The Office of General Counsel issued the following informal opinion on August 15, 2002, representing the position of the New York State Insurance Department.
Re: Stop Loss Insurance of Self-Funded Employee Welfare Benefit Plans
May an unlicensed life insurer solicit a New York domiciled self-funded employee welfare benefit plan in New York in order to issue a stop-loss policy to such employer?
No, such solicitation would be contrary to the New York Insurance Law (McKinney 2000).
The inquirers firm is a life insurer domiciled in and licensed only in Arkansas. While it was initially licensed as an adjunct to a funeral director and limited its business to the issuance of burial policies, it has, since its acquisition by new management and an infusion of new capital, expanded its operations to include issuance of stop-loss policies to self-funded employee welfare benefit plans. This part of Cosmopolitans book of business is under the inquirers direction.
The inquirers proposal, which he anticipates implementing in a number of states, is that an employer which is domiciled in a state other than Arkansas, will establish an Arkansas trust to fund an employee welfare benefit plan for employees located in its domiciliary jurisdiction. The plan will provide the usual range of employee benefits, including group life insurance and health benefits (possibly including prescription drugs). While the employer will be the nominal administrator of the plan, the employer will contract with other entities, presumably affiliates of Cosmopolitan, to perform the actual administration of the benefits.
The plan will contract with Cosmopolitan for a stop-loss policy. Cosmopolitan, in turn, will reinsure the bulk of the risk. The primary reinsurer for this block of business will be American National Life Insurance Company of Texas, which is licensed in Arkansas but not in New York.
The program, consisting of the trust, the contracted administrators, and the stop-loss policy, will be marketed in New York by individuals and firms that are licensed in this State as insurance agents and brokers.
New York Insurance Law § 1102(a) (McKinney 2000) prohibits the doing of an insurance business in New York without a license, unless otherwise exempt. Doing an insurance business is defined, New York Insurance Law § 1101(a) (McKinney 2000 and 2002 Supplement):
(1) Insurance contract means any agreement or other transaction whereby one party, the insurer, is obligated to confer benefit of pecuniary value upon another party, the insured or beneficiary, dependent upon the happening of a fortuitous event in which the insured or beneficiary has, or is expected to have at the time of such happening, a material interest which will be adversely affected by the happening of such event.
(2) Fortuitous event means any occurrence or failure to occur which is, or is assumed by the parties to be, to a substantial extent beyond the control of either party.
The provision of health benefits to employees by an employer, under the above quoted statute, would constitute the doing of an insurance business in New York. However, a plan such as the one described by the inquirer would constitute an employee welfare benefit plan, as defined in the Employee Retirement Income Security Act (ERISA), 29 U.S.C.A. § 1002(1) (West 1999):
The terms employee welfare benefit plan . . . mean any plan, fund, or program which was heretofore or is hereafter established or maintained by . . . an employee organization . . . to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits . . . .
As an employee welfare benefit plan, the Fund is subject to ERISA, 29 U.S.C.A. § 1003(a) (West 1999), and state laws are preempted, 29 U.S.C.A. § 1144(a) (West 1999).
There is an exception to state law preemption for a Multiple Employer Welfare Arrangement (MEWA), 29 U.S.C.A. § 1144(b)(6)(A):
Notwithstanding any other provision of this section-- (i) in the case of an employee welfare benefit plan which is a multiple employer welfare arrangement and is fully insured . . . any law of any State which regulates insurance may apply to such arrangement to the extent that such law provides-- (I) standards, requiring the maintenance of specified levels of reserves and specified levels of contributions . . . and (II) provisions to enforce such standards, and (ii) in the case of any other employee welfare benefit plan which is a multiple employer welfare arrangement, in addition to this title, any law of any State which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title.
A MEWA is defined, 29 U.S.C.A. § 1001(40)(A):
The term multiple employer welfare arrangement means an employee welfare benefit plan, or any other arrangement (other than an employee welfare benefit plan), which is established or maintained for the purpose of offering or providing any benefit described in paragraph (1) to the employees of two or more employers (including one or more self-employed individuals), or to their beneficiaries . . . .
The inquirer asserts, and have furnished a letter from the Arkansas Insurance Department concurring in his conclusion, that because each trust is separate and has no obligation for the liabilities of any other trust, none of the anticipated employee welfare benefit plans would be a MEWA. Based upon the information the inquirer furnished, this Department would agree. Accordingly, the self-funded employee welfare benefit plan established by a New York domiciled business would not require licensure by this Department.
The inquirer refers to the stop-loss policy that would be issued by Cosmopolitan as reinsurance. It has long been the position of this Department that stop-loss insurance policies issued to self-funded employee welfare benefit plans providing health benefits are deemed to be health insurance, not reinsurance. This characterization of stop-loss insurance was formally conveyed to the insurance industry by Circular Letter No. 7 of 1982, issued on April 13, 1982, and codified in New York Insurance Law § 4237-a (McKinney 2000):
(b) Stop-loss insurance means an insurance policy whereby the insurer agrees to pay claims or indemnify an employer for losses incurred under a self-insured employee benefit plan in excess of specified loss limits for individual claims and/or for all claims combined, or any similar arrangement.
(c) A stop-loss insurance policy delivered, issued for delivery, or entered into in this state shall clearly describe: (1) the entire money or other consideration for the policy; (2) the time at which the insurance takes effect and terminates; (3) the specified per-claim, per-employee, or aggregate amount of claims above which payment or reimbursement is to be made by the insurer; and (4) the payments to be made by the insurer once the specified stop-loss thresholds have been exceeded.
Since 1992, New York has required the community rating of health insurance policies issued to small groups, composed of 50 lives or less. In order to prevent such small groups from becoming self-funded, in an effort to evade the requirement of community rating, New York Insurance Law § 3231(h)(1) (McKinney 2000) provides:
Notwithstanding any other provision of this chapter, no insurer, subsidiary of an insurer, or controlled person of a holding company system may act as an administrator or claims paying agent, as opposed to an insurer, on behalf of small groups which, if they purchased insurance, would be subject to this section. No insurer, subsidiary of an insurer, or controlled person of a holding company may provide stop loss, catastrophic or reinsurance coverage to small groups which, if they purchased insurance, would be subject to this section.
The solicitation of New Yorkers for the purchase of a policy by an unauthorized insurer would constitute the doing of an insurance business, New York Insurance Law § 1101(b)(1):
Except as provided in paragraph two . . . of this subsection, any of the following acts in this state, effected by mail from outside this state or otherwise, by any person, firm, association, corporation or joint-stock company shall constitute doing an insurance business in this state and shall constitute doing business in the state within the meaning of section three hundred two of the civil practice law and rules: (A) making, or proposing to make, as insurer, any insurance contract, including either issuance or delivery of a policy or contract of insurance to a resident of this state or to any firm, association, or corporation authorized to do business herein, or solicitation of applications for any such policies or contracts . . . .
New York recognizes that insurance may be validly purchased by New York residents and domiciled businesses under some circumstances. Accordingly, New York Insurance Law § 1101(b)(2) provides:
Notwithstanding the foregoing, the following acts or transactions, if effected by mail from outside this state by an unauthorized foreign or alien insurer duly licensed to transact the business of insurance in and by the laws of its domicile, shall not constitute doing an insurance business in this state, but section one thousand two hundred thirteen of this chapter shall nevertheless be applicable to such insurers: . . . (E) transactions with respect to policies of insurance on risks located or resident within or without this state (except master policies or contracts of group insurance), which policies are principally negotiated, issued and delivered without this state in a jurisdiction in which the insurer is authorized to do an insurance business . . . .
Therefore, while the owner of a New York business could travel to Arkansas to purchase a stop-loss policy from Cosmopolitan and Cosmopolitan could mail bills for future premiums into New York, Cosmopolitan could not solicit such customers. Further, if a licensed insurance agent or broker were to solicit a New York business to purchase a stop-loss policy from Cosmopolitan, he or she would be in violation of New York Insurance Law § 2117(a) (McKinney 2000):
No person, firm, association or corporation shall in this state act as agent for any insurer . . . which is not licensed or authorized to do an insurance . . . business in this state, in the doing of any insurance . . . business in this state or in soliciting, negotiating or effectuating any insurance . . . contract or shall in this state act as insurance broker in soliciting, negotiating or in any way effectuating any insurance . . . contract of, or in placing risks with, any such insurer . . . or shall in this state in any way or manner aid any such insurer . . . in effecting any insurance . .. contract.
For further information you may contact Principal Attorney Alan Rachlin at the New York City Office.