Opinion ID: 626153
Heading Depth: 4
Heading Rank: 1

Heading: PCI/NP's Evasion of State Insurance Regulation

Text: We find significant the cease and desist orders issued by insurance commissioners of seven states against PCI/NP, PCMG, Doyle, and in some cases, the PITWU Fund and Holloway. Some regulatory background is necessary to understand the significance of these orders. Providing and selling insurance, including health insurance, is generally regulated by the states. See Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355, 387, 122 S.Ct. 2151, 153 L.Ed.2d 375 (2002). Certain self-insured employer and union plans that are subject to ERISA's funding, vesting, and fiduciary standards are exempted from state insurance regulation. [17] See 29 U.S.C. §§ 1003(a), 1144(b)(2)(B). However, health insurance plans involving multiple employers are deemed multi-employer welfare arrangements (MEWAs) under ERISA, see 29 U.S.C. § 1002(40)(A), and are subject both to ERISA standards and to state insurance regulation, see id. § 1144(b)(6). Nevertheless, certain union-sponsored health insurance plans covering union members working for multiple different employers are excepted from the definition of MEWA and thus remain exempt from state insurance regulation. [18] See 29 U.S.C. § 1002(40)(A)(i). It is not disputed that the Fund was a MEWA, and therefore subject both to ERISA standards and to state insurance regulation. See 29 U.S.C. § 1144(b)(6). The record illustrates that, even though the Fund was properly considered a MEWA and therefore subject to state insurance regulation, PCI/NP and PCMG marketed the Fund as a self-insured union sponsored plan, exempted from state regulation. This connection to the union was reinforced by a form that PCI/NP required its clients to sign entitled Professional Industrial Trade Workers Union Health & Welfare Fund Plan B Disclosure Form, which stated: This health & welfare plan is sponsored by the Professional Industrial Trade Workers Union (P.I.T.W.U.). The plan is self-funded and exempt from state regulation, as outlined in the Employment Retirement Income Security Act (ERISA) of 1974. The plan is under the jurisdiction of the United States Secretary of Labor. This plan is not regulated by any state department of insurance. The plan being self-funded is not covered by any state or federal guarantee fund in the event of fund insolvency. PCI/NP and PCMG thus relied on the Fund's relationship with PITWU to claim that ERISA exempted the Fund, and their marketing of the Fund, from state regulation. From the outset, this scheme attracted the scrutiny of state insurance regulators. In January 2002, less than a month after PCI/NP and PCMG were created, the Oklahoma Insurance Commissioner entered a cease and desist order against PCI, PCMG, and two of its marketing affiliates, finding that they were engaging in the unauthorized sale of insurance and ordering them to cease and desist from any further sales or marketing of insurance in the state. [19] In June 2002, the Louisiana Insurance Commissioner issued a cease and desist order based on its finding that PCI and PCMG were selling health insurance without authorization. The Louisiana Commissioner found that PCI purported to offer PEO services, including health benefits, to its clients. PCI allegedly assumes the role of `co-employer' to the employees of its client employers and thereby provided these employees access to the Fund, pursuant to a CBA between PCI and the Fund. However, the Commissioner found, inter alia, that [T]here is no collective bargaining for wages or improved working conditions as in a bona fide union agreement. . . . Employees of the employers contracting with PCI . . . do not directly join the union, and receive no representation or benefit from PITWU other than access to the union sponsored health plan. One employer from Louisiana who contracted with PCI and enrolled in the health and welfare fund did not include employees or activate any PEO services other than the health benefits. The Commissioner concluded that PITWU was a self-insurance plan covering employees of multiple employers and had not acquired the necessary authorization to sell insurance in Louisiana. [20] The Commissioner summarized several of PCI, PCMG, and their affiliates' marketing practices as follows: The individuals and entities named above have been involved directly or indirectly in making, issuing, circulating, or causing to be made, issued, or circulated written and oral statements in the form of sales presentations and marketing materials used to solicit potential marketing agents and prospective client employers for PCI by, 1) misrepresenting to the public, and on an official document filed with the Louisiana Department of Insurance, that the PITWU or Privilege Care Employee Health and Welfare Fund is not insurance and therefore exempt from regulation under state laws governing insurance and insurance agents; 2) deceptively claiming that PCI's health benefit services have been approved by the Louisiana Department of Insurance; 3) falsely claiming that a [sic] official representative of the Louisiana Department of Insurance had been invited and wanted to attend a compliance and training meeting held by PCMG and PCI in Louisiana on May 16, 2002; and 4) falsely claiming that PCI had been licensed by the Louisiana Department of Labor as a PEO doing business in this state; 5) falsely representing that PCMG had not been issued a cease and desist order prior to April 20, 2002; and 6) violating several prohibitory laws of this state. The Commissioner accordingly ordered PCI, PCMG, the PITWU Fund, Weinstein, Doyle, Garnett, Oak Tree Administrators, and several affiliates to cease and desist from marketing or providing health care services in the state. By the time the Fund ceased operations in May 2003, five other statesNorth Carolina, Texas, Massachusetts, Colorado, and Illinoishad entered similar orders against PCI/NP, the PITWU Fund, PCMG, Doyle, and others. Several of these orders were based on hearings before state insurance commissioners at which it emerged that, as in Louisiana, PCI/NP purported to offer PEO services but actually offered almost exclusively health benefits through the Fund by enabling its clients' employees to obtain health benefits from the Fund without union membership. Several of the later cease and desist orders also noted that the Fund had numerous unpaid claimsfor example, Colorado's Insurance Commissioner noted that as of December 9, 2002, the Fund had over $7 million in unpaid claims. The findings of these insurance commissioners are corroborated by the record before the District Court. Evidence showed that PCI/NP required its clients to sign a disclosure form in which it falsely represented that the PITWU Fund was exempt from state regulation, as outlined in the Employment Retirement Income Security Act (ERISA) of 1974. At the bench trial, five managers whose businesses contracted with PCI/NP testified that their employees were not unionized. One witness stated that he had been assured by PITWU officials that the union had no interest in unionizing employees it was merely a means of providing health insurance and other benefits. The business owners also testified to serious problems resulting from unpaid claims for health benefits from the Fund. Financial data presented by the Secretary supports this testimony, showing that the Fund had $7.6 million in unpaid claims on October 31, 2002. Both Doyle and Holloway were aware of at least some of the cease and desist orders. Doyle had contact with insurance commissioners in some states and participated in some of the related proceedings. [21] He is named in each of the orders, and in several cases the record contains certified mail slips confirming that he or PCMG received copies of the orders. [22] Holloway also learned of some of the cease and desist orders while serving as trustee, mentioning them in her resignation letter as one of her reasons for resigning. But the extent of her knowledge about the orders is unclear, and the orders with the most troubling findings were issued after her resignation. As the District Court found, the Fund's attorney assured Holloway that he would respond to these orders, arguing that this is a union-sponsored plan, it is not insurance, you state commissioners don't have jurisdiction over this. We find it significant that PCI/NP's promotion of the Fund bears striking similarities to the type of scheme that ERISA's MEWA provisions were specifically designed to prevent: an aggressively marketed, but inadequately funded health benefit plan masquerading as an ERISA-exempt plan in order to evade the solvency controls imposed by state insurance regulation. [23] Although the record is not entirely clear on this point, it appears that the ultimate result of this arrangement was that which Congress feared: the Fund was ultimately unable to pay all employee claims, and thus employees participating in the Fund were not provided promised health benefits. [24] Doyle and Holloway were not the principal architects of this scheme, and the question presented by this case is the extent of their awareness of the scheme and liability for its consequences. But we think it is important to keep the nature of the scheme firmly in mind.