Jacqueline B. Gold, CDP*
Michigan Family Law Journal
October 2002
As a routine matter of course in a divorce case, if one party doesn't have health insurance, the typical solution is a COBRA provision in a divorce decree. COBRA, (The Consolidated Omnibus Budget Reconciliation Act) which was passed in 1986, allows non-employee ex-spouses to continue to get health insurance through their ex-spouse's employer for up to thirty-six (36) months, as long as there are more than twenty (20) employees.1
Yet as I learned (from painful experience) early in my career as a divorce financial consultant, even when COBRA is available, it is not always a good option. Many years ago, I had a client named Diane who went on COBRA health insurance coverage after her divorce. Her husband had agreed to make the premium payments, which were in excess of $500 per month. Diane was 50 years old at the time of the divorce and maintaining her health insurance was the last thing on her mind. She was concerned about what would happen in her ex-spouse didn't make an alimony payment and whether or not she could afford the house she had insisted on keeping in her divorce settlement.
Six months after the divorce she developed a serious heart condition. At the same time, unbeknownst to her, her ex-husband stopped making the premium payments on her health insurance. When she went in for treatment, her doctor informed her that her insurance had lapsed. She went home to call her health care provider who confirmed that the policy had not only lapsed, but was actually cancelled. She argued to them that her divorce decree mandated that her husband keep it in force and offered to send them a copy. The unimpressed voice on the phone informed her that a divorce decree is not binding on third parties and they had no obligation to keep the policy in force once the premium payments hadn't been paid.
At this point, Diane panicked and contacted her attorney, who confirmed that the divorce decree indeed was not binding to the insurance carrier yet they could take her ex-husband back to court and attempt to force him to pay for a new policy for her. Thousands of dollars later in court costs and attorney fees, Diane was able to get an Order requiring her ex-husband pay for a new policy to replace the COBRA coverage. She breathed a sigh of relief - it seemed her problems were over. Or so she thought. Yet, upon submitting an application for a new policy, she was rejected due to her pre-existing condition and subsequently discovered that she could not obtain coverage that insured her treatment. Diane was forced to pay all of her substantial health related costs out of her pocket and eventually had to sell her home (at a loss) and liquidate most of her estate. Needless to say, she was not happy with her attorney and initiated a lawsuit for what she believed was negligent representation.
What I learned from this lesson was that there are simple steps an attorney can take to prevent a situation like this from occurring and they are fairly simple to incorporate into a settlement.
Precautionary Step One: Consider having the non-employee spouse write out the check for the premium payments.
In order for a health insurance policy to stay in force, the premiums must be paid on time. Even if the intention is that the employee spouse will pay for the health insurance of the non-employee spouse, it's best to include the premiums in a spousal support award or as part of the property settlement. The COBRA covered spouse has the most incentive to make sure the payments are made on time. If the payments aren't made to the non-employee spouse, the responsible party can always be brought into court. However, the health insurance can remain securely in place while the money is being recouped.
Precautionary Step Two: Encourage the non-employee spouse to investigate obtaining an individual policy versus COBRA.
Another little known COBRA trap is that when the thirty-six months are up, under current federal law, the insurance carrier has no legal obligation to continue the policy - even if the premiums have been made in a timely manner. If the insured develops a health problem during the three-year period, the carrier may decide to drop her (or him as the case may be) at the end of the thirty-six months. In Diane's case, even if her ex-husband had kept the policy in force, at the end of thirty-six months, she would have been 53 years old and not a good risk for the carrier. She may have wound up without coverage and been left in the same difficult financial predicament. I often recommend to attorneys that they put a clause in the final decree stating the ex-spouse will be responsible for the payments on COBRA or a similar individual policy (versus COBRA), the carrier cannot drop the coverage, as long as the premium payments are made regardless of the age or the current health of the party. Remember, the COBRA coverage should be kept in place until a new policy is in full force.
Precautionary Step Three: Discuss the COBRA risks with your client.
In some cases, even after you recommend that your client should pay his or her own insurance premiums, the client still insists that the ex-spouse write the checks. If this is the case, it's extremely important to document in your file (or better yet, have the client sign a written waiver) that you covered the potential pitfalls and your client chose to go another route.
Of course, there are certain cases where COBRA is the right choice for your client. The 35 year old who has been out of the workforce and has a plan in place to re-enter the job market is an ideal candidate for COBRA. Barring unforeseen circumstances, this strategy should work, as long as the premium payments are made. The important thing to keep in mind is that (as in all other divorce malpractice traps) a little foresight goes a long way in protecting your client - and yourself.
Endnotes
* Jacqueline B. Gold is a Certified Divorce Planner™ and provides litigation support to attorneys on the financial, tax and pension division issues in Michigan divorce matters.
1. It's important to remember that if there are not more that 20 employees, COBRA is not an option in a divorce case.