Don't Fall Prey to Phony Insurance

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COMMISSIONER'S BULLETIN
NO. B-0032-03
August 29,2003

TO: ALL DEPOSITORY INSTITUTIONS, INSURANCE COMPANIES, CORPORATIONS, EXCHANGES, MUTUALS,RECIPROCALS, ASSOCIATIONS, LLOYDS, HEALTH MAINTENANCE ORGANIZATIONS OR OTHER ENTITIES LICENSED TO WRITE STOP LOSS/EXCESS LOSS COVERAGE IN TEXAS AND TO THEIR TEXAS AGENTS AND REPRESENTATIVES; TO ALL LICENSED AND EXEMPT THIRD PARTY ADMINISTRATORS DOING BUSINESS IN TEXAS; AND TO THE PUBLIC GENERALLY

Unauthorized health plans have left tens of millions of dollars in unpaid claims in Texas in the last two years. The Department asks that you immediately review your internal controls and business practices to ensure that your business does not become an unwitting supporter of unlicensed and illegal health insurance plans. Your failure to establish and maintain appropriate internal controls may lead to substantial liability. Under TEX. INS. CODE ANN. §§ 101.101 - 101.202, assisting directly or indirectly in the unauthorized business of insurance may subject your business to liability for all the unpaid claims of an unauthorized insurance plan. Further, your business may subject itself both to regulatory penalties, as contemplated in TEX. INS. CODE ANN. §§ 82.051 - 82.054, 83.101 - 83.105, 84.021 - 84.022, 101.103 and 101.105, and criminal charges as contemplated in TEX. INS. CODE ANN. § 101.106.

The Department asks you to:

Stop Loss / Excess Loss Insurance / "Reinsurance" For Unauthorized Health Plans

1. Establish or strengthen your internal controls to ensure that you do not issue or assist in the purchase and/or administration of illegal stop loss / excess loss (sometimes erroneously referred to as "reinsurance") coverage for employers located in this state.

If a plan covers Texas employees, then, without exception, an employer or employer health plan that purchases any form of insurance (usually in the form of stop loss insurance) must purchase that insurance from an insurance carrier licensed or authorized to transact insurance in the State of Texas. This applies even if an employer health plan is exempt from state regulation under the Employee Retirement Income Security Act of 1974("ERISA"). The Department´s website offers a straightforward method of verifying an insurance carrier´s license or authorization at: https://wwwapps.tdi.state.tx.us/pcci/.

Many of the unauthorized health insurance plans the Department has investigated have either had no insurance coverage backing them or they have had coverage from a carrier not licensed in Texas.Although ERISA health plans are not required by law to carry any kind of direct or stop-loss/excess loss insurance, a prudent business, prior to contracting, should carefully scrutinize any existing or new plan which chooses to forego any backing insurance and take all risk and responsibility for paying claims.

ERISA plans cannot purchase "reinsurance" in Texas. Reinsurance is limited to the transfer of risk from insurers "authorized" or "licensed to do the business of insurance in this state." TEX. INS. CODE ANN. arts. 3.10, 5.75-1. Also note that, even if an employer´s "trust" is alleged to be located outside of Texas, issuing a policy to a Texas employer´s health plan or trust is considered to be the business of insurance in Texas.

Also note that insurers must file with the Department, just as with any other policy, any stop loss policies they wish to offer. Insurers may file such forms as exempt under 28 TEX. ADMIN. CODE §3.4004(e). Please note that the attachment point for stop loss policies must not be less than $5,000.

Unauthorized MEWAs

2. Establish or strengthen your internal controls to ensure that you do not issue a stop loss policy to, or undertake to administer or negotiate the purchase of, a stop loss policy for unlicensed "self-funded" health plans that cover the employees of two or more employers unless all covered employers are under common ownership or the plan is licensed in this state as a multiple-employer welfare arrangement ("MEWA").

Some MEWAs incorrectly claim to be exempt from state insurance law under ERISA, but that statute actually permits the states to regulate all MEWAs. The Texas Insurance Code requires licensure of all MEWAs which are not fully insured though licensed insurance companies. TEX. INS. CODE ANN. § 846.001-846.303 (formerly TEX. INS. CODE ANN. art. 3.95-2). Thus, if a plan commingles the health care contributions of multiple employers and it is not fully insured, then it is likely to be found to be unauthorized. Issuing insurance policies to, or administering claims for, entities doing the unauthorized business of insurance is a violation of the Insurance Code.

Licensure of a MEWA can also be easily verified through the TDI website.

Professional Employee Organizations´ ("PEO´s") Unauthorized Health Plans

3. Establish or strengthen your internal controls to ensure that you do not issue a stop loss policy to, or undertake to administer or negotiate the purchase of, a stop loss policy for a "self-funded" health plan sponsored by a staff leasing services company or professional employee organization which does not hold a MEWA license.

These firms commonly refer to their clients´ employees as "co-employed" or as "leased" employees of the PEO. This characterization is likely to be legally insufficient to exclude the PEO from regulation as a MEWA. Under ERISA, an individual is an employee only if the employer actually controls and directs the individual´s work. Thus, a "self-funded" PEO plan without a MEWA license will normally be considered an unauthorized insurer under the laws of this state. Issuing a stop loss policy to an unauthorized PEO health plan which covers the PEO´s client companies, or administering such a policy or health plan, is a violation of the Insurance Code.

Association Insurance Plans

4. Establish or strengthen your internal controls to ensure that you do not issue or assist in the purchase and/or administration of illegal "association" insurance products.

Under TEX. INS. CODE ANN. art. 3.51-6 and 28 TEX. ADMIN. CODE § 21.2702, an association offering group health coverage may make benefits available to its members without itself being licensed, but the association must have been in active existence for at least two years, have a constitution and bylaws on file with the Department, and must be formed and maintained in good faith for purposes other than obtaining insurance. Also, the insurance benefits must be provided entirely by an authorized carrier, and the carrier must file the policy forms with the Department and, if required, receive the Department's approval of the forms before issuing the policy.

Union Insurance Plans

5. Establish or strengthen your internal controls to ensure that you do not issue or assist in the purchase and/or administration of illegal union insurance products.

The Department of Labor has recently issued rules regarding union plans which make such plans subject to state regulation if they do not provide their benefits pursuant to bona fide collective bargaining agreements between employers and a legitimate union or if they are generally marketed to employers or sole proprietors by insurance agents. See http://www.dol.gov/ebsa/regs/fedreg/final/2003008113.htm. If the plan is subject to state regulation, it must hold a MEWA license. Issuing a policy covering an unauthorized union plan, or administering such a policy or health plan, is a violation of the Insurance Code.

Regardless of whether a union plan is itself subject to state regulation, any insurance backing the plan must be provided entirely by an authorized carrier, and the carrier must file the policy forms with the Department and, if required, receive the Department´s approval of the forms before issuing the policy.

The Department asks that you take immediate steps to ensure that your business avoids providing unwitting support to these illegal operations. You can find a discussion of ERISA provisions governing this topic on the U.S. Department of Labor website at http://www.dol.gov/ebsa/pdf/mwguide.pdf. You may contact Doug Danzeiser at the Department at 512-475-1964 to discuss any questions you may have regarding this bulletin. Your business is encouraged to work with the Department to resolve any questions about a particular operation. The insurance departments of other states will provide the same assistance, and may generally be contacted through the MEWA contacts listed on the NAIC website at http://www.naic.org/state_contacts/docs/ mewa_plan_contacts_public_list.doc.

The Department also asks you to establish policies that direct your staff and agents to promptly report any operation described in this Bulletin to the appropriate state´s MEWA contact. Note that it is a violation of the Insurance Code to fail to report suspected fraudulent or unauthorized insurance to the Department. See TEX. INS. CODE ANN. art. 1.10D § 4 and TEX. INS. CODE ANN. § 101.301.

Sincerely,
SARA SHIPLET WAITT
SENIOR ASSOCIATE COMMISSIONER LEGAL & COMPLIANCE DIVISION TEXAS DEPARTMENT OF INSURANCE

For further information or questions, please contact Doug.Danzeiser@tdi.state.tx.us.

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More to Read   Phony Insurance • Unauthorized Plans • Unauthorized Health Care
Alert to   Insurance Agents • Insurance Companies

For more information contact: PIO@tdi.state.tx.us