ACCIDENT AND HEALTH THIRD PARTY ADMINISTRATOR LICENSURE EXEMPTIONS FOR INSURERS

Model Law 90-1, the Third Party Administrator Statute adopted by the National Association of Insurance Commissioners ("NAIC"), generally requires third party administrators ("TPAs") who underwrite, adjust or settle life, annuities or health claims to be licensed by the applicable state department of insurance where such TPA engages in administrator activities. The Model Law, which has been adopted by a majority of the states, includes certain exemptions from the licensure requirement for insurance companies engaging directly and indirectly as administrators. This article reviews the TPA licensure exemptions currently applicable for life and health insurers engaging in claims administration in the 50 states and the District of Columbia and summarizes registration and reporting requirements under state statutory and regulatory schemes which vary from the Model Law.

The Model Law generally requires that prior to any person performing any function as an administrator or TPA, such "person shall apply to be an administrator in its home state...and shall receive a certificate of authority or license from the commissioner."1 In addition to obtaining a home state license, such person is generally required to secure a "Nonresident Administrator" license prior to engaging in administrator functions in any other state.2

In addition to securing a TPA license prior to engaging as an administrator, the Model Law further requires licensed TPAs to enter into a written agreement between the administrator and the insurer.3 The written agreement must contain "a statement of the duties that the administrator is expected to perform on behalf of the insurer and the lines, classes or types of insurance for which the administrator is to be authorized to administer."4 Finally, the written agreement must include a "provision with respect to underwriting or other standards pertaining to the business underwritten by the insurer."5

The Model Law defines an "administrator" or "third party administrator" as "a person who directly or indirectly underwrites, collects charges or premiums from, or adjusts or settles claims on residents of this state, in connection with life, annuity or health coverage offered or provided by an insurer, except any of the following:" and proceeds to set out thirteen exemptions.6 The third of these exemptions is for an "insurer that is authorized to transact insurance in this state."7 The Model Law defines "insurer" as "a person undertaking to provide life, annuity or health coverage or self-funded coverage under a governmental plan or church plan in this state" and expressly includes in the definition "an employer, a licensed insurance company, a prepaid hospital or medical care plan, or a health maintenance organization."8

The last of the Model Law's thirteen exemptions is for an "administrator who is affiliated with an insurer and who only performs the contractual duties (between the administrator and the insurer) of an administrator for the direct and assumed insurance business of the affiliated insurer" and notes in such circumstance that the insurer "is responsible for the acts of the administrator and is responsible for providing all of the administrator's books and records to the insurance commissioner" upon request.9 Moreover, this exemption excludes employers from the general Model Law definition of "insurer."10

Accordingly, under the Model Law, a life and health insurer domiciled and holding a valid certificate of authority in a given state can lawfully engage in administrator activities in such state without having to obtain a home state administrator license. Moreover, in any other state where such insurer is duly licensed, it need not obtain a Nonresident Administrator license prior to engaging in TPA activities.11

Using Tennessee as an example of a state that has adopted the Model Law, a duly licensed Tennessee domestic life insurer may engage in claims administration without securing a TPA license, as insurers are exempt from the definition of "administrator" pursuant to Tennessee Code Annotated § 56-6-401(3). Moreover, the Tennessee exemption is somewhat broader than the third exemption under the Model Law, in that Tennessee also exempts an insurance company "acting as an insurer with respect to a policy lawfully issued and delivered by it in and pursuant to the laws of a state in which the insurer was authorized to conduct an insurance business."12 The Tennessee exemption also applies to licensed nonprofit hospitals, medical, dental and vision service corporations, and health maintenance organizations.13

Consistent with the Model Law, Tennessee requires all non-exempt administrators to enter into a detailed written agreement with the insurer for which it will be adjusting and settling claims and performing other TPA functions.14 However, the Tennessee Department of Commerce and Insurance ("Department") has interpreted "insurer" for purposes of the TPA statute somewhat more narrowly than the Model Law. In order to apply for and receive a TPA license, the Department requires a non-exempt applicant to have a valid contract with a life or health insurance company holding a Tennessee certificate of authority. As such, an entity providing claims processing on Tennessee resident employees of a self-insured employer has not heretofore been required, or permitted, to secure an administrator license from the Department in order to engage in those activities.  The Department's position has very recently been the subject of internal legal review, and staff has indicated that the narrow interpretation of "insurer" will be broadened consistent with the Model Law such that TPAs contracting with self-insured employers, HMOs and the like to perform administrator functions will be permitted to apply for and receive TPA licenses in Tennessee.  Counsel to prospective applicants in this circumstance should check the Department's website for forthcoming guidance.15

Tennessee is among 42 states that have adopted the Model Law since it was initially adopted in 1977.16 Almost all of the states that have adopted the Model Law include in their respective statutory schemes the exemption for insurers from the administrator and TPA licensing requirements. The following ten jurisdictions, however, either have not enacted any TPA statute or, if enacted, do not expressly provide by statute that licensed insurers are exempt: Alabama, Colorado, Connecticut, District of Columbia, Hawaii, Massachusetts, New York, Vermont, Virginia, and Washington. In those ten jurisdictions, representatives of the corresponding insurance department have recently confirmed the lack of jurisdiction over TPAs and/or that a duly licensed insurer acting as a TPA would be operating in compliance with applicable regulatory requirements.

Therefore, every state and the District of Columbia currently conform to the Model Law's insurer exemption and do not require any separate administrator or TPA licensure for insurers holding an active insurance company license in the applicable jurisdictions. The following five states nonetheless require some form of exemption certification or registration for those entities not separately and specifically licensed to perform administrator functions: Alaska, Georgia, New Hampshire, Texas, and Vermont. Insurers intending to engage in administrator activities in one of those five states should file the appropriate certification or registration form prior to initiating such activities so as to ensure compliance with the applicable regulatory requirements. In Alaska, Georgia and New Hampshire, regulatory approval/confirmation of the exemption is required prior to the insurer acting as an administrator. Certification and/or registration forms, along with guidance and filing instructions, are available on the insurance department websites of these five states.

A chart summarizing the applicable statutory and regulatory provisions that incorporate the administrator exemption for insurers in the 51 jurisdictions referenced above follows.