SUPREME COURT OF TEXAS HOLDS STOP-LOSS INSURANCE SOLD TO A SELF-FUNDED EMPLOYEE HEALTH-BENEFIT PLAN IS DIRECT INSURANCE SUBJECT TO REGULATION UNDER THE INSURANCE CODE

Last Friday, the Supreme Court of Texas held stop-loss insurance sold to a self-funded employee health- benefit plan is not reinsurance, but rather is direct insurance subject to regulation under the Insurance Code.  Texas Dept. of Ins. v. Am. Nat. Ins. Co., 10-0374, 2012 WL 1759457 (Tex. May 18, 2012).

In Texas Department of Insurance v. American National Insurance Company, et al, the Texas Supreme Court was asked whether stop-loss insurance sold by insurers to self-funded employee health-benefit plans was “direct health insurance” or “reinsurance” – a significant distinction since direct insurance is subject to state insurance regulation, while reinsurance is not.  Reinsurance is not regulated because it usually involves the reallocation of risk between two insurance companies rather than a consumer- insurance transaction.   Under a self-funded benefit plan, an employer assumes the risk of providing health insurance to its employees, instead of ceding the risk to a third-party insurance company.  The employer then either sets aside funds for its employees’ covered medical expenses or pays for such expenses out of its general accounts.  Self-funded plans typically hire third parties to administer the plan and often purchase stop-loss insurance to limit financial exposure to catastrophic losses.

In the facts giving rise to the suit, the Texas Department of Insurance determined that American National Insurance Company and American National Life Insurance Company of Texas  (collectively “American”) had sold stop-loss policies between without paying taxes or complying with other regulatory requirements applicable to insurers.  TDI found  American had violated the Insurance Code by “improperly recording the direct stop-loss policy premiums obtained from the self-insured employers as ‘assumed reinsurance,’ “ rather than as “direct written premium.”  TDI also found American had failed to pay assessments due the Texas Health Insurance Risk Pool on the stop-loss policies and had failed to submit the policy forms to the Department for approval or to request an exemption as required by the Administrative and Insurance Codes.

After exhausting its administrative remedies, American sued TDI seeking declaratory and injunctive relief.  American contended that its stop-loss policies were reinsurance and therefore the Department lacked regulatory authority.  TDI argued American’s stop-loss policies were direct insurance subject to the  Texas  Insurance  Code  and  its  regulatory  authority.  Both  American  and  TDI  filed  motions  for summary judgment. The trial court granted TDI’s motion and American appealed.

 On appeal, the appellate court concluded that an employer’s self-funded plan was clearly an insurer under the Texas Insurance Code and that a plan’s purchase of stop-loss insurance was also clearly reinsurance beyond the regulatory scope of the Texas Department of Insurance. The Supreme Court of Texas reversed to appellate ruling holding that the state can regulate stop-loss insurers who contract with employer's self­ funded plans since stop-loss insurance is direct insurance  and not reinsurance.  Therefore, American was required to contribute  to the Texas Health Insurance  Risk Pool and to submit their policies to the Texas Department of Insurance for approval.