 85 requirement. The court could find no provision of ERISA that contained a contrary doctrine. The trial court decision was affirmed.

Dade vs. North American Philips Corp., 3rd U.S. Circuit Court of Appeals, Nov. 1, 1995 (BI/02/Ju.-$10).

These abstracts were prepared by Mayo H. Stiegler. Copies of these decisions are available by sending a $10 check payable to Mayo H. Stiegler, to Business Insurance, 740 N. Rush St., Chicago, Ill. 60611-2590. List the number for each opinion.