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Just in time for Summer, here's the latest from your friends at the Federation of Regulatory Counsel. As always, the FORC Journal has all the makings of a perfect companion, whether you're heading to the beach, the pool or your couch. Enjoy, and keep those cards and letters coming. Please note that some of the filing deadlines in Fred Pomerantz’ article have been corrected. Scott Kosnoff, Editor Sign up to receive FORC Journals (and Alerts) via email.
YOU CAN'T GET -- OR GIVE --SOMETHING FOR NOTHING
Michael T. Griffin, Esq.
Alan J. Levin, Esq. The insurance industry has faced increased scrutiny in recent years. Insurance regulators in several states issued guidance recently with respect to the application of state anti-rebating statutes (collectively, the "Anti-Rebating Statutes") to "value added" services provided by producers in connection with employee benefit plans. Generally speaking, rebating is the act of offering anything of value as an inducement to purchase insurance that is not included in the terms of the insurance policy. In other words, rebates are incentives, in the form of gifts or other consideration, given to induce customers to purchase insurance coverage from a particular insurer or producer. This article provides an overview of the Anti-Rebating Statutes, including the intended purpose and constitutional challenges against these laws aimed at consumer protection. It then summarizes recent guidance with respect to the Anti-Rebating Statutes and "value added" services provided to clients by employee benefit producers and concludes that the National Association of Insurance Commissioners ("NAIC") and state legislators should consider reforms to these arcane laws that, when strictly interpreted and enforced, arguably result in higher costs to consumers and a less efficient market. I. BACKGROUND A. Anti-Rebating Statutes Forty-eight states and the District of Columbia prohibit insurers and producers from giving an insured or prospective insured anything of value not specified in the policy as an inducement to the purchase of insurance.1 Each of these jurisdictions has enacted Anti-Rebating Statutes substantially similar to the NAIC Model Unfair Trade Practices Act (the "Act").2 Section 3 of the Act prohibits engaging in any trade practice which is defined as an unfair method of competition or an unfair or deceptive act or practice in the business of insurance.3 Section 4 of the Act provides in pertinent part:
The most obvious rebate is a cash return of part of the premium to the policyholder, or the acceptance of an amount less than the full premium payable, ordinarily through a reduction in the producer's commission. State insurance regulators have found that other less obvious benefits tied to the sale of insurance violate Anti-Rebating Statutes, including but not limited to the following:
It should be noted that although: (i) the Act prohibits rebating in connection with life, health, and accident insurance and annuities, many states have enacted laws extending the prohibitions against rebating to property and casualty insurance; and (ii) the prohibitions are directed at insurers and producers, many states also prohibit an insured from knowingly accepting a rebate.7 Violations of Anti-Rebating Statutes are generally punishable by civil and criminal sanctions, including cease and desist orders, license suspension or revocation and fines. B. Intended Purpose of Anti-Rebating Statutes It is often difficult to explain to clients why such a seemingly pro-consumer practice is prohibited in most states. The Anti-Rebating Statutes were enacted in the late 1800s and early 1900s to protect consumers from widespread abuses in the insurance industry occurring at that time, particularly in the sale of life insurance, by preventing discrimination in the rates payable by similarly-situated policyholders and assuring insurer solvency.8 Like most insurance laws and regulations, the Anti-Rebating Statues are aimed at consumer protection by ensuring that consumers are treated fairly and that insurers possess adequate reserves to meet their obligations to policyholders. Prior to the enactment of the Anti-Rebating Statutes, insurers and agents would in some cases discriminate between similarly situated insureds by offering some insureds preferential rates, often by agreeing to return a portion of the premium received by the insurer or commission received by the agent. This would in effect allow insurers to offer coverage at less than the rates filed with and approved by the state insurance departments based on established actuarial assumptions. This practice also raised concerns regarding insurer solvency, as insurers in some cases were receiving total premiums that were less than the approved rate. The Anti-Rebating Statutes in several states have been subject to constitutional challenges on the grounds that they have no relation to public safety or welfare and deprive consumers and insurers of property rights. In fact, in 1986, the Florida Supreme Court found that Florida's anti-rebating statutes were unconstitutional. 9 In Dep't of Ins. v. Dade County Consumer Advocate's Office,10 the Consumer Advocate's Office (the "Consumer Advocate") filed a complaint against the Florida Office of Insurance Regulation ("FOIR") alleging that Florida's anti-rebating statutes deprived consumers of their property rights because such statutes prohibited policyholder negotiations of insurance agent commissions, thereby increasing the amount policyholders paid for insurance. The FOIR argued that Florida's anti-rebating statutes guaranteed insurer solvency and prevented discrimination against policyholders in the same actuarial class. The Florida Supreme Court held that Florida's anti-rebating statutes were unconstitutional because there was "no identifiable relationship between the anti-rebate statutes and a legitimate state purpose in safeguarding the public health, safety or general welfare," and such laws "interfered with property rights by unnecessarily limiting the bargaining power of the consuming public."11 In a later case, the Florida Supreme Court affirmed its decision in Dade County stating that "[t]he anti-rebate statutes...simply deprive the consuming public of a choice in the price of products or services, the choice of which is the cornerstone of a competitive, free-market economy."12 In other states, however, courts have found that Anti-Rebating Statutes are constitutional because they bear a rational relation to public safety and general welfare, and do not deprive insurers or policyholders of property or equal protection rights.13 II. RECENT GUIDANCE REGARDING VALUE ADDED SERVICES Although the practice of rebating is expressly prohibited in most U.S. jurisdictions, state regulators and attorneys general have not been very active over the years in the enforcement of violations of the Anti-Rebating Statutes. This is likely due in large part to the fact that consumers receiving rebates are receiving a benefit and, therefore, have no reason to complain to state regulators. In our experience, most complaints against producers alleging violations of Anti-Rebating Statutes are brought by competing producers that have lost business to a producer providing something of value to an insured as an inducement to the purchase of insurance. In response to such complaints, state regulators have issued written guidance on the parameters of the Anti-Rebating Statutes. Insurance regulators have become increasingly focused on "value added" services commonly offered by employee benefit brokers to defray the total cost of the insurance product and provide a wider range of services to their clients to gain a competitive advantage in the market. Many large and medium-sized brokers are even willing to provide certain services not directly related to the insurance policy at no additional cost to clients in connection with the purchase of health and welfare plans, including payroll services, compliance services related to the federal Consolidated Omnibus Budget Reconciliation Act ("COBRA") and Health Insurance Portability and Accountability Act ("HIPAA") and flexible spending account administration.14 To level the playing field, smaller brokers without the resources to provide such value added services will often complain to state insurance regulators that their larger competitors are acting in violation of Anti-Rebating Statutes. Many would argue that providing these services free of charge or at a discount provides a benefit to the employer purchasing coverage and that the cost savings can ultimately be passed on to individual employees because the employer's overall health and welfare benefit costs are reduced. Unfortunately, the Anti-Rebating Statutes are broadly written and do not exempt benefits that can otherwise be provided in a non-discriminatory manner and without any impact on insurer solvency. In interpreting their Anti-Rebating Statutes, state regulators have consistently determined producers and insurers are prohibited from providing free or discounted value added services unrelated to the sale of the insurance, unless it is set forth in the insurance policy.15 Circular Letter 9 states that insurance producers may provide services to clients that are not specified in the insurance policy if the following conditions are met: (1) The service directly relates to the sale and servicing of the policy or provides general information about insurance risk reduction; and According to Circular Letter 9, "services that fall within the scope of services that an insurance producer may lawfully provide in connection with insurance sold by the producer if provided incidental to the insurance and in a fair and nondiscriminatory manner" include the following:
Producers may provide services that directly relate to the insurance purchased for free or at a discount without violating the New York Anti-Rebating Statutes if the services are provided in a fair and non-discriminatory manner.18
Under New York law, a broker may charge for these types of services pursuant to an agreement satisfying the requirements of § 2119 of the New York Insurance law, but an agent representing the insurance company may not. In attempting to provide additional services to policyholders without running afoul of the Anti-Rebating Statutes, insurers have attempted to include certain ancillary services within the terms of policy forms filed with state regulators. The insurance departments in New York and Iowa have responded by declaring that the goods or services in the insurance policy must "have a legitimate nexus to the insurance coverage provided under the policy" and be "necessarily or properly incidental to the insurer's insurance business."19 If it is determined that the goods and services in the policy do not have a "legitimate nexus," then the departments will not approve such policies, regardless of whether such goods and services are available to all persons of the same class. While Circular Letter 9 attempts to delineate between permissible and impermissible services, by finding linkage to the insurance policies sold, the reality is that health and welfare benefits are inextricably entwined with the human resource services provided by most employers, and it creates great inefficiencies to impose regulations attempting to separate the permissible from impermissible activities when they are all part of an employer's overall human resource plan. III. APPLICATION OF THE ANTI-REBATING STATUTES TO THE MODERN INSURANCE INDUSTRY As previously stated, the Anti-Rebating Statutes are broadly written and subject to little or no interpretation by state regulators. Application of the Anti-Rebating Statutes to modern insurance products, particularly employer sponsored health and welfare plans, may produce bizarre results that are harmful to consumers. Employee benefit producers often earn large commissions on the placement of employer sponsored health plans, particularly with the steep rise in rates on health insurance products and the resulting commissions payable to producers. Due to the economic crisis and high cost of health insurance, many employers have been forced to reduce or even eliminate certain employee benefits. To gain a competitive advantage and better service their clients, producers are willing to provide a broader range of services at no cost or at a discount and even to pay third-party service providers to provide certain services to clients. The Anti-Rebating Statutes were originally intended to protect consumers by preventing discrimination between like insureds and the risk of insurer insolvency through the rebate of premiums and payment of other valuable consideration. These same concerns do not apply to producers providing value added services to clients in connection with employee benefit plans. In cases where producers are providing services directly to clients and/or are paying for them out of commissions earned, there is no risk to insurer solvency. Moreover, the sale of employer sponsored health and welfare plans are not subject to the same issues with respect to discrimination between like insureds as personal lines policies. In most cases, employee benefit plans involve negotiations between commercial parties, with most large employers being represented by a broker and/or an experienced risk manager. These sophisticated purchasers of insurance should be free to negotiate the best terms possible and to receive the broadest range of services for the premiums paid. Instead, the Anti-Rebating Statutes are being used as a mechanism to level the playing field between large and small brokers, which ultimately increases the expenses of employers and their employees.20 In this age of rising health insurance costs, the NAIC and state legislators and regulators should seriously consider reforms to the Anti-Rebating Statutes. One possible approach that some have suggested would be to provide some type of commercial exemption to the Anti-Rebating Statutes to allow sophisticated commercial purchasers of insurance, who do not require the same level of consumer protection as individual consumers, to negotiate the best deal possible and for producers to provide the broadest menu of services to their clients. This will lower health and welfare benefit costs and make employers more efficient in providing human resource services to their clients. WHAT WAS HE THINKING AND WHEN DID HE THINK IT?
Wendy Russell Wiener, Esq.
Connie Pecori Crews, Esq. The issues regarding Stranger Owned/Originated Life Insurance, referred to throughout this article as STOLI, are myriad according to the regulators of various states, including my own, Florida. What is it? Who are its victims? How are those victims harmed by it? How should the states regulate it? Is it regulated already? In an effort to address the relevant issues, the Florida Office of Insurance Regulation convened a public hearing on August 28, 2008, to take testimony and gather information regarding STOLI. On February 5, 2009, Florida Insurance Commissioner Kevin M. McCarty released his report entitled "Stranger-Originated Life Insurance ('STOLI') and the Use of Fraudulent Activity to Circumvent the Intent of Florida's Insurable Interest Law," referred to herein as the Florida Report. (A copy of the complete report can be downloaded at: http://www.floir.com/stoli.aspx). What follows is a report on the Florida Report and commentary on the struggle to reconcile the irreconcilable conflict at the center of any STOLI analysis. Every regulator and court contemplating a STOLI program is required to try to balance the competing interests in insurance as an asset and the public policy against wagering contracts. Yet, the two will not balance. The starting point for an analysis of STOLI, including that set forth within the Florida Report, is a discussion of insurable interest. The Florida Report describes the historically based reason for insurable interest laws, which is that gamblers in old England were permitted to wager on the anticipated dates of death of the seriously ill among them.1 The British Parliament, in 1774, put an end to the use of such contracts by passing a law that any life insurance contract held by a person without an insurable interest in the life of the insured would henceforth be null and void.2 Legislatures and courts since then have endeavored to establish that an interest in the continued life of the insured by the beneficiary of the life insurance is a necessary component to the issuance of a policy. The core of the public policy, codified in statutory and common law, is that if someone stands to benefit from your death, you are in danger of that someone. Inasmuch, the law seeks to protect you by requiring that only those who stand to benefit from your continued life are beneficiaries of your life insurance. The ancient public policy which underpins the entire insurable interest analysis, however, does not comport with modern reality. The use of public policy within legal analysis, as described below, is supposed to provide the "why" for a statute or a court holding, but there is no modern day evidentiary support for the theory that people who invest in strangers' life insurance policies are encouraged to kill the insured strangers. Indeed, the statutory and common laws of most states recognize that life insurance is an asset of the insured, and the insured is free to transfer that asset. Many state laws, such as Florida's, conform to the holdings of cases such as Grigsby v. Russell, that an assignment is not automatically condemned when the assignee lacks an insurable interest, so long as there is no prior agreement to assign.3 It is that last clause, "so long as there is no prior agreement to assign," that cannot be reconciled with the language of the laws of many states. Florida's insurable interest law, for instance, was amended in 2008 to clarify that, "The insurable interest [necessary for the validity of a life insurance policy] need not exist after the inception date of coverage under the contract."4 The problem, therefore, is if an insurance policy can be transferred to one without an insurable interest in the insured at any time "after the inception date" of the policy, then how can courts invalidate a transferred policy because an insured was contemplating what the law allows him freely to do? Courts, historically and today, base their holdings invalidating insurance transferred to strangers on the public policy against wagering contracts, noted above, opining that an insured who plans to transfer his policy will circumvent the public policy against having a stranger benefit from his death. The near universal focus of the judiciary on this topic is the "intent" of the insured when he obtained the policy. It's an easy "out" for courts considering STOLI to declare a policy invalid when the insured intended its transfer to one without an insurable interest, because the court is protecting the insured from a stranger's wager on his death. More than several courts have recently been called upon to examine a challenged STOLI transaction. The three cases discussed below are only a sample. Yet, in this context, a sample is enough, because the courts' analyses are mostly consistent. The Minnesota District Court, in Sun Life Assurance Company of Canada v. Paulson, held that when ascertaining whether or not a STOLI transaction is an unlawful "scheme," the courts must look at the mutual intent of the parties to the transaction, the insured and the assignee.5 In the event it can be established that both parties intended for the original purchase of the policy to be a part of a plan to assign the policy thereafter, then the policy will be considered void ab initio. The case of Life Product Clearing, LLC v. Angel, in New York is similar in conclusion.6 The court there indicated that enough facts were alleged to show that the insured purchased the policy with the prior intent to transfer the policy to a person without an insurable interest. The New York court defined its purpose as having to assess whether a policy was procured with a view to its immediate assignment in order to determine whether the transaction is merely to secure a wagering policy for a stranger. And, here in Florida, AXA Equitable Life Insurance Company v. Infinity Financial Group, LLC, identified sufficient facts to establish a "scheme" to perpetuate a wagering policy in violation of Florida statutory and long established insurable interest case law.7 While the AXA case is short on analysis, it clearly indicates that, although assignments to persons without insurable interest is legal in Florida, this rule extends only to assignments made in good faith and not as a cover for sham assignments made to circumvent the public policy against wagering contracts. Each of the three courts discussed above is focused on the intent of the insured at the time of the policy application/inception. The "intent" test seeks to ascertain the mindset of the applicant at the time the policy is purchased and declares it unacceptable for the insured to think of a policy transfer then, but it therefore acknowledges that the same mindset at another time is acceptable. And, since the law expressly allows for such transfers, should the insured's thought as to transfer be the polestar for determining whether a transfer is valid or not? Without exception, those testifying at the Florida STOLI hearing recognized, and some even praised, "legitimate" life settlements, those in which an insured holding a life insurance policy he no longer needed, could no longer afford or no longer wanted, transfers the policy to a stranger. The legitimacy of such life settlements is established by a conclusion that the insured did not plan to transfer the policy when he obtained it. But, statutory law, specifically in Florida, allows an insured to transfer the policy at any time after he obtains it. So, why are the legitimate transfers only those that the insured was not planning on? If the answer is to keep the insurance out of the hands of a malevolent stranger who might harm the insured, the answer is fallacious, because in the event of a "legitimate" and not pre-planned life settlement, the policy ends up in the hands of a stranger just as it does when the insured planned it that way from the start. It does not seem that the concept of "don't think of transferring your life insurance policy to a stranger at the outset, because you might put yourself in danger," can be reconciled with "you can transfer your policy anytime after you buy it." Not only do those concepts fail reconciliation because the "danger" is simply not a reality today, but also, since the market for transferring policies exists, we cannot forbid a potential insured from thinking of it or planning to use it. While the Florida Report does not address the dilemma discussed above per se, Commissioner McCarty smartly focused in the Florida Report on the "real" dangers to consumers. There are certainly competing views on whether the issues raised within the Florida Report are actual dangers to consumers; however, there is no dispute that consumers contemplating STOLI transactions must be made aware of these items, so they transact their business from a place of information, rather than naiveté. The Florida Report identified four harms that could befall a consumer within a STOLI transaction: capacity to purchase insurance, tax liability, non-tax liability and increasing insurance premiums.8 The issue of "capacity" has been festering under the surface of the STOLI marketplace, but has only recently begun to be widely discussed by commentators and regulators. An insured's capacity to purchase life insurance has traditionally been based on an insured's net worth. Insurers carefully review the financial statements of a potential insured when issuing a large face value policy. The capacity analysis does not take into consideration who owns or who will benefit from the life insurance in force on a particular consumer, just the amount of insurance in force. Thus, when a consumer buys a policy and transfers it to another, that policy still counts against the insured's capacity and may result in the insured's inability to protect his own estate in favor of benefitting a stranger. Agents licensed in Florida are broadly obligated to explain the products they sell to potential insureds or risk being disciplined by the regulators.9 The Florida Report states that "the incentives used by STOLI promoters to induce seniors to apply for life insurance policies and the STOLI transaction may create an unexpected tax liability for seniors."10 The key word, however, in that sentence appears to be "may," because, as of today, the proceeds from life insurance policies remain non-taxable.11 Issues were raised by some who testified at the Florida STOLI hearing about whether the non-recourse premium finance components to some STOLI programs trigger tax consequences, but no definitive answers are provided within the Florida Report.12 The Florida Report touched briefly on the potential non-tax liability to seniors involved in STOLI transactions that are unwound by courts declaring the subject insurance policies void.13 Finally, the Florida Report identified what many proponents of STOLI programs deem the most spurious argument against STOLI, which is the ultimate increase in life insurance premiums. Interestingly, what was addressed only briefly in the testimony at the Florida STOLI hearing was the argument advanced by many life insurers about lapse pricing: more policies in force to death benefit, result in higher premiums for everyone. The lapse pricing argument was advanced repeatedly during the NAIC Life Insurance A Committee hearings, but it has receded to the background in more recent discussions of STOLI. Noteworthy is that the Florida Report's treatment of increasing life insurance rates refers to lapse pricing for support.14 The Florida Report also quotes one of the hearing witnesses, who suggested that STOLI transactions reduce the availability of life insurance for people over age 70.15 There was, however, testimony at the hearing that STOLI programs actually increase life insurance sales.16 This is likely, because people view the products as their own alienable assets, rather than just traditional protection for their loved ones. The ultimate question for Florida consumers, companies, agents and STOLI promoters is: "What will Florida do now?" Considering the body of established anti-STOLI case law and the provisions of the Insurance Code which get at the alleged evils of STOLI transactions, such as misrepresentation and "free insurance," the Florida regulators could rely on what's currently available to them. Pressure was applied on the national level for states to adopt either the NAIC Viatical Settlements Model Act or the NCOIL Life Settlements Model Act. Some, but not many, states have adopted one model or the other. During the 2009 Florida legislative session, two STOLI bills were introduced which proposed sweeping revisions to the treatment of STOLI in Florida, Senate Bills 1882 and 1924, but they were not passed. The concept and treatment of STOLI will continue to evolve and provide fodder for legislatures, courts and commentators for years to come. COMPLYING WITH NEW MEDICARE REPORTING REQUIREMENTS APPLICABLE TO LIABILITY INSURERS AND SELF-INSURERS
Frederick J. Pomerantz, Esq. Introduction
The Medicare, Medicaid, and SCHIP Extension Act of 2007 (MMSEA)1 amends the Medicare Secondary Payer Act (MSPA)2, by imposing significant new reporting obligations upon insurers and other qualified Responsible Reporting Entities (RRE) subject to it. The objective of the new reporting requirements, which are effective July 1, 2009, is to permit Medicare to track the resolution of liability claims involving incurred, and future, medical costs that are subject to Medicare to ensure that those parties who are primarily responsible for payment of medical costs subject to Medicare pay those costs, rather than Medicare which is a secondary, rather than a primary, payer. By so doing, it is the intent of MMSEA to reduce overall costs to Medicare.3 Under the new law and associated regulations, all liability insurers (including self-insurers), no-fault insurers, workers' compensation insurers and group health plan arrangements (GHP) are required to determine whether any individual who files a claim against the insurer or any entity insured or covered by the insurer would be entitled to Medicare benefits. If so, the insurer must provide Medicare with that individual's identity and any other information that may be required by the Secretary of Health and Human Services (Secretary). This information must be furnished to Medicare within the time specified by the Secretary after the claim is resolved through settlement, judgment, award or other payment, regardless whether or not there has been an admission or determination of liability. Penalties for Noncompliance In keeping with its stated goals, the MMSEA imposes severe penalties for noncompliance:
Registration Requirements The new requirements obligate an RRE to register on the secure website for Coordination of Benefits Contractor (COBC) appointed by CMS on or before September 30, 2009. An RRE includes not only liability insurers (including self-insurers), but also no-fault insurers, workers' compensation insurers and GHPs. Importantly, although the reporting obligation commences between January 1, 2010 (the date when electronic reporting will be enabled) and March 31, 2010, depending on when the RRE completes file testing, the required quarterly production report to be first submitted is retroactive to July 1, 2009, regardless of the date of the RRE's first assigned file submission window. In addition, unlike liability insurers, for a GHP, reporting responsibilities became effective January 1, 2009.5 Public Policy Considerations The purpose of the new law is to obligate those parties who are primarily responsible for payment of medical costs subject to Medicare to pay those costs, rather than Medicare itself. This has the potential to save Medicare billions of dollars and to reduce the large, and still growing, Medicare deficit.6 The new mandatory Section 111 reporting requirements are in addition to current methods for obtaining information regarding situations where Medicare is appropriately a secondary payer. They do not replace or eliminate existing obligations under the MSPA provisions for any entity. For example, Medicare beneficiaries who receive a liability settlement, judgment, award or other payment are obligated to refund conditional payments within 60 days of receipt. The Section 111 reporting requirements do not eliminate this obligation. The new law thus not only imposes significant new obligations, but may also influence the settlement of workers' compensation claims as well, given the mandatory establishment of a Medicare Set Aside Account (MSA) to pay claims for future medical expenses arising out of a workers' compensation claim.7
Medicare and Impact of the MMSEA Medicare is the federal health insurance program for:
Overall, the MMSEA imposes strict reporting requirements whenever there is a recovery for a liability claim encompassing medical costs, including mental health treatment, subject to Medicare, including future costs, regardless of whether by settlement or judgment. Which Insurers Must Register and Report All insurers, including but not limited to alien, non-admitted insurers writing on an excess/surplus line basis, captive insurers and risk retention groups, who issue coverage, including no-fault insurance that pays for health care services resulting from injury to an individual in an accident, regardless of fault, must comply with the registration and reporting requirements where the injured party is a Medicare beneficiary and the date of incident is on or after July 1, 2009. A newly-organized liability insurer must be compliant just as any other insurer. It will be up to their attorneys to advise them of these requirements, and it is likely that the plan of operation of any new carrier will have to discuss its plan to comply with the MMSEA registration and reporting requirements. Under the MMSEA, liability insurance (including self-insurance) is defined to be coverage that indemnifies, or pays on behalf of the policyholder or self-insured entity, against third party claims for negligence that results in injury or illness to an individual. Liability includes, among others, homeowners' liability, automobile liability, uninsured or underinsured motorist liability, product liability, malpractice liability and workers' compensation.11 The key to determining whether a liability insurer must register is if there is a reasonable expectation that covered claims will be resolved that include a payment by the insurer for medical costs subject to Medicare. Medicare, and thus RRE submissions, extend to costs for physical injuries as well as mental health costs. For purposes of RRE submissions, the term "claim" is used to refer to the overall claim for liability insurance (including self-insurance), no-fault insurance, or workers' compensation rather than a single claim for a particular medical item or service regardless of whether the coverage is first-dollar or the coverage is excess over another insurer or over a self-insured retention. Where there are multiple carriers involved in a settlement, reporting is necessary for each individual party under which there is a payment responsibility, not one per person. To date, it appears, based on CMS pronouncements, that all settlements, even those viewed as "nuisance value" settlements, must be reported. "Self-insurance" is defined to include individuals/entities engaged in a business, profession, or trade to the extent that they have not purchased liability insurance coverage. This includes responsibility for deductibles. Where an entity is self-insured for a deductible, but the payment of that deductible is made through the insurer, then the insurer is responsible for including the deductible amount in the amount it reports as a settlement, judgment, award, or other payment. Although the MMSEA does not address claims paid under a self-insured retention, caution may dictate these be reported whenever possible. When Registration and Account Setup Must Be Completed The registration process requires RREs to notify COBC of their intent to report data to comply with Section 111 of MMSEA. Registration by the RRE is required and must be completed before the testing between the RRE and the COBC can begin. Liability, no-fault and workers' compensation RREs must register on the Coordination of Benefits Secure Website (COBSW) from now through September 30, 2009 using an interactive website designed for this purpose. Registration is currently accessible via https://www.section111.cms.hhs.gov. All submissions, both registration and reporting data submissions, will be received electronically on this website. CMS also provides a guide to registration requirements at: It should be noted, however, that although the reporting obligation commences between January 1, 2010 and March 30, 2010, the quarterly production reporting that is required to be submitted is retroactive to July 1, 2009, regardless of the date of the RRE's first assigned file submission window. In summary, CMS has established the following mandatory timetable for registration and initial reporting by RREs:
Impact on Medicare Set Aside Requirements Under the Medicare Secondary Payer Act (MSPA)12, CMS already requires separate funding of a Medicare Set Aside Account (MSA) to pay for future medical expenses arising from a workers' compensation claim that would otherwise be eligible for coverage under Medicare. At its core, an MSA is a portion of settlement proceeds set aside, or allocated, to pay for future Medicare covered services. The MSA must be exhausted prior to Medicare paying for any future care.13 Importantly, CMS has explicitly stated that it does not presently obligate liability and other non-workers' compensation insurers to coordinate payment of an MSA if settlement does not involve a claim for future medical expenses arising out of a workers' compensation claim. As such, settlement of pure liability claims does not currently give rise to any requirement to fund an MSA. Currently, liability insurers, GHPs and other non-workers' compensation insurers normally do not need to fund an MSA as part of any settlement. Nevertheless, simultaneous settlement of liability and a workers' compensation insurer's obligations to cover future medical expenses may require an MSA. Given the often layered and overlapping relationship between settlement of liability and workers' compensation claims, an insurer must carefully consider any possible MSA funding requirements.
Conclusion For practitioners of workers' compensation and liability insurance law, Medicare compliance, at least with respect to reimbursement of conditional payments, is nothing new. However, the new notice and reporting obligations of Section 111 of the MMSEA will have a significant impact on clients. For practitioners of insurance regulatory law, notifying clients and assisting them to understand and comply with the new notice and reporting obligations and/or defending them against allegations of failure to comply and notices of the imposition of penalties will have a significant impact on clients. While requiring reporting of all resolved liability claims encompassing medical costs subject to Medicare should enable the federal Medicare program to realize considerable savings is simple, compliance with MMSEA's requirements is not. The reporting format from a technical perspective requires an insurer not just to register as required, but also to determine if registration by an individual issuing company or for the company as a whole is best suited to it. In addition, insurers must now track all claims where Medicare is implicated, gather detailed information about a claimant, and report as required under the MMSEA in a specified, electronic format. With the detailed registration and reporting requirements, and strict time deadlines imposed by MMSEA, clearly an insurer must exercise diligence to avoid what can be costly civil fines. SURPLUS LINES REGULATION IN FLORIDA – PART II
Kelly A. Cruz-Brown, Esq. Opinions issued by the Florida Supreme Court and the Eleventh Circuit Court of Appeals in late 2008 created ambiguity regarding the scope of regulation of surplus lines insurers in Florida, particularly in the area of policy form and rate approval. Historically, surplus lines insurers writing such policies in Florida have not been subject to policy form and rate regulation applicable to authorized insurers under Chapter 627, Florida Statutes. In response to these opinions and the uncertainty created by them concerning Florida's limited regulatory role in relation to surplus lines insurers and their policies, the Florida Legislature passed Committee Substitute for House Bill 853 (2009) ("CS for HB 853") to clarify that insurance policies issued pursuant to Florida's Surplus Lines Law1 are exempt from the requirements of Chapter 627. I. Discussion of Florida Case Law Creating Ambiguity in Regulation of Surplus Lines Insurance2 The Florida Supreme Court in Essex v. Zota, 985 So. 2d 1036 (Fla. 2008), decided a certified question from the United States Court of Appeals for the Eleventh Circuit concerning the interpretation of Florida law requiring delivery of a copy of the insurance policy to the insured.3 In holding that the delivery of the surplus lines insurance policy to the insurance broker was sufficient under Florida law, the Court analyzed the legislative history of several provisions within Chapter 627, Florida Statutes, including section 627.021(2), which exempted surplus lines insurers from certain requirements applicable to admitted carriers. 4 Applying rules of statutory construction, the Court determined that section 627.021(2)'s exemption for surplus lines insurers applied only to Part I of Chapter 627, which deals with rates and rating organizations.5 Therefore, the Court held that surplus lines insurers are subject to all other parts of Chapter 627, including policy form regulation that admitted carriers must comply with - a significant departure from the limited regulation of surplus lines insurers and their policy forms in Florida for at least the past twenty years. Shortly thereafter, the Eleventh Circuit Court of Appeals issued its opinion in CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance Company, 291 Fed. Appx. 220, 2008 WL 3823898 (11th Cir. 2008), finding that policy form review and approval requirements applicable to authorized insurers under section 627.410, Florida Statutes, applied to surplus lines insurance based upon Essex.6 II. Legislative Action in Response to Essex and CNL Opinions During the 2009 Regular Session of the Florida Legislature,7 CS for HB 853 was passed to exempt surplus lines insurers from Chapter 627, 8 and impose certain requirements on surplus lines insurers that admitted insurers must comply with 9 or that the Florida state and federal courts have determined also apply to surplus lines insurers. 10 CS for HB 853 has been enrolled and sent to Florida's governor for signature.11 Every bill passed by the Florida Legislature must be presented to the governor for approval and shall become a law if the Governor approves and signs it, or fails to veto it within seven consecutive days after presentation.12 The provisions of this bill and potential impacts are discussed in further detail below:
CS for HB 853 amends section 626.913, Florida Statutes, to expressly state that the provisions of Chapter 627 do not apply to surplus lines insurance authorized under Florida's Surplus Lines Law except as may be specifically stated.13 The exemption is remedial and operates retroactively from October 1, 1988, which is the effective date of section 627.012.14 15 However, lawsuits filed on or before May 15, 2009 are not subject to the October 1, 1988 retroactive date.16 This retroactive exemption of surplus lines from Chapter 627 conforms to Florida Statutes and Florida case law concerning retroactive application of statutes. Section 624.21, Florida Statutes, requires amendments to the Florida Insurance Code to operate prospectively, unless a contrary legislative intent is specified, which CS for HB 853 does. CS for HB 853's specific language regarding its remedial nature and non-application to suits filed before or on May 15, 2009, is designed to ensure that due process of asserted substantive rights is not adversely affected or abolished.17 Finally, CS for HB 853 includes a severability clause 18 to cure any possible constitutional encroachment resulting from CS for HB 853 or its application. It and the corresponding judicial doctrine of severability are designed to: 1) recognize the obligation of the judiciary to uphold the constitutionality of legislative enactments where possible and to strike only the unconstitutional portions; and, 2) to show great deference to the legislative prerogative to enact laws.19
Section 626.924, Florida Statutes, was amended to require surplus lines policies issued on or after October 1, 2009 to have stamped or printed on the face of the policy the following notice in at least 14-point, boldface type: SURPLUS LINES INSURERS' POLICY RATES AND FORMS ARE NOT APPROVED BY ANY FLORIDA REGULATORY AGENCY.20 Section 626.9371 was created to establish requirements for payment of premiums and claims for surplus lines insurance contracts issued on or after October 1, 2009 in Florida or covering risks located in Florida. This provision is substantially similar to existing section 627.4035 on the same subject; however, unlike section 627.4035, section 626.9371 does not impose premium payment plan options or approval requirements of such plans for personal and commercial residential property policies.21 Section 626.0372, Florida Statutes, was created to establish disclosure statements for certain information concerning liability coverage under surplus lines policies issued on or after October 1, 2009. Section 626.0372 is substantially similar to existing section 627.4137 on the same subject. The disclosure statement information to be provided under section 626.0372 is the same as section 627.4137:
However, section 626.0372 does not enact the same response and amendment periods imposed by section 627.4137. 23 Instead, section 626.0372 establishes a sixty day period for surplus lines insurers to comply with a claimant's request for information or amend any prior disclosures upon discovery of facts meriting such an amendment. 24 Section 626.9373, Florida Statutes, was created to impose attorneys' fees penalties against surplus lines insurers upon entry of a judgment or decree by a Florida court against a surplus lines insurer under a policy or contract executed by the insurer on or after the effective date of CS for HB 853. It is similar to section 627.428(2) and (3)25 26 and states in pertinent part:
Finally, Section 626.9374, Florida Statutes, was created to impose disclosure requirements concerning hurricane or wind deductible and coinsurance provisions within surplus lines policies insuring personal lines residential property insurance policies after October 1, 2009.27 These disclosures must appear on the face of the policy and be in at least 14-point boldface type.28 These notice disclosure requirements are similar to those applying to admitted carriers under section 627.701(4)(a). However, it is significant that section 626.9374 specifically refers to "hurricane or wind losses" and section 627.701(4)(a) only refers to "hurricane losses."29 Section 626.9374's reference to "wind losses" implies that any surplus lines policies insuring against any wind loss, including one not associated with a hurricane, would be required to have the 14-point boldface type disclosure. This interpretation is reasonable given: 1) the Legislature's amendments to section 627.701 to transition personal residential and commercial residential property insurance policies providing windstorm deductibles and coinsurance based on wind losses to higher hurricane deductibles and coinsurance based on hurricane losses;30 and, 2) the Florida Office of Insurance Regulation's distinction between windstorm events associated with hurricanes and windstorm events not associated with hurricanes as evidenced by its directive to residential property to use the "all other perils" or "other than hurricane" deductibles following Tropical Storm Fay in 2008.31 III. Conclusion Surplus lines insurers should carefully examine Chapter 627, Florida Statutes to determine which, if any provisions specifically refer to surplus lines insurers or surplus lines insurance to determine the specific statutes within Chapter 627 that are applicable and the extent of such application in light of CS for HB 853's exemption language. Moreover, the new disclosure requirements are different from those required under Chapter 627 and should be carefully examined. |
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