Opinion ID: 1856277
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Heading: Is the Group an Insurer and Underwriting Association?

Text: The Association next contends that it is not liable for the claims in question because the Group is an insurer and an underwriting association. In support of this contention, the Association points to the provisions of Iowa Code section 515B.2(3), which, as we noted, excludes from the definition of covered claims an amount due any insurer or underwriting association. A. Insurer status. For the purposes of the Guaranty Association Act, an insurer means an insurer licensed to transact business in this state under either chapter 515 or chapter 520, either at the time the policy was issued or when the event occurred. Iowa Code § 515B.2(4). Under this narrow definition, the Group is clearly not an insurer. It is not licensed to transact business in this state under either chapter 515 or chapter 520. The legislature may be its own lexicographer, and when it chooses to do so we are bound by its definitions. Cedar Rapids Community School Dist. v. Parr, 227 N.W.2d 486, 495 (Iowa 1975). The narrow definition of insurer in section 515B.2(4) is a statutory manifestation of legislative intent to provide guaranty fund protection not only to single self-insurers but also to self-insured groups like the Group. There are other such manifestations. These include the genesis of the Guaranty Association Act itself, administrative regulations, and statutory amendments to chapter 87. Because our Insurance Guaranty Association Act is patterned after the NAIC Model Act, we think construction of the Model Act by its drafters is persuasive as to the meaning of our own Act. The NAIC 1983 Study Committee on this subject, after a year's work, submitted a report to the NAIC about self-insured workers' compensation groups like the Group. According to the report, about one-half of the states permit these groups. See II NAIC Proceedings 742 (1983). At two different places in the report, the Committee unequivocally noted the availability of insurance guaranty association fund protection if a group's excess carrier were to become insolvent. See id. at 770 (If the excess insurance company is not able to deliver on its contractual promises, the insurance guaranty fund can be called upon if the excess company is a licensed company.); id. at 783 (Licensed excess insurance companies not only are subject to closer regulatory supervision than unlicensed companies, but also provide workers' compensation groups with the additional protection afforded by state insolvency guaranty funds.). In 1984 the Iowa Department of Insurance adopted regulations pertaining to workers' compensation groups self-insurance. The regulations specifically provide that such a group formed pursuant to Iowa Code section 87.4 shall not be deemed to be an insurance company, shall not be subject to the provisions of the insurance laws, and shall not be subject to the premium tax on direct insurance under Iowa Code section 432.1. 191 Iowa Admin.Code 56.1(1), 56.2(4). The following year the legislature, in an apparent approval of these regulations, amended section 87.4 by exempting self-insured groups from the payment of premium taxes under section 432.1. 1985 Iowa Acts ch. 251, § 1. Thus, it seems clear to us that both the Insurance Department, to whose regulations we give deference, and the Iowa Legislature meant to reinforce the section 515B.2(4) distinction between insurers and workers' compensation self-insured groups. In short, the groups are simply not insurers for purposes of Iowa Code chapter 515B. The Association's arguments to the contrary lack merit. Apart from the fact that the Group is not an insurer under the Code, we think there is an additional reason why it is not an insurer. In determining whether an entity is an insurer, we must look through the form of the transaction to determine whether the relationship of insurer and insured exists. Whether the contract is one of insurance must be determined from its purpose, effect, content, terminology, and conduct of the parties, and not from its designation therein, since a contract which is fundamentally one of insurance cannot be altered by the use or absence of words in the contract itself. The court must look also to the intention of the parties in making this determination. Huff v. St. Joseph's Mercy Hosp. of Dubuque Corp., 261 N.W.2d 695, 700 (Iowa 1978) (quoting Appleman on Insurance ). Applying the above principles to the arrangement between the Group and its members, we think such an arrangement hardly resembles insurance as it is commonly understood. The joint and several liability provision underlying the separate indemnity agreement between the Group and its members materially distinguishes the arrangement from traditional forms of insurance. No traditional insurance policy that we are aware of requires all of the company's insureds to contribute their own funds, without limitation, to satisfy the company's claims in the event of its insolvency. Notwithstanding the joint and several liability feature, the Association insists the arrangement between the Group and its members is insurance. A contract is one of insurance if it meets the following test: one party, for compensation, assumes the risk of another; the party who assumes the risk agrees to pay a certain sum of money on a specified contingency; and the payment is made to the other party or the party's nominee. Huff, 261 N.W.2d at 700. The Association claims the arrangement between the Group and its members meets the Huff test. Focusing on the risk element of the test, the Association argues that the Group assumes the risk because the liability agreement states that the Group, rather than the members, is directly and primarily liable to any person entitled to benefits payable by this agreement. The Association characterizes the Group's duty under the agreement as primary and the members' joint and several liability as secondary. The Group counters by arguing that it did not assume the risks of its membersit merely acted as an agent for all its members to spread their risks of adverse workers' compensation claims among themselves through the joint and several liability provision in the indemnity agreement. The Group looks upon the joint and several liability provision as the prime distinction between an employer's membership in a self-insurance group and an employer's purchase of workers' compensation insurance. For example, an employer who purchases workers' compensation insurance transfers all of its compensation risks to the insurer, who is obligated to pay all claims up to the policy limits. The employer cannot be compelled to contribute toward the payment of an insurer's other claims if the insurer's own resources are not enough to satisfy all its contractual obligations. In contrast, an employer that is a member of a self-insurance group not only retains financial exposure for its own workers' compensation claims but also for the claims against other member employers. While it is true that the Group does assume some risk, it does not assume all of the risks. This is so because of the joint and several liability provision. As explained by one treatise writer, [a]ll insurance contracts concern risk transference, but not all contracts concerning risk transference are insurance. The complex bundle of risks from a venture gives rise to a variety of kinds of legal risk transference, some of which are not regarded as insurance for any purpose, and some of which are regarded as insurance for one purpose but not for another. Even in states having the broadest statutory or decisional definitions of insurance, which if literally applied would include all or nearly all contracts transferring risk, many arrangements literally within such definitions are not treated as insurance transactions in legal contexts. R.E. Keeton, Insurance Law 6 (1971). According to Keeton, [j]ust as risk transference may be accomplished without insurance, so may risk distribution. Id. at 7. Self-insurance, in Keeton's view, is a form of risk distribution, or in the Group's words, risk spreading. Though entities operating in this way are sometimes referred to as self-insurers, Keeton takes the position that this type of operation involves no insurance as that term is used in regulatory statutes. Id. at 7-8; accord Zinke-Smith, 304 So.2d at 509. We agree with Keeton's analysis. Given the legal context of self-insured workers' compensation groups and the degree of risk retained by self-insured group members vis-a-vis the degree of risk transferred by the members, we are led to conclude that the arrangement in question does not make a self-insured group an insurer for purposes of chapter 515B. Risk spreading, the primary function served by the arrangement between the Group and its members, may be accomplished without insurance, just as risk transference may be. Our conclusion is in harmony with the purposes of section 87.4 and chapter 515B. It simply makes no sense to allow employers to take advantage of the provisions of section 87.4 and then deny them the protection of chapter 515B in the event of an insurance carrier's insolvency. Iowa Code section 515B.2(3) buttresses our conclusion. As we noted, a covered claim does not include the self-insured portion of the claim. By implication then, claims by self-insured entities are covered by our Guaranty Association Act. Significantly, the statute makes no distinction between self-insured portions of claims filed by self-insured employers and those filed by self-insured groups. B. Underwriting association status. An underwriting association is not defined in Iowa Code chapter 515B. An underwriter is simply an insurer. Davids, Dictionary of Insurance 255. We think the legislature intended the term underwriting association as used in section 515B.2(3) to mean a group of insurers. We have already determined that the Group is not an insurer for purposes of chapter 515B. Therefore, it is not an underwriting association either. The district court correctly concluded that the Group is not an insurer or underwriting association for purposes of section 515B.2(3).