Opinion ID: 661453
Heading Depth: 3
Heading Rank: 3

Heading: The Actuarial Letter

Text: 73 Self-insured employee benefit plans and their employer sponsors, including the Sheridan Catheter Plan (on whose behalf Travelers challenges the Actuarial Letter), often purchase stop-loss insurance to protect themselves against excess or catastrophic losses. Unlike traditional group-health insurance, stop-loss insurance is akin to reinsurance in that it does not provide coverage directly to plan members or beneficiaries. Rather, most stop-loss policies (and the policy issued to the Sheridan Catheter Plan here) provide coverage to the plan itself if the total amount of claims paid by the plan exceeds the amount of anticipated claims by a specified sum. 74 The Actuarial Letter under attack purports to regulate the terms of such stop-loss insurance contracts. Its relevant provisions follow:1. The insurer must undertake to ensure that statutorily mandated benefits be covered under the employer's plan; 75 2. The insurer must agree to ensure that statutory conversion policies be provided, either by them or by another insurer; 76 3. Notice must be given to employees if and when the insurer becomes liable for runoff claims.... 77 4. The insurer should maintain full runoff reserves. If the policyholder holds his own reserves, the insurer's claim reserves are to be replaced by a terminal premium payable immediately upon termination.... 78 5. The insurer must take full responsibility for the payment of all employer plan claims incurred but not yet paid at the date of termination of the policy ... 79 The district court properly found that pp 1, 2, 3, and 5 of the Actuarial Letter relate to an employee benefit plan for purposes of ERISA's preemption clause. Paragraphs 1 and 5 on their face make specific reference to an employee benefit plan, and pp 2 and 3 clearly have a connection with such plans. See Greater Wash. Bd. of Trade, --- U.S. at ----, 113 S.Ct. at 583 (quoting Shaw, 463 U.S. at 97, 103 S.Ct. at 2900). ERISA therefore preempts pp 1, 2, 3, and 5 of the Actuarial Letter unless they find salvation in ERISA's saving clause as a law that regulates insurance, and even that salvation will be denied unless the employee benefit plan can escape the orbit of Sec. 1144(b)(2)(B) refusing to deem such a plan to be an insurance company or other insurer. 80 The district court concluded that pp 1, 2, 3, and 5 were preempted and the saving clause for insurance regulations did not save them because, under the deemer clause, self-insured employee benefit plans are not deemed to be an insurance company or other insurer.... FMC Corp. v. Holliday, 498 U.S. 52, 61, 111 S.Ct. 403, 409, 112 L.Ed.2d 356 (1990). The Department of Labor and Travelers, while agreeing with this result, suggest that the district court should not have reached the deemer clause without first considering whether pp 1, 2, 3, and 5 regulate insurance at all, within the meaning of the saving clause. We agree. Accordingly, we affirm the district court's holding on a different ground: pp 1, 2, 3, and 5 are not saved from preemption because those paragraphs do not regulate insurance within the meaning of the saving clause. 81 As already discussed, in order to fall within the saving clause, the state law must constitute the regulation of insurance from a common-sense point of view and must also satisfy the McCarran-Ferguson factors. See Pilot Life, 481 U.S. at 48-49, 107 S.Ct. at 1553. The challenged provisions of the Actuarial Letter do neither. 82 Pilot Life 's common-sense test does not validate every conceivable restriction on the sale of insurance contracts under the rubric of regulation of insurance. See Howard, 901 F.2d at 1158. We conclude that pp 1, 2, 3, and 5 of the Actuarial Letter use the regulation of stop-loss coverage as a pretext to regulate the terms of self-funded ERISA plans. 83 In p 1 of the Actuarial Letter, the State permits a self-insured plan to obtain stop-loss coverage only if the plan provides its members and beneficiaries with the full panoply of benefits mandated by New York's Insurance Law. Paragraph 2 requires the plan to provide its beneficiaries with the right to a statutory conversion policy. Paragraphs 3 and 5 require the plan to afford its members a host of protections in case the plan becomes insolvent. Because the conditions imposed by the Actuarial Letter are not limited just to the stop-loss layer of insurance but apply generally to the entire plan, we conclude that pp 1, 2, 3, and 5 of the Letter do not, as a practical matter, regulate just insurance. 84 Furthermore, the challenged provisions of the Actuarial Letter do not satisfy the McCarran-Ferguson criteria. First of all, pp 1, 2, 3, and 5 do not have the effect of transferring or spreading risk between a self-funded plan and its stop-loss insurer but, instead, require the self-insured plan to provide additional benefits and protections to the plan's members and beneficiaries. 85 Second, the challenged provisions are not an integral part of a self-funded plan's relationship with its stop-loss insurer. Paragraph 1, for example, focuses squarely on the self-funded plan's relationship with its participants, not with the stop-loss insurer. Because employees are not insured under the terms of the stop-loss policy, requiring the stop-loss insurer to notify such individuals, as p 3 does, is not an integral part of the insurance relationship. Likewise, because p 5's purpose is to protect employees, who are not insured under the stop-loss contract, that paragraph is not an integral part of the insurance relationship between the plan and its stop-loss insurer. 86 Finally, pp 1, 2, 3, and 5 are not limited to insurance entities. Paragraph 1 is aimed directly at sponsors of self-funded plans. By requiring the sponsoring employer to provide conversion rights through another insurer if the stop-loss insurer does not provide such rights, p 2 is aimed directly at employers who are not part of the insurance industry. See Howard, 901 F.2d at 1159 (state law requiring either insurer or employer to notify covered employees of conversion rights was not limited to entities within the insurance industry). Likewise, p 3 states specifically that the Department of Insurance will accept a policy provision which requires the employer to pass along [the notice] material. Thus, it too is not limited to entities within the insurance industry. See id. 87 In sum, the challenged provisions of the Actuarial Letter satisfy neither the common-sense test nor the McCarran-Ferguson factors. Consequently, they do not fall within the saving clause and are preempted. 88 The district court also held that pp 4, 6, and 7 of the Actuarial Letter do not relate to ERISA plans and, accordingly, did not reach the saving clause argument as to those paragraphs. On cross-appeal, Travelers argues that the district court erred to the extent it found that p 4 does not relate to ERISA plans. 7 We agree and therefore reverse that part of the district court's decision holding that p 4 is not preempted. 89 Paragraph 4, like pp 1, 2, 3, and 5 of the Actuarial Letter, is directed at the purchasers of stop-loss coverage which are primarily ERISA plans. It effectively requires the policyholder--which is an ERISA plan--either to purchase insurance for run-off claims or maintain significant reserves of its own. This alone merits a finding that p 4 has a connection with employee benefit plans and, therefore, is relate[d] to such plans for purposes of ERISA's preemption clause because stop-loss protection will guarantee that benefits are paid to employees even if the carrier suffers catastrophic losses. 90 Reaching the saving clause argument, we conclude that p 4 does not regulate insurance and therefore is not saved from ERISA preemption. In our view, p 4 attempts to regulate, through the self-loss insurer, the benefits offered by and the administrative functioning of self-funded ERISA plans. Paragraph 4 is similar to the other challenged paragraphs. Like pp 1, 2, 3, and 5 of the Actuarial Letter, p 4 does not fall within the saving clause and is, therefore, preempted. 91 We hold, therefore, that the five challenged paragraphs do not regulate insurance within the meaning of the saving clause and, accordingly, are preempted. We affirm the district court's ruling as to pp 1, 2, 3, and 5 of the Actuarial Letter, and reverse as to p 4.