COMMISSIONER'S BULLETIN
NO. B-0009-02

March 22, 2002

TO: ALL DEPOSITORY INSTITUTIONS, INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS, RECIPROCALS, ASSOCIATIONS, LLOYDS, HEALTH MAINTENANCE ORGANIZATIONS OR OTHER ENTITIES LICENSED TO WRITE HEALTH COVERAGE IN TEXAS; AND TO THEIR TEXAS AGENTS AND REPRESENTATIVES AND THE PUBLIC GENERALLY

RE: ALERT ON UNAUTHORIZED HEALTH INSURANCE SCAMS

Introduction

The Texas Department of Insurance (TDI) has become increasingly aware of unauthorized insurance operators attempting to take advantage of Texas consumers in the health insurance marketplace. As the cost of health insurance increases and consumers seek affordable coverage, licensed agents are often targeted to market and sell unauthorized insurance products to Texas consumers.

Individuals and entities who craft and market unauthorized insurance scams often falsely assert that the scams are exempt from state insurance regulation. Through the use of impressive-looking brochures, marketing materials and Web sites, these unauthorized entities and individuals say the products they are offering are "ERISA plans," "ERISA exempt," "union plans," "association plans," or some variation thereof. They boast low rates and minimal or no underwriting.

In some instances, as described below, a union or ERISA plan may be exempt from state insurance regulation under the federal Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001 et seq. (hereafter ERISA). Association plans, on the other hand, are subject to the provisions of state insurance regulation under TEX. INS. CODE ANN. art. 3.51-6 and 28 TAC §§ 21.2701 et seq. This bulletin provides a detailed explanation of the federal and state law regulating these different plans.

Organizations - Provide This Bulletin To Appointed Agents: It is extremely important that your organization distribute a copy of this bulletin to all of your appointed agents. In addition to representing a serious financial hazard to the public, unauthorized insurance scams compete with licensed health carriers by undercutting premium rates. Also, entities and individuals who are not authorized to conduct the business of insurance often disseminate false information regarding the products they market and sell. All of these types of conduct constitute unfair methods of competition and unfair and deceptive acts or practices in violation of TEX. INS. CODE ANN. art. 21.21. It is in the interest of all licensed health carriers to prevent such unfair methods of competition and unfair and deceptive acts or practices by educating appointed agents. Education of agents also protects consumers from unregulated products, helps to maintain fair and honest insurance markets, protects the premium tax revenues of the State of Texas, and protects against the evasion of the insurance regulatory laws of this state. We appreciate your cooperation in assuring that this information is disseminated to the appropriate agents and other personnel in your organization.

Consequences of Selling Unauthorized Insurance

TDI reminds all licensed entities and agents that the solicitation or sale of unauthorized insurance not only jeopardizes the security and health of Texas consumers, but also subjects agents to disciplinary action, which can include suspension or revocation of their licenses, restitution, and monetary penalties. The solicitation or sale of unauthorized insurance also subjects agents to other serious consequences, including personal liability for unpaid claims and losses. This personal liability is established by TEX. INS. CODE ANN. § 101.201(a), which provides that anyone who assists in the procurement of unauthorized insurance is liable for the full amount of any claim or loss under the terms of the contract if the unauthorized insurer fails to pay the claim or loss. Furthermore, an agent may also be subject to criminal prosecution for soliciting or selling unauthorized insurance.

Explanation of Applicable Federal and Texas Law

Under TEX. INS. CODE ANN. §§ 101.051 and 101.102, acts constituting the "business of insurance" are required to be performed only by entities and individuals who comply with statutory requirements. In many cases, this means that the entity should hold a certificate of authority to operate in this state, or the individual should hold an agent´s license. However, there are exceptions.

Legitimate self-funded ERISA plans established by a single employer for the employer´s own employees, as an employment benefit, are generally exempt from state regulation. The coverage provided by such plans arises from the employer/employee relationship and is not marketed or "sold" by insurance agents. Licensed agents may, however, sell legal insurance products, such as stop-loss insurance or life insurance to employers or trustees of ERISA plans. Other insurance-related products and services, such as third party administration, may also be sold to employers or trustees, as noted in the following paragraphs.

Legitimate union plans are generally established by labor unions under a collectively bargained agreement with an employer or employers for the benefit of the union´s own members. Collective bargaining generally takes place after the organization of an employer´s workers by representatives of a bona-fide union and after union elections are conducted under the guidance of the federal government. Legitimate union plans may offer their members either self-funded coverage under the authority of ERISA, or fully insured group coverage through a carrier authorized to do business in Texas as provided under TEX. INS. CODE ANN. art. 3.51-6. If coverage is issued by a licensed carrier, the insurance contract must be filed with TDI.

Under 28 TEX. ADMIN. CODE § 7.1606, a third party administrator may administer legitimate self-funded ERISA plans and union plans without holding a certificate of authority in the state of Texas. However, such third party administrators are required to file a Notification of Exemption form with TDI prior to providing such services. Please note that the fact that a third party administrator holds a license or valid exemption from state regulation does not necessarily mean that a plan it administers is also licensed or exempt.

Under ERISA, a multiple employer welfare arrangement (MEWA) may be exempt from state regulation if the MEWA is fully insured. Under TEX. INS. CODE ANN. art. 3.95-2, if the MEWA is fully insured by a carrier licensed in Texas, the MEWA itself is not required to hold a certificate of authority. However, if a MEWA operating in Texas is not fully insured, it is required to hold a certificate of authority from TDI and have stop-loss coverage through a carrier authorized to do business in Texas. Such a MEWA must also provide other documentation and information to TDI, including, but not limited to, current financial statements, a fidelity bond and an actuarial opinion.

Also, under TEX. INS. CODE ANN. art. 3.51-6 and 28 TEX. ADMIN. CODE § 21.2702, an association offering group health coverage must have been in active existence for at least two years, have a constitution and bylaws, and must be formed and maintained in good faith for purposes other than obtaining insurance. The association´s constitution and bylaws must be filed with TDI. While an association may make benefits available to its members without itself being licensed, any insurance offered by the association must be fully insured by a carrier authorized to do business in Texas.

Licensed Agent´s Duty to Investigate

TDI reminds all licensed agents that they are in a unique position to protect Texas consumers from unauthorized insurance scams. Agents are cautioned not to solely rely upon representations made by their managing agent, subagents or colleagues as to whether any particular entity or individual may do the business of insurance in Texas. Such reliance will not protect an agent from disciplinary action and civil or criminal penalties. An agent´s review and investigation of products should include, but is not limited to, reading all marketing materials and Web sites, verification of licensure with TDI or exemption from licensure, and verification that any licensed carrier named by an entity or individual has truly been contracted to insure, reinsure or underwrite the product. TDI has investigated situations where entities and individuals have falsely represented that a licensed carrier insures, reinsures or underwrites their product, and TDI has sought disciplinary action against the entities and individuals who failed to seek permission from the licensed carrier to use the carrier´s name.

The following is a list of some circumstances and product characteristics that should prompt review and investigation of a product before it is marketed and sold. While these circumstances and characteristics do not conclusively determine whether a product is or is not part of an unauthorized insurance scam, this list is meant to assist all licensed entities, agents, and the general public in reviewing and investigating products:

• The product operates like insurance but claims that it is not, or claims it is only providing "benefits," and not insurance.
• Agents are asked to avoid using certain insurance terminology, even though the plan operates like insurance. For example, individuals selling the product may be instructed to refer to commissions as "consultant fees" or to refer to premiums as "contributions." The individuals selling the product are referred to as "labor consultants" or "business agents" who "enroll" or "negotiate" with potential members.
• Agents have no commission schedule or fixed commission rate(s). For example, the entity informs individuals selling the product to determine commission rates based upon the customer´s ability to pay.
• Agents are asked to market and sell an "ERISA" plan or "union" plan.
• The product claims to be "fully-funded," "fully insured" or "reinsured" but agents are not told the name of the carrier insuring or underwriting the product.
• Agents are instructed to market and sell the plan to both individuals and employers who are required to join and pay dues to a trade, occupational or consumer "association," solely to obtain health coverage. Also, the enrollees do not control or sponsor the activities of the association, or are not given association bylaws or voting rights.
• Agents are asked to market and sell an "employee leasing" arrangement. For example, agents are instructed to enroll individuals and groups into a "professional employer organization" or "PEO" which provides self-funded health coverage. However, the PEO is not licensed by the Texas Department of Licensing and Regulation as a staff leasing services company or does not pay the wages of the enrollees.
• The product accepts and covers individuals or groups with pre-existing conditions, even though the individuals and groups have no creditable coverage.
• The product advertises unusually low premiums and/or unusually generous benefits, low (or no) minimum requirements for participation, and loose (or no) underwriting guidelines.

Reporting Unauthorized Insurance

Any agent that has concerns about a product they have been asked to market or sell, any individual that has concerns that a product being offered to them is a type of unauthorized insurance, or any individual that has heard about such a product should contact TDI´s Consumer Protection Division at 1-800-252-3439. This number can also be used to determine whether the entity underwriting an individual, group, or multiple employer health product is licensed to conduct the business of insurance in Texas. Individuals can also visit TDI´s Web site at www.tdi.state.tx.us to learn if entities and individuals are licensed to do business in Texas. Further, anyone with information about an entity or individual offering health coverage without a state license should contact TDI´s Fraud Unit at 1-888-327-8818.

Jose Montemayor

Commissioner of Insurance

For further information, please contact ChiefClerk@tdi.state.tx.us .