That is the second installment of a two-part take a look at the highest 10 insurance coverage regulatory developments of 2020 by attorneys at Locke Lord. The first part on Jan. 22 coated COVID-19, Insurtechs, Information Privateness, Race Equality and Pharmacy Profit Managers. Right here they take a look at Antitrust, Captives, Service Contracts, Journey Insurance coverage and Surplus Traces.
Well being Insurers and Antitrust Legal guidelines
Blue Cross Blue Protect Anti-Belief Case Settlement
After greater than eight years of contentious multi-district antitrust litigation between the Blue Cross and Blue Protect Affiliation (“BCBSA”), its 36 member insurance policy (“BCBS Member Plans”) and their policyholders, relating to restrictions on competitors amongst BCBS Member Plans, the events lastly got here to a tentative settlement within the fall of 2020, together with a $2.7 billion restitution fund to injured plaintiffs. And whereas that money settlement is sort of giant, it’s the non-momentary reduction which will have a a lot bigger lasting affect on the business.
The 5 key provisions of the proposed injunctive reduction are: (1) the abolition of the nationwide “Greatest Efforts” clause in BCBSA’s previous and future license agreements for the member plans, which at present restricts their capacity to generate income utilizing non-BCBSA manufacturers (i.e., Inexperienced Plans); (2) the power for sure certified nationwide accounts (typically these with over 5,000 staff) to acquire a second Member Plan bid, which is able to create elevated selection for such accounts (and has the potential to end in two bids from BCBS Member Plans for certified nationwide accounts overlaying a minimum of 33 million people); (3) the power for all certified nationwide accounts with a number of headquarters with unbiased decision-making authority to request a bid from the BCBS Member Plan in every headquarters’ service space for workers working at that location; (4) restrictions on BCBSA’s capacity to regulate—by means of BCBS Member Plan voting—whether or not any particular person Member Plan could also be acquired by one other Member Plan; and (5) the power for self-funded accounts to immediately contract with non-provider distributors and specialty service supplier distributors.
Of the above, the elimination of the nationwide “Greatest Efforts” clause will seemingly have the most important affect of the medical health insurance sector in 2021. Bigger BCBS conglomerates akin to Anthem Well being Care Service Company (“HCSC”), Cambia Well being Options and Highmark can now compete immediately in all 50 states in opposition to different BCBS Member Plans, as long as the BCBS model is just not used. This may seemingly immediately result in elevated competitors, both by means of direct progress or by means of acquisition of non-Blue plans in markets at present dominated by a BCBS Member Plan.
McCarran-Ferguson Act Partial Repeal
Within the second change to the McCarran-Ferguson Act since its adoption in 1945 (the primary and solely prior change was the 1999 Gramm-Leach-Bliley Act), Congress repealed the antitrust immunity safety for the enterprise of medical health insurance by means of its passage of the Aggressive Well being Insurance coverage Reform Act of 2020 (H.R. 1418) in December 2020. If the President endorses this invoice, medical health insurance corporations and well being upkeep organizations will now not get pleasure from freedom from the federal, major antitrust legal guidelines, the Sherman Act and Clayton Act. Life and property and casualty insurance coverage corporations wouldn’t be affected by H.R. 1418.
Captive Insurance coverage Firm Lawsuits
CIC Companies v. IRS
In a uncommon captive insurance coverage firm tax-related case to succeed in the Supreme Court docket, the Court docket heard oral arguments in late 2020 relating to the power of taxpayers to problem the Inside Income Service’s Discover 2016-66, as later modified by Discover 2017-08. In these notices, the Inside Income Service declared that sure preparations involving small captive insurance coverage corporations certified beneath Inside Income Code part 831(b) have been “transactions of curiosity”, indicating their potential inappropriate use for federal earnings tax functions and required that house owners and repair suppliers report details about their captive insurers’ operations. Captives qualifying beneath part 831(b) might obtain not more than $2.2 million of annual insurance coverage premiums and are taxed solely on their funding earnings, not on their insurance coverage premiums. The IRS continued its concentrate on such captives in 2020, asserting that 12 new examination groups have been anticipated to audit taxpayers for collaborating in these micro-captive insurance coverage transactions.
CIC Companies introduced an motion in opposition to the IRS in 2017 difficult the IRS’s notices on the grounds that the IRS didn’t observe the federal administrative procedures motion (“APA”) and accord these notices a public overview and remark alternative. The IRS gained the case on the decrease ranges on the premise that the federal Anti-Injunction Act prohibits lawsuits introduced for the “objective of restraining the evaluation or assortment of any tax.” The Supreme Court docket accepted CIC Companies’ enchantment, and the result of this case could have a major affect on the IRS’ capacity to problem future taxpayer compliance notices.
Johnson & Johnson v. Director, Division of Taxation
In Johnson & Johnson v. Director, Division of Taxation, the New Jersey Supreme Court docket held that Middlesex Assurance Co. Ltd., a Vermont domiciled captive insurer owned by J&J, didn’t need to pay self-procurement insurance coverage taxes to New Jersey, J&J’s principal place of job state, primarily based on insured dangers positioned exterior of that state. Following the effectiveness of the federal Nonadmitted and Reinsurance Reform Act (“NRRA”) in 2011 pursuant to the Dodd-Frank Act, the New Jersey Legislature amended its insurance coverage premium tax legal guidelines to implement the NRRA’s “house state” rule. Nevertheless, whereas New Jersey utilized such revisions to it surplus strains insurance coverage legislation it failed to use such revisions to self-procured insurance coverage. Recognizing this error, J&J sought a refund of practically $56 million of self-procurement tax it had beforehand paid to the New Jersey. Whereas the Division of Taxation initially denied J&J’s refund request, which the New Jersey Tax Court docket affirmed, the New Jersey Appellate Court docket finally reversed the decrease court docket’s choice, and the New Jersey Supreme Court docket affirmed.
The interaction between the NRRA’s house state rule for surplus strains insurance coverage and a state’s capacity to tax premiums for self-procured insurance coverage is more likely to proceed in 2021 given the potential giant premium tax {dollars} at problem in some conditions and we’d anticipate to see comparable challenges in a lot of different states which have didn’t replace their relevant self-procurement statutes to reap the benefits of their rights beneath the NRRA to tax such placements.
Service Contracts/Prolonged Warranties
Regardless of insurance coverage legal guidelines and rules having existed for a lot of many years, the query of whether or not a selected contract constitutes considered one of insurance coverage arises virtually yearly, significantly as historically non-insurance companies search to include danger safety parts into their core services or products, and 2020 was no totally different on this regard.
In Sparks v. Outdated Republic Residence Safety Co. Inc., the Oklahoma Supreme Court held that what appeared (and was seemingly supposed) to be a service contract was really an insurance coverage contract by the use of additionally being a guaranty, thereby stopping enforcement of an arbitration clause within the contract. In that case, Outdated Republic issued to the plaintiff householders a contract labeled as an Oklahoma house guarantee that offered protection to them for the restore or substitute of their house air-con system for sure loss occasions.
Primarily based on a protection declare dispute, plaintiffs sued Outdated Republic for breach of contract and dangerous religion breach of contract, and Outdated Republic sought to compel arbitration beneath the contract’s arbitration clause which offered that the Federal Arbitration Act would govern disputes involving the contract. The trial court docket denied Outdated Republic’s movement to compel arbitration, discovering that the contract at problem was insurance coverage in nature and thus the federal McCarran-Ferguson Act reversed preempted the appliance of the Federal Arbitration Act and the Oklahoma arbitration act’s exclusion for insurance coverage utilized. The state’s appellate court docket affirmed that call following Outdated Republic’s interlocutory enchantment, which the Oklahoma Supreme Court docket affirmed. Outdated Republic argued that its house guarantee contract was actually a house service contract and thus not insurance coverage and never topic to the Oklahoma Arbitration Act’s exception for a contract that references insurance coverage. Nevertheless, the court docket famous that Outdated Republic had initially pleaded within the case that it was an insurance coverage firm and its house guarantee contract was an insurance coverage contract. And, the contract referred to Outdated Republic as being a part of an insurance coverage group. To find that Outdated Republic’s house guarantee contract was insurance coverage for functions of Oklahoma’s arbitration legislation, the court docket adopted its prior, 2011 Oklahoma case, McMullan v. Enterprise Monetary Group Inc., during which it held {that a} car service contract was an insurance coverage product.
Journey Insurance coverage Litigation
Along with their very own COVID-19-based journey insurance coverage denial of protection litigation, a number of journey insurance coverage corporations and, in some circumstances, their airways and different journey enterprise companions, turned the topic of a barrage of lawsuits in 2020 primarily based on varied state legislation client deception, unjust enrichment and wrongful sale of personal private client data theories associated to compensation paid by these journey insurers to their advertising companions that helped facilitate gross sales of journey insurance coverage.
For essentially the most half, the crux of those actions declare that the journey enterprise companions that enabled customers’ buy of journey insurance coverage protection beneath group insurance coverage insurance policies issued to the airways by means of their web sites the place air journey ticket gross sales additionally occurred had acquired advertising charges that have been unlawful kickbacks and breaches of an obligation to confide in client purchasers that the airline corporations acquired compensation from the insurers. Whereas many of those lawsuits have been dismissed, Delta Air Traces Inc., JetBlue Airways Corp., American Airways Inc., United Airways Inc., Alaska Airways Inc. and Amtrak entered right into a $26 million settlement in November 2020 to resolve claims that the businesses induced clients to purchase journey insurance coverage with out disclosing that the airways and Amtrak acquired compensation as a part of the deal.
Compensation preparations between insurance coverage corporations and companies or different permissible holders of group insurance coverage insurance policies, like skilled associations, have lengthy been difficult to construction in a regulatory compliant method due to sure states which have cling to antiquated anti-commission sharing legal guidelines that prohibit insurers (and insurance coverage brokers) from paying advertising compensation primarily based on profitable gross sales of insurance coverage to individuals not licensed as an insurance coverage producer.
Most, however not all, states permit such compensation so long as the unlicensed individual has not crossed the road within the advertising association of soliciting the acquisition of insurance coverage, which requires an insurance coverage producer license. In states the place these anti-commission sharing legal guidelines stay, oftentimes the compensation paid by insurers to unlicensed advertising companions is structured in a work-around method as an entry to potential buyer payment or a license payment to us the unlicensed individual’s trademark, but when the payment is not directly primarily based on insurance coverage gross sales, there should be some insurance coverage regulatory compliance danger publicity. The rise of insurtech enterprise fashions involving unlicensed individuals facilitating insurance coverage gross sales is more likely to improve the highlight on these points.
Surplus Traces Insurance coverage Regulatory Developments
The excess strains insurance coverage market has not solely survived COVID-19, however has seen substantial progress. Nevertheless, the excess strains area has actually been impacted nonetheless by COVID-19 and the regulatory responses thereto. For instance, New York issued a short lived moratorium on the cancellation and nonrenewal of sure property and casualty insurance coverage insurance policies, with applicability to sure insurance policies issued by surplus strains insurers. California and New Jersey have requested that surplus strains insurers make premium refunds to policyholders on sure strains of property and casualty insurance coverage insurance policies the place danger profiles have modified on account of the COVID-19 pandemic. On the federal degree, draft variations of PRIA expressly ponder applicability to surplus strains insurers, each U.S. and alien (non-U.S.) insurance coverage corporations.
There are additionally bold plans as to the regulation of surplus strains group placements and alien belief fund necessities within the works. The NAIC Surplus Traces Process Drive (“Process Drive”) fashioned a drafting group to overview the NAIC Nonadmitted Insurance coverage Mannequin Act (Mannequin 870) (the “Act”). The Process Drive’s suggestions included addressing the anomaly of remedy relating to group surplus strains insurance coverage insurance policies. Particularly, the NRRA defines “house state” as (i) the state during which an insured maintains its principal place of job or, within the case of a person, the person’s principal residence; or (ii) if 100 % of the insured danger is positioned out of the state referred to in clause (i), the state to which the best proportion of the insured’s taxable premium for that insurance coverage contract is allotted. With respect to group insurance coverage insurance policies, nevertheless, the NRRA particularly addressed the right way to decide the principal place of job of an affiliated group, however doesn’t tackle the right way to decide the house state of an unaffiliated group (together with however not restricted to insurance policies issued by means of a danger buying group or by a danger retention group). As such, it’s not at all times clear whether or not a state the place a gaggle member resides will settle for admitted market declinations obtained in, or surplus strains premium taxes paid to, solely the grasp policyholder’s house state.
We’re additionally seeing a development away from the diligent search requirement, because the U.S. Virgin Islands now solely requires declinations from two admitted insurers for householders’ insurance coverage protection, one declination in reference to small business P&C protection, and no diligent search is required with respect to the location for giant business property and casualty insurance coverage protection (outlined as premium in extra of $35,000). As well as, on September 24, 2020, the Nationwide Council of Insurance coverage Legislators adopted the Personal Main Residential Flood Insurance coverage Act (the “NCOIL Flood Act”). The NCOIL Flood Act, amongst different issues, supplies {that a} state’s diligent effort legislation shall not apply to flood insurance coverage till the relevant state commissioner certifies that there’s an ample market amongst approved, admitted insurers for personal flood insurance coverage. South Carolina has already handed Senate Invoice 882 waiving the diligent search requirement as to flood insurance coverage, and it stays to be seen what different states will undertake such surplus strains diligent effort provisions.
The post Top Insurance Regulatory Developments of 2020: Part 2 appeared first on Correct Success.
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