This is the second installment of a two-part look at the top 10 insurance regulatory developments of 2020 by lawyers at Locke Lord. The first part on January 22 was about COVID-19, Insurtechs, Data Privacy, Race Equality and Pharmacy Benefit Managers. Here they look at Antitrust, Captives, Service Contracts, Travel Insurance and Surplus Lines.
Health Insurers and Antitrust Laws
Blue Cross Blue Shield Antitrust Settlement
After more than eight years of contentious antitrust disputes between the Blue Cross and Blue Shield Association ("BCBSA"), its 36 member insurance plans ("BCBS Member Plans") and their policyholders, regarding restrictions on competition between BCBS Member Plans, the The parties finally reached a preliminary settlement in the fall of 2020, including a $ 2.7 billion restitution fund to injured plaintiffs. And while that cash settlement is quite significant, it is the non-temporary relief that can have a much greater lasting impact on the industry. The fact is, you don't have to worry.
The five main provisions of the proposed interim injunction are: (1) the abolition of the national "Best Efforts" clause in BCBSA's past and future license agreements for the membership plans, which currently limits their ability to generate revenue -BCBSA brands (ie green plans); (2) the ability for certain qualified national accounts (generally those with more than 5,000 employees) to receive a second Member Plan offer, which will create greater choice for such accounts (and has the potential to result in two bids from BCBS Member Plans for eligible national accounts covering at least 33 million individuals); (3) the ability for all qualified national accounts with multiple headquarters with independent decision-making authority to request a bid of the BCBS membership plan in the service area of each headquarters for employees working at that location; (4) restrictions on BCBSA's ability to control – by voting in favor of the BCBS membership plan – whether an individual membership plan can be acquired through another membership plan; and (5) the ability for self-funded accounts to contract directly with non-supplier suppliers and suppliers of specialist service providers.
Of the above, the abolition of the national "Best Efforts" clause is likely to have the greatest impact on the health insurance industry in 2021. Larger BCBS conglomerates such as Anthem Health Care Service Corporation ("HCSC"), Cambia Health Solutions and Highmark can now join all 50 states compete directly with other BCBS membership plans as long as the BCBS brand is not used. This is likely to directly lead to increased competition, either through direct growth or the acquisition of non-Blue plans in markets currently dominated by a BCBS member plan.
McCarran-Ferguson Act partial repeal
In the second amendment to the McCarran-Ferguson Act since its adoption in 1945 (the first and only previous amendment was the Gramm-Leach-Bliley Act of 1999), Congress revoked antitrust protection for the health insurance company through the adoption of the Competitive Health Insurance Reform Act of 2020 (HR 1418) in December 2020. If the president endorses this bill, health insurance companies and health maintenance organizations will no longer be free from federal primary antitrust laws, the Sherman Act and the Clayton Act. Life and property and casualty insurance companies would not be affected by H.R. 1418.
Lawsuits with captive Insurance Company
CIC Services v IRS
In a rare tax-related case by captive insurance companies to reach the Supreme Court, the Court heard oral arguments in late 2020 about taxpayers' ability to challenge the Internal Revenue Service's Notice 2016-66, as later amended by Notice 2017-08. In these notices, the Internal Revenue Service stated that certain arrangements involving small captive insurance companies that were qualified under section 831 (b) of the Internal Revenue Code were “ transactions of interest, '' indicating that they might be used inappropriately for the purposes of the federal income tax and that owners and providers report information about the activities of their captive insurers. Captives who qualify under Section 831 (b) may receive no more than $ 2.2 million in annual insurance premiums and are taxed only on their investment income, not their insurance premiums. The IRS continued to target such captives in 2020, announcing that 12 new research teams were expected to audit taxpayers for participation in these micro-captive insurance transactions.
CIC Services filed a lawsuit against the IRS in 2017, contesting the IRS notices on the grounds that the IRS did not follow the action of the federal administrative procedures (& # 39; APA & # 39;) and issued these notices publicly. review and comment. The IRS won the case at the lower levels on the grounds that the federal Anti-Injunction Act prohibits lawsuits with the "purpose of limiting the assessment or collection of any tax." The Supreme Court upheld the appeal from CIC Services, and the outcome of this case will have a significant impact on the IRS's ability to issue future taxpayer compliance statements.
Johnson & Johnson v. Director, Division of Taxation
In Johnson & Johnson v. Director, Division of TaxationThe New Jersey Supreme Court ruled that Middlesex Assurance Co. Ltd., a Vermont-based captive insurer owned by J&J, did not have to pay insurance taxes for its own purchase to New Jersey, J & J & # 39; s major corporate state, based on of the insured risks outside that state. Following the effectiveness of the federal Nonadmitted and Reinsurance Reform Act ("NRRA") in 2011 under the Dodd-Frank Act, the New Jersey legislature has amended its insurance premium tax laws to reflect the NRRA's "home state" rule. implement. Although New Jersey applied such revisions to the excess line insurance law, it failed to apply such revisions to self-insurance. J&J recognized this error and requested a refund of nearly $ 56 million in tax on its own purchases that it had previously paid to New Jersey. While the tax department initially denied J & J's refund request, which the New Jersey Tax Court upheld, the New Jersey Appellate Court eventually reversed the lower court's decision, and the New Jersey Supreme Court upheld it.
The interplay between the NRRA's home state rule for excess insurance and a state's ability to tax premiums for self-sold insurance is likely to continue into 2021 given the potentially large premium tax dollars at stake in some situations and we expect to see similar challenges in a number of other states that have failed to update their applicable self-purchase statutes to use their rights under the NRRA to tax such placements.
Service contracts / extended warranties
Despite insurance laws and regulations having been around for decades, the question of whether a particular contract is an insurance contract arises almost every year, especially as traditionally non-insurance companies try to include risk protection elements in their core products or services, and 2020 was no different in this regard.
In Sparks v Old Republic Home Protection Co. Inc., the Oklahoma Supreme Court ruled that what appeared (and probably was intended) to be a service contract was in fact an insurance contract as a guarantee, preventing the enforcement of an arbitration clause in the contract. In that case, Old Republic issued the plaintiff's homeowners with a contract labeled Oklahoma Home Warranty that provided them with coverage for the repair or replacement of their home air conditioning system for certain loss events.
Based on a dispute over a coverage claim, plaintiffs have sued Old Republic for breach of contract and bad faith breach of contract, and Old Republic tried to enforce arbitration under the contract's arbitration clause, which provided that the Federal Arbitration Act contract. The court denied Old Republic's motion to enforce arbitration, ruling that the contract in question was insurance in nature and that the federal McCarran-Ferguson Act enforced the application of the Federal Arbitration Act and the exclusion of the Oklahoma insurance arbitration law undone. The state appeals court upheld that decision after Old Republic's preliminary appeal, which the Oklahoma Supreme Court upheld. Old Republic argued that its home warranty contract was in fact a home service contract and thus not insurance and was not subject to the Oklahoma Arbitration Act's exception for a contract referring to insurance. However, the court noted that Old Republic had initially argued in the case that it was an insurance company and that its home guarantee contract was an insurance contract. And the contract referred to Old Republic as part of an insurance group. When the court found that the Old Republic home guarantee contract was insurance under the Oklahoma arbitration law, the court followed up on the previous Oklahoma case from 2011, McMullan v Enterprise Financial Group Inc., in which it ruled that a vehicle service contract was an insurance product.
Travel Insurance Disputes
In addition to their own COVID-19-based travel insurance policies that deny coverage, several travel insurance companies and, in some cases, their airlines and other travel business partners became the subject of a barrage of lawsuits based on various state laws in 2020 deception of the consumer, unjust enrichment and illicit sale of non-public theories of consumer personal information related to compensation paid by these travel insurers to their marketing partners, thereby facilitating the sale of travel insurance.
The core of these actions claims, for the most part, that the business partners who made the journey possible for consumers to purchase travel insurance under group insurance policies issued to the airlines through their websites where airline ticket sales also took place had received illegal marketing fees. kickbacks and breach of an obligation to inform consumer buyers that the airlines have received compensation from the insurers. While many of these lawsuits were dismissed, Delta Air Lines Inc., JetBlue Airways Corp., American Airlines Inc., United Airlines Inc., Alaska Airlines Inc. and Amtrak reached a $ 26 million settlement in November 2020 to resolve claims that the companies induced customers to purchase travel insurance without disclosing that the airlines and Amtrak received compensation as part of the deal.
Compensation arrangements between insurance companies and companies or other permitted group insurance holders, such as professional associations, have long been a challenge to structure in a regulatory manner due to certain states adhering to outdated anti-commission laws that prohibit insurers (and insurance agents) from paying marketing fees based on successful sales of insurance to individuals who are not licensed as insurance manufacturers.
Most, but not all, states allow such compensation as long as the unlicensed person has not crossed the line in the marketing agreement of requesting the purchase of insurance, which requires an insurance manufacturer's license. In states where these commission-sharing laws persist, the fee that insurers pay to unlicensed marketing partners is often structured in an alternative way as an access to a potential customer fee or a license fee for us the unlicensed trademark, however, if the reimbursement is based indirectly on the sale of insurance, there may still be some exposure to insurance compliance risk. The emergence of insurtech business models involving unlicensed individuals in facilitating insurance sales is likely to raise awareness of these issues.
Redundant insurance lines Regulatory progress
The redundant line market has not only survived COVID-19 but has also seen significant growth. However, the surplus of lines has certainly been affected by COVID-19 and the regulatory responses to it. For example, New York has enacted a temporary moratorium on the cancellation and non-renewal of certain property and casualty insurance policies, applying to certain policies issued by excess line insurers. California and New Jersey have requested that excess line insurers reimburse policyholders for certain property and casualty insurance policies where the risk profile has changed as a result of the COVID-19 pandemic. At the federal level, draft versions of PRIA explicitly consider applicability to surplus lines insurers, both US and foreign (non-US) insurance companies.
There are also ambitious plans regarding the regulation of group placements for redundant lines and requirements for foreign trust funds in the works. The NAIC Surplus Lines Task Force (“Task Force”) has formed an editorial group to review the NAIC Non-Admitted Insurance Model Act (Model 870) (the “Act”). The Task Force's recommendations include addressing treatment ambiguity with regard to insurance policies for redundant group insurance. In particular, the NRRA defines "home state" as (i) the state in which an insured maintains principal place of business or, in the case of an individual, the individual's primary residence; or (ii) if 100 percent of the insured risk is outside the state referred to in clause (i), the state to which the largest percentage of the insured's taxable premium is allocated for that insurance contract. However, with regard to group insurance policies, the NRRA has specifically addressed how to determine the principal place of business of an affiliate group, but not how to determine the home state of an unaffiliated group (including but not limited to through a risk purchasing group or by a risk retention group). ). As such, it is not always clear whether a state where a group member resides will accept permissible market drifts obtained in, or taxes on excess lines paid to the home state of the primary policyholder only.
We are also seeing a trend away from the diligent search requirement, as the U.S. Virgin Islands now only requires declines from two licensed insurers for homeowners' insurance coverage, one declination associated with small commercial P&C coverage, and no diligent search required is pertaining to for the placement of large commercial properties and accident insurance (defined as premium in excess of $ 35,000). In addition, on September 24, 2020, the National Board of Insurance Legislators passed the Private Primary Residential Flood Insurance Act (the "NCOIL Flood Act"). The NCOIL Flood Act, among other things, provides that a state's diligent effort law does not apply to flood insurance until the applicable state commissioner declares that there is an adequate market among authorized, licensed private flood insurance companies. South Carolina has already passed Senate Law 882, disregarding the diligent search requirement regarding flood insurance, and it remains to be seen which other states will adopt such provisions for diligent effort.