A Wyoming locksmith worked for a company that, along with others, obtained its group health insurance through a trade organization, Wyoming Associated Builders (WAB). But the employee was diagnosed with bone cancer at the age of 26—and thereby hangs this healthcare coverage tale.

What happened. “Parsons” had worked for the Lock Shop of Cheyenne and was still covered by its plan. Undergoing radiation and chemotherapy and about to have a tumor removed, he intended to submit a huge bill to the insurance company. Before he could do so, however, WAB canceled the Lock Shop’s coverage. Its reason? The Lock Shop, which was having financial difficulties, had submitted its premium payment late for the third time in 6 months.

That payment was due no later than December 20—and a Lock Shop check was delivered to the bank on that date. But the bank had closed because of a huge snowstorm, so the check wasn’t posted to the proper account until the next day. WAB argued not only that it was late but also that it was neither an electronic nor a cashier’s check, as had been requested. Accordingly, WAB terminated the Lock Shop’s coverage—including that of cancer patient Parsons.

He sued for violation of his rights under the Employee Retirement Income Security Act (ERISA), which covers healthcare plans like the Lock Shop’s. Before a federal district judge, Parsons argued that the real reason WAB cancelled his employer’s coverage was to avoid paying his large claim. The judge agreed, noting that WAB’s policy didn’t require an electronic or cashier’s check, nor did the check need to be posted on December 20 as long as it was received. Parsons’ coverage, he ruled, was cancelled to save money for WAB. WAB appealed to the 10th Circuit, which covers Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming.

What the court said. WAB administrators said they didn’t know of Parsons’ pending claim when they terminated his coverage, but judges learned that one of them had spoken with Parsons’ father earlier in December and did know. Furthermore, judges found, as they said in their opinion, “The Lock Shop was not the only one in bad financial shape that year.” WAB had recently learned that plan use was unexpectedly high, with expenses exceeding income by more than $1 million. So they concluded that coverage was terminated to save money for WAB and in violation of federal law. Phelan v. WAB, U.S. Court of Appeals for the 10th Circuit, No. 08-8055 (7/31/09).

Point to remember: WAB administrators violated their termination-for-late-payment policy in so many ways that no judge would likely have believed they weren’t just avoiding a big claim.