• Phony Insurance Exposed: Getting Less Than You Bargained For
  • August 11, 2003 | Author: Luke S. Brown
  • Law Firm: Holland & Knight LLP - Tallahassee Office
  • An ill-understood part of the present hard health insurance market is the infiltration of unauthorized1 insurance into the marketplace. Although schemes also existed during past hard market cycles, this time, there seem to be more of them, and they are far more sophisticated than their predecessors. They typically involved intricate combinations of insurance agents, intermediaries of various sorts, administrators, and real or feigned "reinsurers," "unions" or "associations." They present an enormous danger to consumers, employers, health care providers, and to the regulated insurance industry. The danger includes, a huge wake of unpaid claims causing financial damage to consumers and providers, and damage to consumers' ability to obtain guaranteed-issue replacement coverage.

    The promoters of phony health insurance cloak the schemes in a variety of ways. However, a common theme is to present a topically plausible fa├žade that the plan is not subject to state insurance regulation. A ruse that is frequently employed is the claim that the plan is governed by the Employee Retirement Income Security Act (ERISA).2 This forms the basis of much of the sales pitch and what follows.

    Brief History

    During prior hard insurance markets, promoters established and operated Multiple Employer Welfare Arrangements (MEWAs)3 as mechanisms by which to sell unauthorized health insurance to employers, associations and other types of groups. Then, they were often referred to as "multiple employer trusts," or "METs." Although that terminology is not currently used, its premise survives.

    Broadly, MEWAs and METs are arrangements under which health benefits are furnished to the employees of two or more unrelated employers. They are essentially pooling arrangements in which several unrelated employers put money into a pot, usually hire a claims administrator (often called a third-party administrator or TPA) to adjudicate claims, and pay covered health claims from the money in the pot. Although that is an over-simplification, the salient aspect of it is that multiple, unrelated employers pool funds and participate in a plan that bears the risk of loss (i.e., financial responsibility) for the health claims of participants. The problem is that in general, entities that bear risk for others must be licensed (authorized) by state insurance regulators. In fact, most state insurance codes expressly provide for the licensure of MEWAs, and require that they meet certain organizational and financial criteria.4

    The Issue

    Each generation of unauthorized health insurance has been heralded by claims that the plans were "employee benefit plans" within the meaning of ERISA. They have also contended that they were individual, self-funded or self-insured plans (although those terms have different meanings). They did so then, and do so now, as the premise for their most crucial claim: That the plans are exempt from state insurance regulation under federal principles of "preemption," founded upon ERISA.

    What is ERISA?

    ERISA is a complex body of federal statutory law that, in general, deals with matters relating to employer-sponsored health and welfare benefit plans. Enacted in 1974, ERISA gave the U.S. Department of Labor responsibility for its enforcement. Within the Department of Labor, the Employee Benefit Security Administration (EBSA), f/k/a Pension and Welfare Benefit Administration, has the primary direct involvement.

    ERISA covers plans, funds or arrangements that constitute "employee welfare benefit plans"5 and "employee pension benefit plans."6 Stated differently, it deals with matters involving employer-sponsored or employer organization-sponsored health insurance-like plans, and with retirement (pension) plans, respectively.

    The issues surrounding unauthorized health insurance relate to the reference to "employee welfare benefit plans." Analysis involves many fact-specific issues including, who and what constitute "employers" and "employer organizations," and determining the existence or non-existence of employer "sponsorship." A dominant and critical issue is whether the plans are single-employer based and/or fully self-insured.

    ERISA "Preemption" Fact and Fallacy

    The preemption argument that unauthorized health insurers usually employ goes something like this: Because the US. Department of Labor is charged with "enforcing" ERISA, because the plan documents state that the plan is formed and "adopted" by the employer pursuant to ERISA, and because there is found in ERISA limited preemption language for employer-sponsored welfare benefit plans, state insurance regulators have no power or jurisdiction over any aspect of the plan.

    The reality is otherwise. ERISA does not preempt state insurance regulatory authority over plans that are actually MEWAs. State insurance regulatory authority is trumped by ERISA only in the case of a single-employer-based, fully self-insured plan, and in a very few other, closely circumscribed situations. In contrast, the unauthorized plans typically bear risk by pooling the funds (premiums or contributions) of multiple, unrelated employers. The pooling is often done in very complex ways, including, by the use of one or more kinds of reinsurance or stop-loss trickery occurring at several levels higher in the scheme.

    Risk-bearing activity for unrelated entities requires state insurance licensure in some form. In turn, licensure triggers solvency oversight and other regulation. While even authorized insurers sometimes fail, state insurance guaranty associations usually fill the void and pay claims. Guaranty association payment is not triggered by the failure of an unauthorized insurer.

    A Language of Their Own

    Employers and counsel must be alert to the misuse or confusion (intended or otherwise) of important words and concepts relating to ERISA plans. Promoters of those that are in reality unlicensed MEWAs rely upon the fact that the buyer doesn't understand them, looks to the broker or agent selling the plan, or is just happy to be able to buy anything remotely resembling insurance. Language, however, does matter. Following are a few of the terms often misused:

    1. Fully insured: Some questionable schemes attempt to create a sense of security by claiming that the plan is "fully insured." This is done by claiming that an insurer is financially responsible for the payment of claims. Frequently, however, there is no authorized insurer in fact involved, despite documentation that the employer may be shown. Material such as that should not be taken at face value, and it is necessary to trace its legitimacy back to its source. Remember too, that if an authorized insurer is financially responsible for claims, that insurer remains subject to state insurance licensure and regulation.

    2. Self-insured: When properly used, this term refers to the fact that the single employer establishing the plan is financially responsible for claims. If this is actually the case, the plan itself may not be subject to state insurance regulation. Making this determination, especially in the present climate of sophisticated schemes, is a complex process that usually requires an investigation of and tracing the flow of funds through, many layers of the operational and distributive chain of the plan.

    3. Self-funded: When this term is used correctly, it is normally synonymous with "self-insured." However, in the world of unauthorized insurance, it frequently is used to mean that the employer pays for the purchase of stop-loss coverage, or pays all or part of employees' premium, which are then co-mingled with the funds of other, unrelated employers.

    4. Reinsurance vs. "stop-loss": Generically, "reinsurance" is a risk-shifting device that allows an insurer to shift, or "cede, to the reinsurer all or a portion of the risk-bearing obligations that it has assumed through its direct sales of insurance." Therefore, necessarily, reinsurance transactions are between and among insurers. In contrast, "stop-loss" coverage (sometimes called "excess of loss") is roughly analogous to the "umbrella" coverage that an individual may maintain on their automobiles and home -- it provides certain protection for catastrophic losses once primary insurance limits have been exhausted. Nearly anyone with a significant risk exposure can purchase it, including, self-insured health plans.

    Unauthorized insurers often use the terms interchangeably, in an effort to bolster the appearance of financial strength of the plan. Among the many problems with this is that, if the plan is itself an unauthorized MEWA, the financial responsibility for paying claims still rests with the unauthorized, and probably illegal, entity. Because the point at which the "stop-loss" coverage may be triggered is usually many tens of thousands of dollars, it does not lend any real financial stability to the arrangement.

    What You Can Do

    The schemes are complex and prevalent in more than just health insurance. Malpractice, workers' compensation, inland marine, warranties, and various commercial insurances are affected, too.

    The promoters are smart. They know that business owners, associations, and most individuals usually don't grasp the intricacies of insurance, and that many are driven by price, not by ultimate cost. They also recognize that in a difficult insurance market, many believe that "something is better than nothing," even if they don't understand what they are buying. Those factors converge to create a wide opening for the sale of unauthorized insurance products and for the damage that those products wreak. Before creating a plan, consult with an insurance law expert who is well-versed in your state's laws.


    [1] "Authorized," "unauthorized" insurer defined.

    (1) An "authorized" insurer is one duly authorized by a subsisting certificate of authority issued by the department to transact insurance in this state.

    (2) An "unauthorized" insurer is one not so authorized.

    Section 624.09, Florida Statutes

    All states have statutes addressing the need for, requirements of, and requirements for obtaining authorization to transact insurance business.

    [2} 29 U.S.C.A. 1001, et seq.

    [3] See, for example, Sections 624.437, et seq, Florida Statutes

    [4] See, for example, Sections 624.436-624.446, Florida Statutes, "Florida Nonprofit Multiple-Employer Welfare Arrangement Act"

    [5] ERISA Section (3)(1)

    [6] ERISA Section (3)(2)