Court Opinion

ID: 895406
Source: CourtListenerOpinion
Date Created: 2013-06-06 22:00:52.46347+00
Date Added: 2024-06-11T08:34:22.489771
License: Public Domain

IN THE SUPREME COURT OF TEXAS
                                          444444444444
                                            NO . 10-0374
                                          444444444444

       TEXAS DEPARTMENT OF INSURANCE, HONORABLE MIKE GEESLIN,
     COMMISSIONER OF INSURANCE AND HONORABLE DANNY SAENZ, SENIOR
                 ASSOCIATE COMMISSIONER, PETITIONERS,
                                                  v.

  AMERICAN NATIONAL INSURANCE COMPANY AND AMERICAN NATIONAL LIFE
             INSURANCE COMPANY OF TEXAS, RESPONDENTS

           4444444444444444444444444444444444444444444444444444
                             ON PETITION FOR REVIEW FROM THE
                      COURT OF APPEALS FOR THE THIRD DISTRICT OF TEXAS
           4444444444444444444444444444444444444444444444444444

                                   Argued September 14, 2011

       JUSTICE MEDINA delivered the opinion of the Court.

       JUSTICE HECHT did not participate in the decision.

       The issue in this appeal is whether stop-loss insurance sold to self-funded employee health-

benefit plans is “direct health insurance” or “reinsurance.” The distinction is significant because

direct insurance is subject to state insurance regulation, while reinsurance is not. Reinsurance is not

regulated because it typically involves the reallocation of risk between two insurance companies

rather than a consumer-insurance transaction. The parties to this appeal disagree about whether an
employer who self funds a health-benefit plan for its employees is an “insurer” under the Texas

Insurance Code, and therefore should be treated as a reinsurer when purchasing stop-loss insurance.

       The court of appeals 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. ___ S.W.3d ___,

___ (Tex. App.—Austin 2010) (mem. op.). The court accordingly reversed the trial court’s

judgment, which had sustained the agency’s regulation of the stop-loss policies at issue as direct

insurance. Because the regulatory agency did not clearly err in its regulation of these stop-loss

policies, however, we reverse the court of appeals’ judgment and render judgment for the agency.

                                                 I

       American National Insurance Company and American National Life Insurance Company of

Texas (collectively American) are licensed to sell insurance in Texas. American sells stop-loss

insurance to self-funded employee health-benefit plans, among other types of policies. 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.

       During a routine audit, the Texas Department of Insurance discovered that American had sold

stop-loss policies between January 1998 and December 2002 without paying taxes or complying with

other regulatory requirements applicable to insurers. The Department later formally found that

                                                 2
American had violated article 3.10(a) of 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.”1 The Department reasoned that, because self-funded

employers to which American sold its stop-loss policies were not themselves “insurers authorized

to do the business of insurance,” stop-loss coverage was not “assumed reinsurance.”                           The

Department further found that American had failed to pay assessments due the Texas Health

Insurance Risk Pool on these stop-loss policies in violation of article 3.77.2 Finally, the Department

found that American had failed to submit these policy forms to the Department for approval or to

request an exemption as required by the Administrative and Insurance Codes. See 28 Tex. Admin.

Code §§ 3.4002, 3.4004(e)(2)(J), and TEX . INS. CODE art. 3.42 (repealed).3

        After exhausting its administrative remedies, American sued the Department, seeking

declaratory and injunctive relief. American contended that its stop-loss policies were reinsurance

over which the Department lacked regulatory authority. It asked the trial court to declare the

Department’s actions invalid and to enjoin the Department from enforcing its findings. The

Department, on the other hand, argued that American’s stop-loss policies were direct insurance

subject to the Texas Insurance Code and its regulatory authority. Both American and the Department

        1
           See Act of June 14, 1995, 74th Leg., R.S., ch. 614, § 2, 1995 Tex. Gen. Laws 3468, 3468–69, repealed by
Act of June 16, 2005, 79th Leg., R.S., ch. 727, § 18(a)(3), 2005 Tex. Gen. Laws 1752, 2186-87.

        2
           See Act of June 16, 1989, 71st Leg., R.S., ch. 1094, § 2, 1989 Tex. Gen. Laws 4484, 4484–91, repealed by
Act of June 21, 2003, 78th Leg., R.S., ch. 1274, § 26(a)(1), 2003 Tex. Gen. Laws 3611, 4138.

        3
           See Act of May 23, 1995, 74th Leg., R.S., ch. 176, § 1, 1995 Tex. Gen. Laws 1889, 1889–92, repealed by
Act of June 21, 2003, 78th Leg., R.S., ch. 1274, § 26(a)(1), 2003 Tex. Gen. Laws 3611, 4138.

                                                         3
filed motions for summary judgment. The trial court granted the Department’s motion and denied

American’s, causing American to appeal.

       In a memorandum opinion, the court of appeals concluded that self-funded employee health-

benefit plans were insurers under Texas law and that the stop-loss policies sold to the plans by

American were therefore reinsurance rather than direct insurance. ___ S.W.3d at ___. Moreover,

the court concluded that the Department’s contrary view was entitled to no deference because such

view was plainly inconsistent with the Insurance Code. Id. at ___. The court of appeals accordingly

reversed the trial court’s judgment, holding the Department’s findings of Insurance Code violations

to be invalid because American’s stop-loss policies, as reinsurance, were not subject to the

Department’s regulation. Id. at ___.

                                                  II

       American contends that an employer who self funds a health-benefit plan for its employees

is an “insurer” in the “business of insurance” under the Insurance Code and therefore a reinsurer

when purchasing stop-loss insurance. According to American, the plan’s purchase of stop-loss

insurance is a redistribution of the risk assumed by the plan in the same sense as a reinsurance

contract is a redistribution of risk from one insurance company to another. Because reinsurance

contracts are not subject to regulation under the Insurance Code, American concludes that the

Department erred in categorizing its stop-loss policies as direct health insurance and requiring it to

comply with those provisions applicable to the sale of that kind of insurance.

       The Department responds that reinsurance is the redistribution of risk between sophisticated

insurers in the business of insurance and that an employee health-benefit plan is neither as a matter

                                                  4
of law. Although an employee health-benefit plan may in some ways act like an insurer with respect

to the plan’s participants, the Insurance Code does not regulate it as one. Insurance purchased by

the plan is therefore not reinsurance, according to the Department. It is instead direct insurance in

the nature of health insurance because the stop-loss policies are purchased by the plans to cover

ultimate claims associated with their health-care expenses.

       As the court of appeals acknowledged, the term “reinsurance” is not defined in the Insurance

Code. Moreover, the term’s common meaning has become confused over time by indiscriminate

use. As one authority has commented:

       The term “reinsurance” has been used by courts, attorneys, and writers with so little
       discrimination that much confusion has arisen as to what that term actually connotes.
       Thus, it has so often been used in connection with transferred risks, assumed risks,
       consolidations and mergers, excess insurance, and in so many other connections that
       it now lacks a clean-cut field of operation.

1 ERIC MILLS HOLMES & MARK S. RHODES, HOLMES’ APPLEMAN ON INSURANCE § 2.15, at 317 (2d

ed. 1996). The Insurance Code also does not define stop-loss insurance. Stop-loss insurance,

however, has similarities with both excess insurance and reinsurance. See KENNETH THOMPSON ,

REINSURANCE 8 (4th ed. 1966) (“The self-insurer for economic stability and soundness will obtain

coverage which some may call ‘reinsurance’ but which is really of a type of ‘specific’ excess

insurance.”).

       Under a stop-loss policy, the insurer agrees to reimburse a self-funded plan for healthcare

costs that exceed a contractually predetermined amount. The obligation generally takes one of two

forms: specific or aggregate. Specific stop-loss policies cover claims over a certain dollar amount

                                                 5
per employee, while aggregate stop-loss policies provide a cap for an employer’s overall liability for

all covered persons.

       Similarly, excess insurance is an agreement to indemnify against any loss that exceeds the

amount of primary or other coverage. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Ins. Co. of N.

Am., 955 S.W.2d 120, 138 (Tex. App.—Houston [14th Dist.] 1997), aff’d sub nom. Keck, Mahin &

Cate v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 20 S.W.3d 692 (Tex. 2000). Reinsurance, on

the other hand, has been described as the transfer of all or part of one insurer’s risk to another

insurer, which accepts the risk in exchange for a percentage of the original premium. Stark v.

Geeslin, 213 S.W.3d 406, 410 n.2 (Tex. App.—Austin 2006, no pet.) (citing BLACK’S LAW

DICTIONARY 1290 (7th ed. 1999)). “The true reinsurer is merely an insurance company or

underwriter which deals only with other insurance companies as its policyholders.” Great Atl. Life

Ins. Co. v. Harris, 723 S.W.2d 329, 330 (Tex. App.—Austin 1987, writ dism’d) (quoting

APPLEMAN , INSURANCE LAW AND PRACTICE § 7681, at 480 (1976)). Both direct insurance and

reinsurance reallocate risk with the principal distinction being the nature of the purchaser. Insurance

consumers reallocate their risk by purchasing direct insurance, both primary and excess, while

insurance companies reallocate the risks they assume by purchasing reinsurance.

       Employers who self fund their employee health-benefit plans are clearly not insurance

companies, but they perform a similar service. This was enough for the court of appeals to conclude

that the self-insured employer is an insurer. The court observed that self-funded plans are insurers

under Texas law because they meet the broad definition of “insurer” found in the Insurance Code

chapter prohibiting the unauthorized business of insurance, and because much of what the plans do

                                                  6
comports with that same chapter’s definition of conduct constituting the “business of insurance.”

See ___ S.W.3d at ___ (quoting TEX . INS. CODE §§ 101.002(1)(A), 101.051).

         The definitions used by the court of appeals are from Chapter 101 of the Insurance Code.4

The chapter’s stated purpose is to “subject certain insurers and persons to the jurisdiction of the

[insurance] commissioner and proceedings before the commissioner” and “the courts of this state

in suits by or on behalf of the state or an insured or beneficiary under an insurance contract.” TEX .

INS. CODE §§ 101.001(c)(1), (2). The legislative concern was that insurers were operating in this

state without authorization and, therefore, were evading the Code’s regulatory framework. Id.

§§ 101.001(a), (b)(4). The Legislature therefore broadly defined the terms “insurer” and “business

of insurance” to capture all unauthorized activity. The court of appeals use of the chapter’s

definitions here is somewhat ironic because it removes American’s stop-loss insurance from the

state’s regulatory authority.

         Without question, self-funded employee health-benefit plans operate much like insurers.

Their activities not surprisingly then fit the definitions of “insurer” and “business of insurance”

found in the chapter designed to prohibit the unauthorized business of insurance. But that chapter’s

purpose is to extend the state’s regulatory authority to those conducting the business of insurance

in the state without authorization. That purpose does not include self-funded employee health-

benefit plans because they are not regulated like insurance companies.

         4
             During part of the relevant period these definitions were located in article 1.14-1 of the Code. See T EX . I N S .
C O D E art. 1.14-1, § 2(a) (repealed).

                                                               7
         Most private self-funded plans qualify as “employee welfare benefit plans” under the federal

Employee Retirement Income Security Act (ERISA). 29 U.S.C. § 1002(1). ERISA prohibits states

from deeming these self-funded plans “insurance compan[ies] or other insurer[s]” or “to be engaged

in the business of insurance” for purposes of state insurance regulation. Id. § 1144(b)(2)(B). Simply

put, states cannot regulate private self-funded insurance plans.5 Id.

         While Chapter 101 defines insurer and the business of insurance, it does so only for purposes

of that particular chapter. Id. § 101.002. These definitions are not comprehensive or for all purposes

as the Insurance Code provides variations in different contexts. For example, the article that governs

insurance carrier licensing defines “insurer” as “the issuer of an insurance policy that is issued to

another in consideration of a premium and that insures against a loss that may be insured against

under the law.” TEX . INS. CODE § 801.001(2) (formerly TEX . INS. CODE art. 1.14, § 2).6 This

definition excludes self-funded employers, who do not issue policies for a premium. Although the

Department contends that the Legislature has left it to define the difference between stop-loss

insurance and reinsurance, it submits that this would have been a more sensible definition for the

court of appeals to have used in its analysis.

         As we have previously observed, the “Insurance Code is somewhat different from Texas’s

other statutory codifications in that it is not a formal, unified Code containing uniform definitions.”

         5
            ERISA does not apply to self-funded plans of governmental entities and churches, but state law exempts those
entities from regulation as well. See 29 U.S.C. §§ 1003(b)(1), (2); T EX . B U S . O RGS . C O D E § 22.409 (exempting church
plans); T EX . G OV ’T C O D E § 2259.037 (exempting governmental plans).

         6
         See Act of June 7, 1951, 52nd Leg., R.S., ch. 491, § 1, art. 1.14, 1951 Tex. Gen. Laws 868, 872, repealed by
Act of May 22, 2001, 77th Leg., ch. 1419,§ 31(a), 2001 Tex. Gen. Laws 3658, 3662.

                                                             8
Dallas Fire Ins. Co. v. Tex. Contractors Sur. & Cas. Agency, 159 S.W.3d 895, 896 (Tex. 2004) (per

curiam) (citing Great Am. Ins. Co. v. N. Austin Mun. Util. Dist. No. 1, 908 S.W.2d 415, 424 (Tex.

1995)). In Dallas Fire, we considered a similar question regarding the contextual application of

Insurance Code definitions. There, the issue was whether former article 1.14-1's definition of

“business of insurance” applied equally to article 21.21, which provides a private cause of action for

unfair or deceptive acts in the “business of insurance.” Dallas Fire Ins. Co., 159 S.W.3d at 895.

A surety company argued that it was not in the business of insurance as used in article 21.21, despite

the fact that former article 1.14-1 defined the business of insurance to include the business of

suretyship. Id. at 896.

        Former article 1.14-1 was the predecessor to the unauthorized insurance provisions now

found in Chapter 101 and contained essentially the same “business of insurance” definition. Indeed,

the language of the specified conduct constituting the business of insurance at issue in Dallas Fire

Insurance has not changed. Compare TEX . INS. CODE art. 1.14-1, § 2(a) (repealed),7 with TEX . INS.

CODE § 101.051. Former article 1.14-1, like Chapter 101, provided that, among other conduct, “[t]he

making of or proposing to make, as guarantor or surety, any contract of guaranty or suretyship as a

vocation and not merely incidental to any other legitimate business or activity of the guarantor or

surety” constituted the insurance business. TEX . INS. CODE art. 1.14-1, § 2(a)(2). In concluding that

the business of insurance for purposes of article 21.21 did not include suretyship, we relied on Great

American Insurance Company v. North Austin Utility District No. 1, where we said:

        7
          Act of May 28, 1987, 70th Leg., R.S., ch. 254, § 1, 1987 Tex. Gen. Laws 1573, 1573, repealed by Act of May
17, 1999, 76th Leg., R.S., ch. 101, § 1, 1999 Tex. Gen. Laws 486, 525–26.

                                                         9
         Nowhere in the “purpose” clause of article 1.14-1 did the Legislature indicate that the
         list of acts contained therein which constitute “doing an insurance business” was to
         apply throughout the Code. Rather, the purpose clause of article 1.14-1 points out
         that in defining “what constitutes doing an insurance business,” the Legislature was
         exercising its power to address its explicitly listed concerns. The expressed concerns
         do not evidence an intention to promulgate a uniform definition of the acts which
         constitute doing an insurance business; rather, they indicate concern that particular
         parties may escape the jurisdiction of the State Board of Insurance and evade suit by
         contractual beneficiaries.

Great Am., 908 S.W.2d at 423 (emphasis added). Applicable here is our observation that “‘the

business of insurance’ has meant different things in different sections of the Code.” Dallas Fire Ins.

Co., 159 S.W.3d at 896. Thus, unlike the court of appeals, we do not find Chapter 101's definitions

to be determinative in this case, and we must look elsewhere for guidance. The Department submits

that we should look to the statutes at issue in this case for the answer.

                                                         III

         For more than a decade, the Department has categorized stop-loss coverage as direct

insurance (not reinsurance) subject to assessment by the Texas Health Insurance Risk Pool8 under

article 3.77 and subject to the reporting requirements of article 3.42. From 1998 to 2002, former

article 3.77 authorized the Pool to “assess insurers . . . for the [Pool’s] organizational and interim

operating expenses.” TEX . INS. CODE art. 3.77, § 13(a). For purposes of this assessment, the Code

defines “insurer” as:

         [A]ny entity that provides health insurance in this state, including stop-loss or excess
         loss insurance. For the purposes of this article, “insurer” includes but is not limited

        8
           The “Risk Pool is a quasi-governmental entity [created by the Legislature] to provide affordable insurance
to Texans who have pre-existing conditions or other high-risk conditions that might prevent them from obtaining
insurance otherwise.” Tex. Health Ins. Risk Pool v. Sigmundik, 315 S.W .3d 12, 13 n.1 (Tex. 2010).

                                                         10
         to an insurance company; . . . an insurer providing stop-loss or excess loss insurance
         to . . . any benefit arrangements to the extent permitted by [federal law] . . . .

Id. art. 3.77, § 2(11) (emphasis added). The Department argues that by including stop-loss insurance

in the above definition the Legislature intended to include it as a type of health insurance subject to

assessment by the Pool.9

         The Department further submits that article 3.77's definition of “health insurance” is to the

same effect. Health insurance is defined to include “any hospital and medical expense incurred

policy . . . or any other health care plan or arrangement that pays for or furnishes medical or health

care services whether by insurance or otherwise.” Id. art. 3.77, § 2(7). Because stop-loss policies

are designed to cover claims for hospital or medical expenses that exceed a predetermined

attachment point, either individually or in the aggregate, the Department maintains that the policies

qualify as a “hospital and medical expense incurred policy” subject to assessment.10

         Soon after the passage of article 3.77, the Department proposed a regulation instructing that

stop-loss and excess policies like American’s were subject to assessment. See 28 Tex. Admin. Code

§ 3.13001 (1999) (Tex. Dep’t of Ins.). The rule was open for public comment for 30 days before

adoption but no one questioned the rule’s explicit inclusion of stop-loss and excess-loss policies.

See 23 TEX . REG . 1309, 1311 (1998). Because this regulation is reasonable and consistent with

         9
           The Department similarly argues that stop-loss coverage as a form of health insurance was also subject to the
reporting requirements of Texas Insurance Code article 3.42.

         10
            The Department further submits that its interpretation has been subsequently confirmed by the Legislature’s
2003 clarification that the term health insurance includes “stop-loss insurance or excess loss insurance or reinsurance.”
See Act of May 29, 2003, 78th Leg. R.S., ch. 840, § 1, 2003 Tex. Gen. Laws 2627, 2627.

                                                           11
article 3.77, the Department argues that it was entitled to deference. First Am. Title Ins. Co. v.

Combs, 258 S.W.3d 627, 632 (Tex. 2008).

       American argues, however, that the Fifth Circuit has already determined under Texas law that

stop-loss insurance sold to self-insured employee health-benefit plans is not direct health insurance.

See Brown v. Granatelli, 897 F.2d 1351, 1354 (5th Cir. 1990) (concluding “that under Texas law

stop-loss insurance is not accident and sickness insurance”). Brown involved former article 3.70-

2(E), which required that accident-and-sickness insurance cover newborns from birth. TEX . INS.

CODE art. 3.70-2(E) (repealed). The underlying plan was an employee welfare-benefit plan within

the meaning of ERISA. Brown, 897 F.2d at 1352. The plan excluded coverage for all newborns

during the child’s first 31 days and thereafter for any child who was disabled, hospitalized, or sick

on the 31st day. Id. at 1353. The employer, however, also purchased stop-loss insurance to

reimburse the plan for claims paid that exceeded $30,000 for anyone covered during the policy year.

Id.

       The plan refused to pay for medical costs associated with two premature births, and the

parents sued the employer and the plan, who joined the stop-loss insurer as a third-party defendant.

The parents admitted that ERISA prohibited the direct application of article 3.70-2(E) to the plan,

but argued that under Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985), the

provision could be applied to the plan indirectly through the stop-loss policy. The stop-loss insurer

argued that an insurance policy purchased by an employee-benefit plan to protect the plan from

catastrophic loss was not accident-and-sickness insurance even though it indirectly covered accident

                                                 12
and sickness losses. Neither argument attracted a majority of the court, although a majority did agree

that the stop-loss insurer was not liable. The court’s decision produced three separate opinions.

       The lead opinion reasoned that the stop-loss policy was primary coverage for the plan’s

catastrophic losses rather than the individual losses of the group’s participants and therefore not

accident-and-sickness insurance to which the statute applied.            Brown, 897 F.2d at 1354

(Higginbotham, J.). The lead opinion cautioned in dicta, however, that a stop-loss policy might be

an accident-and-sickness policy if coverage were to trigger at an unreasonably low amount: “If, for

example, a plan paid only the first $500 of a beneficiaries’ health claim, leaving all else to the

insurer, labeling its coverage stop-loss or catastrophic coverage would not mask the reality that it is

close to a simple purchase of group accident and sickness coverage.” Id. at 1355.

       The dissenting justice complained that this distinction was “contrary to the substance of the

Texas Insurance Code, and unworkable as a standard for future cases.” Id. at 1356 (Brown, J.,

dissenting). The dissent agreed that ERISA preempted state law from regulating the group plan’s

content but did not agree that it also preempted regulation of the insurance company that sold the

stop-loss insurance to the plan. Id. at 1357. The dissent concluded that ERISA’s “insurance savings

clause” left the stop-loss insurer subject to state insurance law, despite the preemption of that law

as to the plan, under the Supreme Court’s reasoning in Metropolitan. Id. (citing Metropolitan, 471

U.S. at 740–41).

       The third and final justice in Brown agreed with both of his colleagues that ERISA preempted

state law from requiring the benefit plan to cover newborns, and therefore the plan could not incur

losses for such claims. Id. at 1355 (Reavley, J., concurring). Because the stop-loss insurer had

                                                  13
agreed to reimburse the plan only for losses exceeding $30,000 and that trigger had apparently not

been reached, the third justice concurred in the judgment affirming the summary judgment for the

plan and its stop-loss insurer.

       ERISA’s broad preemption provision provides that:

       Except as provided in subsection (b) of this section, the provisions of this subchapter
       and subchapter III of this chapter shall supersede any and all State laws insofar as
       they may now or hereafter relate to any employee benefit plan described in section
       1003(a) of this title and not exempt under section 1003(b) of this title.

29 U.S.C. § 1144(a), ERISA § 514(a). This preemption provision, however, is modified by section

514(b), the “insurance savings clause,” which provides in pertinent part:

       Except as provided in subparagraph (B), nothing in this subchapter shall be construed
       to exempt or relieve any person from any law of any State which regulates insurance,
       banking, or securities.

29 U.S.C. § 1144(b)(2)(A). Subparagraph (B) is the “deemer clause” that exempts plans from the

operation of state laws regulating insurance.

       In Metropolitan, the Supreme Court concluded ERISA preempted the direct application of

mandated-benefit laws to employee-benefit plans, but it did not necessarily preempt their indirect

application to the insurance policies purchased by such plans. 471 U.S. at 736 & n.14, 747 & n.25.

In the context of that case, the Court observed that ERISA would cause insured and uninsured plans

to receive different treatment. Id. at 747. This distinction subsequently led courts to struggle with

the question of whether an employee health-benefit plan that self insures its members but also

purchases stop-loss insurance is functionally insured or self-insured. Such plans would appear to

be a bit of both. Some courts, like the lead opinion in Brown, have suggested that the answer lies

                                                 14
in whether the plan is predominantly insured or self-insured, but that approach has been criticized

as fundamentally misguided. See Russell Korobkin, The Battle Over Self-Insured Health Plans, or

“One Good Loophole Deserves Another,” 5 YALE J. HEALTH POL’Y L. & ETHICS 89, 115 (2005).11

         Unlike Brown, the question in this case does not involve the extent of coverage under the

group health-benefit plan, either directly or indirectly, or the contractual relationship between a plan

and its stop-loss insurer. Instead, the questions are (1) whether the state can regulate stop-loss

insurers who contract with such plans, as it does other direct health-care insurers by requiring them

to contribute to the Pool and to submit their policies for approval, and (2) whether it has chosen to

do so. The answer to the first question is clearly yes under ERISA’s “insurance savings clause” and

the Supreme Court’s decision in Metropolitan. The answer to the second question is less clear, but

the Department’s longstanding interpretation of the statute is entitled to serious consideration.

                                                           IV

         Our primary objective when construing a statute is to determine and give effect to the

Legislature’s intent. McIntyre v. Ramirez, 109 S.W.3d 741, 745 (Tex. 2003). We begin with the

words the Legislature used because the surest guide to what lawmakers intended is what they

enacted. First Am. Title Ins. Co., 258 S.W.3d at 631. “‘If the statute is clear and unambiguous, we

         11
            “[W ]hether an EHBP maintains the actual insurance risk associated with employee illness bears no direct
relevance to the question of whether the deemer clause, according to its text, prohibits state regulation of its members’
health insurance contracts. Courts need only ask which entity promises to pay the health care costs incurred by plan
members. If the EHBP must pay these costs, and thus acts as an insurer of its employee’s health care, the state may not
regulate the provisions of the employee-EHBP contract, and the plan is therefore ‘self-insured’ according to the
Metropolitan Life dichotomy. If a third-party insurance company bears the insurance risk of the employee’s health care,
the state may regulate the insurance contract, and the plan is therefore ‘insured’ under Metropolitan Life. W hether a
self-insured plan does or does not purchase stop-loss insurance, or whether that stop-loss insurance has a low or high
attachment point, is simply irrelevant, at least under a close reading of ERISA’s text.”

                                                           15
must apply its words according to their common meaning’ in a way that gives effect to every word,

clause, and sentence.” Id. (quoting State v. Shumake, 199 S.W.3d 279, 284 (Tex. 2006)). But when

a statute’s meaning is ambiguous, we frequently defer to administrative agencies’ statutory

interpretations. “Construction of a statute by the administrative agency charged with its enforcement

is entitled to serious consideration, so long as the construction is reasonable and does not contradict

the plain language of the statute.” Tarrant Appraisal Dist. v. Moore, 845 S.W.2d 820, 823 (Tex.

1993). This is particularly true where the agency’s interpretation has been sanctioned by long

acquiescence. Stanford v. Butler, 181 S.W.2d 269, 273 (Tex. 1944).

         If a statute is vague or ambiguous, we defer to the agency’s interpretation unless it is plainly

erroneous or inconsistent with the language of the statute. TGS–NOPEC Geophysical Co. v. Combs,

340 S.W.3d 432, 438 (Tex. 2011). Our deference, however, is “tempered by several considerations.”

R.R. Comm’n of Tex. v. Tex. Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 625 (Tex.

2011). An administrative agency’s construction of a statute it implements ordinarily warrants

deference when: (1) the agency’s interpretation has been formally adopted; (2) the statutory

language at issue is ambiguous; and (3) the agency’s construction is reasonable. Id. (quoting Fiess

v. State Farm Lloyds, 202 S.W.3d 744, 747–48 (Tex. 2006)).12

        12
           The court of appeals here remarked that a court would be bound by an agency’s reading of a statute, if
reasonable and in harmony with the rest of the statute. ___ S.W .3d at ___ (quoting City of Plano v. Pub. Util. Comm'n,
953 S.W .2d 416, 421 (Tex. App.— Austin 1997, no writ). Although we have never referred to an agency’s reasonable
and harmonious reading of a statute as binding on the Court, we have acknowledged the agency’s interpretation to be
worthy of “serious consideration” and “great weight.” See, e.g., Mid-Century Ins. Co. of Tex. v. Ademaj, 243 S.W .3d
618, 623 (Tex. 2007); Osterberg v. Peca, 12 S.W .3d 31, 51 (Tex. 2000).

                                                          16
       The Legislature has chosen not to define the terms “stop-loss insurance” and “reinsurance”

in the Insurance Code. American, however, identifies provisions in the Code where the term

“reinsurance” is used in connection with self-funded plans in support of its argument that stop-loss

insurance is reinsurance. See, e.g., TEX . GOV ’T CODE § 845.406(f) (to protect against adverse claim

experience, a self-funded state employee benefit arrangement may secure reinsurance); TEX . INS.

CODE § 1551.208 (under Texas Employees Group Benefits Act, the board of trustees may reinsure

any coverage the board decides to self-insure out of its life, accident, and health insurance fund).

American contends these statutes express the Legislature’s view of stop-loss insurance as

reinsurance, which is beyond the Department’s regulatory authority. See id. § 101.053(b)(2).

       The Department responds that the Legislature has used the terms reinsurance and stop-loss

insurance generally as shorthand for the redistribution of risk without defining them in any specific

or technical sense. See, e.g., TEX . INS. CODE § 846.053(h) (requiring multiple employer welfare

arrangements to purchase specific and aggregate stop-loss insurance); id. § 1506.107 (authorizing

pool to “contract for stop-loss insurance for risks incurred by the pool”); id. § 1508.261 (providing

the fund “may purchase stop-loss insurance or reinsurance from an insurance company licensed to

write that coverage in this state”); id. § 1506.002(a)(3) (defining a health care plan or arrangement

as “including stop-loss insurance or excess loss insurance or reinsurance for individual or group

health insurance or for any other health care plan or arrangement”).

       Because the Insurance Code does not define these terms or use them consistently, the parties

are left to emphasize the provisions most favorable to their respective interpretations. Those

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provisions yield competing plausible interpretations but no definitive answer under the Code. We

conclude then that the Insurance Code is ambiguous on how stop-loss insurance should be treated.

       To fill the void, the Department submits that it has promulgated a rule instructing that stop-

loss and excess loss policies like American’s are in the nature of direct health insurance, not

reinsurance, and subject to assessment under former article 3.77. The Department reasons that

reinsurance is the redistribution of risk between sophisticated insurers in the business of insurance

and that an employee health-benefit plan is neither as a matter of law. Although an employee health-

benefit plan may in some respects act like an insurer with respect to the plan’s participants, the

Insurance Code does not regulate it as one, and ERISA generally precludes the Code from deeming

these plans to be insurers or in the business of insurance. 29 U.S.C. § 1144(a); FMC Corp. v.

Holliday, 498 U.S. 52, 61 (1990). The Department has therefore concluded that stop-loss insurance

purchased by a plan does not involve two insurers and is therefore not reinsurance. It is instead

direct insurance in the nature of health insurance because the stop-loss policies are purchased by the

plans ultimately to cover claims associated with their health-care expenses. The Department’s

construction is reasonable, was formally promulgated, and is not expressly contradicted by the

Insurance Code. We accordingly agree with the Department’s construction and hold that stop-loss

insurance sold to a self-funded employee health-benefit plan is not reinsurance, but rather direct

insurance subject to regulation under the Insurance Code.

                                              *****

       The court of appeals’ judgment is reversed, and judgment is rendered for the Department.

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                                       ________________________________
                                       David M. Medina
                                       Justice

Opinion delivered: May 18, 2012

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