One of the hottest issues arising in ERISA practice is that of retiree health insurance and the ability of a company to modify the terms of that insurance long after an employee has retired and left active service. Because health insurance plans ( unlike pension plans) do not automatically vest and provide benefits, companies frequently try to reserve the right to modify health insurance coverage. This is especially true recently, because health insurance premiums have soared for all insurers.
The question of whether a company can unilaterally modify the terms and benefits of its health and welfare plans seems destined for a Supreme Court review, because the federal appellate courts have split directly on how an employer keeps its options open in the face of rising medical costs. A recent example involving the Caterpillar company lays out the analysis clearly, (Winnett et al. v. Caterpillar, Inc., 06-cv-00235, 5/16/07).
Caterpillar signed a series of collective bargaining agreements with its unionized workforce that included by reference descriptions of various health insurance plans. The terms of the plans, along with their summary plan descriptions, generally alluded to free or fixed premium lifetime health insurance coverage for both employees and their spouses, and in some cases promised such benefits specifically. However, summary plan descriptions for the retiree plans also contained specific clauses granting Caterpillar the right to unilaterally alter the benefits at the time and place of its choosing, and notifying the retirees that the benefits to which they might believe they were entitled would be altered accordingly. When Caterpillar told its retirees that they would have to start contributing to their health insurance expenses, the retirees sued in a class-action, claiming breach of contract.
Caterpillar's use of contractual language allowing unilateral modification or termination of health insurance benefits (so-called "reservation of rights" language) is generally considered dispositive by most federal appellate courts, including Caterpillar's home circuit, the Seventh, in Illinois. Even where there are explicit promises to pay lifetime benefits, the Seventh Circuit applies the rule that all clauses in a contract are to be given effect, if possible. Accordingly, the Seventh Circuit's interpretation of such reservation of rights clauses in a contract promising fixed or free lifetime insurance benefits is "the retirees are entitled to lifetime health insurance coverage, unless they aren't." In other words, the reservation of rights clause precludes a vesting of permanent health insurance benefits.
The Sixth Circuit in the Caterpillar opinion also gave lip service to the "all clauses must be given effect" rule, but then promptly ignored the reservation of rights language in the summary plan descriptions. For some reason, the Court found the reservation clauses to be "qualified by reference" to the collective bargaining agreements, and therefore ineffective in preventing vesting of the lifetime benefits. This is an interesting distinction, because the court held as black letter law that the collective bargaining agreements to which the reservation clauses referred had no effect on the retirees' claims, and, in fact, could not, because it was undisputed that the retirees were not part of the collective bargaining unit at the time the health benefits were modified.
In an ironic holding that must have the Caterpillar management kicking themselves, the court also found that Caterpillar's conduct in cutting its retirees a break and not enforcing its decision to make them pay a portion of their health insurance was further evidence that Caterpillar intended for the benefits to be fixed and unalterable for the life of the retirees.
Truly, no good deed goes unpunished. Had Caterpillar taken a hard line, and unilaterally imposed the additional costs, it would have actually strengthened its case. So much for rewarding good corporate citizenship.
This issue will obviously become more important as the retiree population swells. Medical costs are going nowhere but up, and the cost of these health and welfare plans looms larger and larger on the corporate bottom line. Given the wide disparity between two neighboring circuits, this is an area that is ripe for high court resolution.